This article is Part Two of a three-part summary of the recently-published Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2019,released by the Department of Finance on July 10, 2019 (Finalized Regulations).1
The three-part series discusses prominent changes made to the Regulations and compares the changes to the Department of Finance’s initial proposed regulatory changes released on June 9, 2018 (Initial Proposal).2
In Part Two, we will discuss the finalized amendments relating to open-loop prepaid cards that come into force on June 1, 2021. In Part One, we considered the amendments made to the Regulations regarding virtual currency, Money Services Businesses (MSB) and foreign MSBs. In Part Three, we plan to consider other notable amendments.
Introduction: Legislating changes to Canada’s Anti-Money Laundering/Terrorist Financing Act to mitigate the risk of prepaid payment products
The Finalized Regulations include new provisions aimed at addressing the weaknesses of Canada’s anti-money laundering legislation as it relates to prepaid payment products that come into force on June 1, 2021. The Finalized Regulations are a response to the Financial Action Task Force’s (FATF) 2016 Mutual Evaluation Report (Report), which reaffirmed the quality of Canada’s Anti-Money Laundering/Terrorist Financing (AML/TF) regime, while identifying some notable, high-risk gaps. Among those gaps was the lack of AML/TF regulation applicable to open-loop prepaid cards.3 The Report noted that globally, open-loop prepaid card transaction volumes grew by more than 20 percent and reached 16.9 billion annually in 2014.4
On June 9, 2018, the Department of Finance released a set of proposed regulatory changes to “help address and close the gaps that exist in Canada’s AML/TF regime, including regulating new business models and technologies, and address new emerging risks.”5 The Initial Proposal included new initiatives to regulate prepaid cards in a manner similar to bank accounts.6
The Finalized Regulations are predominantly the same as the Department of Finance’s Initial Proposal in its June 2018 report. Prepaid cards are considered a type of “prepaid payment product,” a term defined by the regulations as, subject to certain exceptions discussed below, any:
“Product that is is sued by a financial entity and that enables a person or entity to engage in a transaction by giving them electron¬ic access to funds or virtual currency paid to a prepaid payment product account held with the financial entity in advance of the transaction.”7
“Prepaid payment product account,” in turn, is defined as an account, subject to certain exceptions, that is
“Connected to a prepaid payment product that permits (a) one or more transactions that total CA$1,000 or more to be conducted within a 24-hour period; or (b) a balance of funds or virtual currency available in the amount of CA$1,000 or more to be maintained.”
Under the Finalized Regulations, these accounts will now be subject to similar record-keeping requirements as bank accounts. This includes increased record-keeping obligations on all prepaid accounts and transactions; identity verification for accounts and payments over CA$1,000; and special record-keeping and investigative requirements for foreign, virtual-currency and other suspicious transactions.
The New Regulations: Additional details and prescribed exceptions
The Finalized Regulations establish specific requirements applicable to financial entities that open and support transactions in prepaid payment product accounts, and outlines new exceptions that differ from the Department of Finance’s Initial Proposal.
Restricted scope of prepaid payment products and accounts
The Finalized Regulations limit the scope of prepaid payment products governed by the regulations to products “issued by a financial entity,” and exclude any product that “a) enables a person or entity to access a credit or debit account, or one that is issued for use only with particular merchants; or b) is issued for single use for the purposes of a retail rebate program.”8 The definition of prepaid payment products in the Final Regulations is the same as the Initial Proposal, except for the addition of the retail rebate program exception that was not available in the Initial Proposal. Collectively, these exceptions omit entities that issue specific-use cards or open prepaid accounts directly linked to a regulated account with a financial institution from abiding by the new record-keeping requirements.
The definition of prepaid payment product account in the Finalized Regulations is similar to the definition in the Initial Proposal. The most prominent change is that the definition of an account has gone from an account that permits aggregate transactions of CA$1,000 in a 24-hour period in the Initial Proposal, to accounts that allow CA$1,000 or more of aggregate funds to be added to the account in a 24-hour period in the Finalized Regulations. This implies that prepaid accounts can service aggregate outgoing payments of more than CA$1,000 in a 24-hour period without being subject to the Finalized Regulations, as long as the aggregate funds added to the account in that period are less than CA$1,000 and the account balance never exceeds CA$1,000.
The prepaid payment product account definition in the Finalized Regulations also includes new exceptions for accounts opened by a registered charity that opens the account for the purposes of humanitarian aid or accounts accessible only by a public body.9
Increased record-keeping and suspicious transaction investigation requirements
The Finalized Regulations require financial entities that service prepaid payment product accounts to include and keep record of the following for every account opening and transaction:
- Name(s), address(es) and date of birth/incorporation;
- Nature of principal business or occupation;
- Copy of any official corporate records that bind the use of the account, if the account holder is a corporation;
- Record of all account applications;
- Every debit/credit memo created or received in respect of the account;
- Copy of every account statement that it sends to a holder of the account;
- Foreign currency exchange transaction ticket for foreign exchange transactions through the account; and
- Prepaid Product Slip with date of payment to the account, name of the person or entity making the payment, type and amount of each type of fund/virtual currency, method by which the payment is made, name of each holder of the account and the account number for every payment that is made into the payment account.10
The Finalized Regulations differ from the original Initial Proposal in that they do not require a signature card, telephone number or description of the purpose of the prepaid payment product account. Similar to the Initial Proposal, the Finalized Regulations include increased record-keeping requirements for international and virtual currency payments into and from the prepaid account of a value greater than CA$1,000, including names and addresses of payees and beneficiaries, and detailed account numbers and information on all accounts involved in the transaction.11 Payments of less than CA$1,000 and payments within Canada are subject only to the general transaction record-keeping requirements referenced above, and the suspicious transactions and increased identity verification requirements discussed below.
Lastly, the Finalized Regulations mandate that any financial entity that services a payment of CA$100,000 or more into a prepaid payment product account shall take reasonable measures to investigate the person making the request, in accordance with the suspicious transaction and politically exposed person investigation requirements outlined in the Regulations.12
Increased Identify Verification Requirements
The Finalized Regulations impose heightened identification validation procedures for financial entities that open prepaid payment product accounts or service payments of CA$1,000 or more into the prepaid account.13In both cases, the financial entity must obtain government-issued identification from individuals, or certificate(s) of incorporation (or equivalent proof of existence), and director information for companies.14
1 Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2019, S.O.R./2019-240 [Finalized Regulations]. ↩
2 Canada, Department of Finance, Regulations amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2018, June 2018 (Ottawa: Department of Finance, 9 June 2018) [Initial Proposal]. ↩
3 The Financial Action Task Force, “ Anti-money laundering and counter-terrorist financing measures-Canada: Mutual Evaluation Report,” Asia/Pacific Group on Money Laundering (September 2016). ↩
4 Ibid. at 83, n 82.↩
5 InitialProposal, supra note 2.↩
6 Ibid. ↩
7 Finalized Regulations, supra note 1 at s. 22(3), amending s. 1(2) of the Regulations.↩
8 Finalized Regulations, supra note 1 at 22(3), amending s. 1(2) of the Regulations. ↩
9 Ibid. Definition of “registered charity” as per the definition in the Income Tax Act. ↩
10 Ibid. at s. 28, amending s. 14(1) of the Regulations. ↩
11 Ibid. ↩
12 Ibid. at s. 44, amending s. 116(1)(b)(iii) of the Regulations.↩
13 Ibid. at s. 40, amending s. 88 of the Regulations.↩
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