FINA Committee Report
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The Discussion Paper identified a number of legislative and regulatory gaps in the regime that witnesses provided comments on; in particular, witnesses provided suggestions with respect to:
- beneficial ownership,
- politically exposed persons,
- the legal profession,
- white label automated teller machines,
- the real estate sector and alternative mortgage lenders,
- structuring to avoid reporting,
- armoured cars,
- high-value goods dealers and auction houses, and
- securities dealers.
A. Beneficial Ownership
In contrast to a “legal owner” – who holds legal title to a property or asset in his/her own name – a “beneficial owner” is an individual who possess certain benefits of ownership over a property or asset irrespective of appearing on its legal title. For example, individuals or groups of individuals who are not the legal owners of a corporation might directly or indirectly have the power to vote or influence the actions of that company and may therefore be considered its beneficial owners. In general, legal ownership is recorded and easily determined by the government and/or law enforcement, while information pertaining to beneficial ownership is more difficult to collect or obtain.
Beneficial ownership is connected to the regime as the perpetrators of money laundering and/or terrorist financing may obscure their identities through their beneficial ownership of an entity, such as a “shell corporation” or other legal arrangements.
Under the Act’s regulations, a “beneficial owner” is the actual persons who directly or indirectly owns or controls 25% or more of entities such as corporations and trusts. Beneficial owners cannot be another corporation or entity; they must be a natural person.
In the United Kingdom (U.K.), all companies and limited liability partnerships operating in that jurisdiction are required to provide Companies House – an executive agency under the U.K.’s Department for Business, Energy & Industrial Strategy – with certain information with respect to individuals who can influence or control a company, referred to as “persons with significant control” (PSCs). PSCs can also be referred to as the “beneficial owners” of a company and are defined as those having at least 25% of total share ownership or voting rights in the corporation. This PSC register includes details such as the names, addresses, dates of birth and nationalities of the PSCs. The information of the PSC must be confirmed by the company and are made publicly available apart from their home addresses and full dates of birth. Corporations may apply for an exemption from having their PSCs listed publicly for a limited number of reasons, such as to prevent activists from targeting the PSCs, but this information will still be accessible to law enforcement.
In the United States, beneficial ownership is also defined using the 25% share ownership threshold, and designated financial institutions are required to – at minimum – apply the same customer identification verification requirements to the beneficial owners of corporate clients as they would to their non-corporate clients. While the Financial Crimes Enforcement Network (FinCEN) – the U.S. financial intelligence agency – ultimately decided on the 25% share ownership threshold for beneficial ownership, it noted in a clarification statement that certain stakeholders argued in favour of a 10% ownership threshold in their own determination of beneficial owners, and that setting the threshold at such a percentage would be appropriate.
On 19 April 2018, the European Parliament adopted the European Commission’s proposal for a Fifth Anti-Money Laundering Directive (AMLD5) to prevent terrorist financing and money laundering through the European Union’s financial systems. AMLD5 proposes that the share ownership threshold for beneficial ownership would be reduced to 10% for companies that present a real risk of being used for money laundering and tax evasion.
A “trust” is a legal instrument under which an individual transfers legal ownership of his/her assets to a trustee, who will hold those assets for the benefit of anyone named by the transferor. The individual who transfers their assets to a trustee is no longer the legal owner of those assets, and any individual(s) named as a beneficiary of those assets under the trust will be the beneficial owner of them.
With respect to the European Union (EU), in May 2015 the European Commission adopted the Fourth Anti-Money Laundering Directive (AMLD4) which requires all member states to create beneficial ownership registries for all legal persons and entities, including trusts. Under the AMLD4, companies, legal entities and others – such as trustees of express trusts – will be required to collect and disclose to their governments adequate, accurate, and current beneficial ownership information. Each Member State is required to create a central registry of beneficial ownership information that is accessible – at a minimum – to competent authorities, financial intelligence units and certain specified entities when carrying out customer due diligence measures, as well as those who can demonstrate a “legitimate interest” in the information. The AMLD4 also imposed registration and customer due diligence requirements on “obliged entities,” which it defined as banks and other financial and credit institutions.
In addition to operating the registry of domestic corporate beneficial ownership, the U.K. government recently announced that Companies House will begin operating a public registry of the beneficial owners of foreign companies that own property in the U.K. in 2021. The U.K. government published draft legislation for such a registry on 23 July 2018, as well as an overview document – which sets out the way in which the register is intended to work – and an impact assessment of the proposed legislation. In brief, the draft legislation proposes a public registry of the beneficial owners of all corporations, partnerships or other entities that are governed by the law of any jurisdiction outside the U.K. that owns or seeks to own U.K property. These entities will be required to take reasonable steps to ascertain and list their beneficial owners, and if such information is not ascertainable, they would instead be required to provide information about their managing officers. Failure to comply with the registry could result in fines, imprisonment, or the inability to buy, sell or lease U.K property.
With respect to trust arrangements (trusts), the U.K. requires all trusts that pay or owe tax to be registered with HM Revenue and Customs (HMRC). This registry contains the name, address, date of birth and National Insurance number or passport number of any individuals who are beneficiaries under the trust. The trust registry is not publicly accessible, but it can be accessed by certain law enforcement authorities and the HMRC.
Within Canada, certain corporate information is collected and subsequently made publicly accessible when a business is incorporated, including the names and addresses of the corporation’s directors. Business operating in Canada can choose to incorporate federally under the Canada Business Corporations Act (CBCA) or under the provincial regime in which the business operates, such as under Ontario’s Business Corporations Act. This corporate information is kept by the jurisdiction under which the incorporation took place. Corporations Canada keeps the registry of federally incorporated businesses. In the United States, businesses may similarly choose to incorporate at the federal or state level, and are not required to disclose beneficial ownership information during the incorporation process. Both Canada and the U.S. therefore do not currently operate beneficial ownership registries.
As announced on 11 December 2017, the federal and provincial ministers of Finance have agreed to pursue legislative amendments to federal, provincial and territorial corporate statutes to ensure corporations hold accurate and up-to-date information on beneficial owners, and that such information will be available to law enforcement, tax and other authorities. The goal of the agreement is to bring these changes into force by 1 July 2019.
With respect to a publicly accessible and centrally operated registry of corporate beneficial ownership information, Mora Johnson, and Vanessa Iafolla – who appeared as individuals – and the Federation of Law Societies of Canada, Canadians for Tax Fairness, and Transparency International Canada, recommended that Canada create such a registry. Furthermore, various witnesses identified the need to expand the mandate of such a registry to collect additional data, including information for other legal arrangements and entities such as trusts and real estate ownership. Witnesses advocating this expanded registry included the Foundation for Defence of Democracies, Christian Leuprecht, Marc Tassé and Kevin Comeau, who appeared as individuals. Transparency International Canada and Mr. Comeau further noted that the registry required appropriate powers to apply proportionate and dissuasive sanctions if the information provided is untruthful. For her part, Ms. Johnson explained that the complexity of certain corporate ownership structures may require a sophisticated register that would be capable of following up on information submitted to properly perform its intended function.
There was no consensus among witnesses concerning the public accessibility and availability of personal information within a beneficial ownership registry. Milos Barutciski, who appeared as an individual, supports the creation of a registry that can only be accessed by government and by law enforcement and the Privacy Commissioner of Canada suggested that any data that would be made public under such a registry should be limited to what is necessary to achieve a specific purpose, such as informing another contractual party with whom they are dealing. The Investment Industry Association of Canada felt that a central registry was required, but that the public or private nature of the registry would depend on the government’s policy objectives. The Canadian Life and Health Insurance Association believed that the sensitivity of the information in such a registry may not be appropriate for the public at large, but allowing limited access for authorized reporting entities would reduce certain regulatory burdens placed on their industries. Furthermore, the Canadian Bar Association explained that any law that requires a lawyer to collect client information on behalf of the government undermines solicitor-client privilege and weakens the independence of the Association. However, witnesses informed the Committee during its travels that lawyers in other jurisdictions – such as the U.K – have AML/ATF reporting requirements for their non-litigious work. In addition, the Canadian Real Estate Association did not feel that the duty to collect beneficial ownership information should be extended to realtors.
Witnesses from the public service also discussed beneficial ownership; FINTRAC noted that the Financial Action Task Force on Money Laundering (FATF) identified beneficial ownership as one of the two most important issues concerning the Canadian system. The Department of Finance indicated that it was moving forward with the development of a beneficial ownership registry, while the Department of Industry emphasized that this is an area of shared jurisdiction between the federal and provincial governments and will require extensive co-operation. The Attorney General of British Columbia explained that while a centrally managed registry could be a solution; alternatively, the federal government could establish the best practice standards for beneficial ownership disclosure and allow the provinces/territories to establish and administer their own registries. The Canada Revenue Agency (CRA) indicated that the absence of a public beneficial ownership registry hinders its investigations.
During the Committee’s travels, certain witnesses explained that the U.K.’s beneficial ownership registry was the product of many years of AML/ATF work that has set the standards for the rest of Europe. They also noted that this registry was not extended to trusts that do not have tax consequences because it was felt that these trusts were personal in nature. However, they went on to say that all trustees are required to keep up-to-date records of their beneficial owners and provide those records to law enforcement upon request.
Witnesses further explained to the Committee that the U.K.’s beneficial ownership registry relies largely on public scrutiny to verify the accuracy of the information entered by each corporation, though Companies House has forensic accounting capabilities to examine any allegations of incorrect information. Furthermore, the Committee was informed that individuals tasked with entering and updating their corporation’s information into the registry are required to take reasonable steps to identify the beneficial owners of their corporation and can be personally liable – including facing up to a two-year prison sentence – for failing to report that information in a timely and accurate manner.
Witnesses also believed that the European Union was considering amending the definition of PSC by decreasing the percentage of share ownership or voting rights in a corporation that constitutes a PSC from 25% to 10%.
Section 9.3 of the PCMLTFA requires all reporting entities (listed in section 5 of the PCMLTFA) to determine whether it is dealing with “politically exposed persons” (PEPs), a prescribed family member of a PEP or an individual who the person or entity knows or should reasonably know is closely associated – for personal or business reasons – with a PEP. As defined under section 9.3(3) of the PCMLTFA, PEPs can be those who hold certain military or government positions either domestically or for a foreign government, as well as those who are a head of an international organization.
In addition, section 9.6(2) of the Act and section 71(1)(c) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations require every reporting entity to assess the level of risk of money laundering and terrorist financing associated with each client as well as their business relationships. As a result of this risk assessment, where the reporting entity considers that the risks are high, it is required to take the special or enhanced anti–money laundering and anti–terrorist financing (AML/ATF) measures set out in section 9.6(3) of the Act and section 71.1 of the Regulations.
Within the United Kingdom and United States, the definition of a PEP is largely identical under section 14(5) of the Money Laundering Regulations 2007, and Department of the Treasury Regulations, respectively.
In the paper Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist-Financing Regime, the Department of Finance indicated that the requirements under the PCMLTFA and its regulations for reporting entities to determine whether their clients are PEPs does not extend to the beneficial owners of corporate clients, or those of other legal arrangements such as trusts. Mora Johnson pointed out that PEPs often use an associate or an agent to conduct business on their behalf, who may not have identified themselves as a PEP. She further explained that this behaviour necessitates the creation of one or more databases to establish patterns of behaviour and connections between individuals, such as the commercial World-Check database employed by banks. However, access to these databases are expensive and may therefore not be utilized by smaller reporting entities.
The Canadian Life and Health Insurance Association would welcome clarification of the definition of PEPs, both domestic and foreign, but do not support the extension of the definition to include First Nations Chiefs at this time. They also felt that the requirement to determine if a beneficial owner is a PEP should only be considered once a reliable method of identifying PEPs – such as a registry – is in place. However, the Canadian Real Estate Association suggested that implementing new requirements around beneficial ownership and politically exposed persons would cause significant frustration and increase the cost of compliance in their industry.
Over the course of the Committee’s travels, certain witnesses noted that – across jurisdictions – the identification of PEPs is troublingly inconsistent. Reporting entities have been afforded the freedom to determine the extent to which they apply due diligence procedures to PEP identification, and many entities conduct little or none. For example, witnesses noted that some reporting entities will only request that a client self-identify as a PEP through a checkbox in their application for services without defining what a PEP is, while other entities have stopped accepting PEPs as clients because of the uncertainty surrounding their level of risk. Furthermore, some witnesses contend that the definition of a PEP under Canadian law is overly broad, to the extent that everyone would be a PEP if a more technical interpretation of the definition was adopted.
Witnesses explained that larger financial institution will operate or subscribe to media advisory services that will identify the names of their clients if they are engaged in higher-risk activity and/or identify them as PEPs through media reports. However, smaller reporting entities do not have the capacity to operate or subscribe to these services. They argued that a central registry or database of PEPs in Canada would address these problems in the AML/ATF regime.
Lawyers practicing in Canada and notaries practicing in Quebec (legal professionals) are self-regulated under their province’s or territory’s law society, of which there are currently 14. Prior to 2015, legal professionals were among the entities listed in the PCMLTFA that were required to keep detailed records about the financial activity of their clients, and law enforcement were permitted to search their client’s information without a warrant. The Federation of Law Societies of Canada argued that these provisions in the Act were unconstitutional, and on 13 February 2015, the Supreme Court of Canada ruled that these provisions conflicted with solicitor–client privilege. As a result of this ruling, these provisions of the Act do not apply to legal professionals. Provincial/territorial law societies may nevertheless require lawyers in their respective jurisdiction to conduct client verification and keep a record of monetary transactions.
Solicitor-client privilege describes the legally protected confidentiality that exists for communications between a client and his or her lawyer, which stems from the argument that people must be able to speak candidly with their lawyers to enable their interests to be fully represented, thereby facilitating the just operation of the legal system. The Supreme Court of Canada described the origins of Canadian solicitor-client privilege in the 2001 case of R. v. McClure, which explains that this form of privilege began as a rule of evidence and became a fundamental legal right through the common law. The case explains that while limited exceptions to this privilege exist – namely, that it will not apply to a client who is not seeking legal advice – it must be as close to absolute as possible in order to function properly.
Attorney-client privilege in the United States operates similarly to Canadian solicitor-client privilege, and legal professionals are exempt from AML/AFT reporting in both jurisdictions. However, legal professionals in the United Kingdom are subject to the same AML/ATF reporting requirements as other U.K. reporting entities in all non-litigious work they perform. In general, the U.K. weighs the paramountcy of the client’s interests differently than in Canada and the United States. A lawyers’ duties to the court are given more weight in the U.K., and societal differences exist between our jurisdictions with respect to the interpretations of acting in the “interests of justice” and the role that members of the legal profession are expected to play in society.
The legal profession is also self-regulated in the United States and the United Kingdom. However, the U.K,’s Office for Professional Body Anti-Money Laundering Supervision (OPBAS) sets out how certain professionals – such as lawyers and accountants – should comply with their professional obligations with respect to Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) initiatives. OPBAS is funded through fees placed on the professional bodies and is operated under the U.K. Financial Conduct Authority, which is the U.K.’s prudential and business conduct regulator. OPBAS aims to improve consistency of professional body AML/ATF supervision in the accountancy and legal sectors, but it does not directly supervise legal and accountancy firms.
The U.K. Treasury department controls which entities are listed as self-regulatory organizations for the purpose of compliance with the U.K’s Money Laundering Regulations. OPBAS operates within the U.K’s Financial Conduct Authority and has the authority to use information gathering powers, review and issue directions to self-regulatory organizations. If such an organization fails to comply with its obligations under the U.K.’s Money Laundering Regulations or provides false or misleading information to OPBAS, the Financial Conduct Authority can publicly censure the organization or recommend it be removed as a designated self‑regulatory organization.
The Royal Canadian Mounted Police (RCMP) and the Department of Finance identified the exclusion of lawyers and Quebec notaries from the PCMLTFA as the most significant gap within the AML/ATF regime. The Government of British Columbia explained that the absence of lawyers from the regime is also an impediment to police investigations involving the movement of money through the real estate and financial sectors. To address this gap, Transparency International Canada and Marc Tassé recommended that the Federation of Law Societies of Canada, in collaboration with the federal government, bring legal professionals into the ALM/ATF regime in a constitutionally compliant way. They also argued that the Act should designate all financial transactions by legal professionals – especially those using trust accounts – as high-risk and require reporting entities to take enhanced due diligence measures on those transactions, including identifying the beneficial owner and the source of funds. Transparency International Canada indicated that the Solicitors Regulation Authority which regulates solicitors in England and Wales is a model that both the Federation of Law Societies of Canada and the government should explore. Furthermore, the Government of British Columbia recommended that legislation be created to require the legal profession to report the funds in lawyers’ trust accounts. Mora Johnson recommended that agents and trustees – including nominee shareholders and directors – should be required to disclose their status as representative as well as the identity of the parties they represent to certain officials. However, these points of view were not unanimously shared among the witnesses.
The Canadian Bar Association emphasized that the legal profession’s independence from government and respect for solicitor-client privilege are at the foundation of Canada’s justice system. In light of this, the Association and the Federation of Law Societies recommended that the Canadian law societies should continue to self-regulate their industry with respect to anti-money laundering and terrorist financing requirements. The Federation of Law Societies argued that their rules, such as limiting the ability of legal counsel to accept cash (the “No Cash Rule”) and imposing client verification obligations (the “Client ID Rule”) are evidence of the Canadian law societies' commitment to proactively regulate themselves in this area. In their estimation, the combination of rules of professional conduct, financial accounting rules, the “No Cash Rule” and the “Client ID Rule” provide effective safeguards against members of the legal profession becoming involved in money laundering or terrorist financing. They also brought to the Committee’s attention that they were currently engaged in a comprehensive review of the AML/AFT rules and associated compliance and enforcement measures used by the law societies, and that amendments to these rules would be implemented by late 2018. On 19 October 2018, the Federation of Law Societies approved amended AML/AFT rules.
The RCMP indicated that because lawyers have considerable involvement in real estate and corporate transactions, it is important that they are included in the regime. They undertook an audit from July 2013 to June 2017 of 51 financial crime cases and found that over 75% involved lawyers as either a direct suspect or someone identified during the investigation.
During the Committee’s travels, certain witnesses brought to the Committee’s attention that lawyers often perform no PEP or sanctions list screening of their clientele, and no such requirement exists for their profession. Similarly, they noted that lawyers are not required to inquire into the source of funding of heir clients, and believed that their codes of professional conduct only extend AML/ATF considerations to transactions that are obviously dubious.
With respect to reporting to FINTRAC, these witnesses explained that transfers of $10,000.00 or more from a lawyer’s trust account will be reported by the bank that provides that trust account. However, it is uncertain to what extent banks would file suspicious transaction reports from these transfers.
“White-label” or “no name” automated teller machines (ATMs) are mostly owned and operated by private companies, not financial institutions. White Label ATMs can access the Interac payment network, which allows for the sharing of electronic financial services and the electronic access to bank accounts.
In 2015, the Department of Finance released its report on the Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada that detailed Canada’s approach to “better identify, assess and understand inherent money laundering and terrorist financing risks in Canada on an ongoing basis.” This report noted that this industry is highly vulnerable to money laundering and terrorist financing, but industry participants are not subject to the PCMLTFA.
According to the ATM Industry Association, the ATM industry is subject to the to several regulations at the federal and provincial levels, as well as FINTRAC oversight through their connection with financial institutions. In their introductory statement to the Committee, it recounted that since 2009, white label ATMs have been subject to specific anti-money laundering regulations requiring ATM owners to provide information about themselves, the source of cash used in the ATM, the location of the ATM, and details about the Canadian bank account to which the ATM will deposit funds to be withdrawn. Furthermore, the association stated that business owners with multiple ATMs or high-volume ATMs are required to provide criminal background checks and regulations require annual audits. They also indicated that Quebec is the only province in Canada that has a money-services business act that includes ATMs, white label ATMs and that they would prefer this act to be repealed or have ATMs taken out of that act.
Conversely, FINTRAC stated that ATMs are a way to launder money, but conceded that it is difficult to know the extent of the problem because it is not something that is currently being measured, as the industry does not report to FINTRAC.
Certain businesses and individuals in the real estate sector are subject to the PCMLTFA, such as real estate brokers, sales representatives and developers. However, other businesses and individuals such as mortgage insurers, land registries and title insurance companies are not. The Department of Finance’s report on the Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada noted that this industry is highly vulnerable to money laundering and terrorist financing.
In Canada, the mortgage sector extends beyond Banks into a variety of non-federally regulated businesses, such as private equity companies, mortgage finance companies, real estate investment trusts, mortgage investment corporations, mutual fund trusts, syndicated mortgages or individuals acting as private lenders. Both the Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada and the Financial Action Task Force’s most recent Mutual Evaluation Report identified complex loan and mortgage schemes, such as mortgage fraud, as areas of money laundering risk.
The Government of British Columbia outlined one example of money laundering through real estate by connecting a gambler who obtained $645,000 in small bills through a “drop off” outside a casino to ownership of a $14 million house in Vancouver. It also alleged that loans from an unregistered money service business had been used to fund real estate development and make mortgage payments, and indicated an interest in pursuing the issue of criminality in the real estate sector now that the current review of money laundering in casinos is near completion. The Government of British Columbia added that the real estate industry is of particular concern as it is estimated that one third of British Columbia’s GDP is dependent on the sector, and recommend that real estate transactions be subject to PCMLTFA reporting requirements.
Transparency International Canada agreed with the Government of British Columbia, and further recommend the PCMLTFA be amended to require real estate brokers, representatives, developers and lenders to identify beneficial ownership before conducting transactions. They also indicated that the Act does not address purchases of existing commercial or residential buildings, and suggest that redevelopers of existing buildings should be included in the regime to further minimize the risk of real estate being used for money laundering and terrorist financing (ML/TF) purposes. It also called for a registry of beneficial ownership for land.
In their statement before the Committee, the Canadian Real Estate Association said that it is in favour of expanding the types of reporting entities that must report to FINTRAC to create a more level playing field in the real estate sector. It also emphasized that closing existing loopholes for the real estate sector should be a focus of the government and indicated that sales between private individuals create vulnerabilities that money launderers can exploit. Thus, it recommended that reporting and record keeping obligations should be extended to the companies that facilitate such transactions, and also recognized that education and ongoing outreach efforts are essential for new and existing realtors to make sure that they understand their requirements. It also suggested that FINTRAC improve its outreach strategy to build stronger partnerships with reporting entities and maximize compliance, as well as clarify existing guidance in a manner that is meaningful to brokers and agents, and adopt policy interpretations that are better suited to the industry.
During the course of the Committee’s travels, certain witnesses believed that the real estate sector does not fully understand the requirements placed upon them under the regime. In particular, they may not understand how complex corporate ownership structures interact with their “know your client” (KYC) requirements, and that they do not check their clients against any form of sanctions lists or perform PEP scrutiny.
Under the Act, it is permissible for businesses to structure themselves and/or the conduct of their business in a way such that their transactions avoid triggering AML/ATF reporting requirements. In other jurisdictions, such as the United States which adopted U.S. Code 31 USC 5324, it is a criminal offence to structure financial transactions in this way.
According to the Foundation for Defense of Democracies, it should be a criminal offence for an entity or an individual to structure transactions to avoid the regime’s reporting requirements, similar to the operation of title 31 of the U.S. code section 5324 in the United States. This should apply equally to financial institutions and their clients.
In Canada, the armoured car sector is not subject to the AML/ATF regime, unlike other jurisdictions such as the United States. Armoured cars may collect funds from various clients and deposit them into accounts controlled by the armored car company. Those funds are then transferred electronically into the accounts of their customers, which may potentially obscure their origin.
The Foundation for Defense of Democracies argued that armoured car companies operating in Canada should be subject to the AML/ATF regime, and indicated that armoured cars are one of the main ways in which drug cartels have gotten money from Mexico to the United States.
In Canada, dealers of precious metals and stones are subject to the regime, while other dealers of high value and/or luxury goods are not. FATF’s most recent Mutual Evaluation of Canada identified other luxury goods sectors as being areas of increased money laundering and/or terrorist financing risks, such as luxury automobiles, art and antiques. In addition, auction houses selling precious metals and stones are not subject to the AML/ATF reporting requirements.
The Government of British Columbia identified the auto sector as a high-risk area, as Vancouver has among the highest number of “super cars” in North America and auto dealers in Greater Vancouver are among the highest new and used luxury car dealers in Canada by sales volume. They also believe that the criminal lifestyle is often attracted to expensive consumer goods such as luxury cars and pleasure crafts, and such goods are excellent ways in which illegal cash can be reintroduced into the economy. The Government of British Columbia recommended that companies that sell luxury items be subject to reporting requirements under the PCMLTFA and report cash transactions to FINTRAC. The Canadian Automobile Association noted that only 8% of new vehicle sale transactions were concluded without formal leasing or loan arrangements in 2017. Therefore, the transactions that use such arrangements, 92% of all transactions, would already be captured by the reporting of financial institutions. Moreover, only a fraction of 1% of the remaining 8% of transactions concluded without formal leasing or loan arrangements were made in physical cash.
The Canadian Jewellers Association contended that all luxury product dealers – such as those of cars, boats and art – should be required to report large cash transactions to FINTRAC. The auction houses that would be captured under the regulations and the dealers in Precious Metals and Stones that fall into a lower-risk category should be allowed to have a simplified compliance regime, or be exempted entirely if they do not engage in cash transactions above the reporting threshold. The Association also pointed out that auctions houses do not have regulated KYC requirements.
Securities are publicly traded financial assets such as shares of a corporation, bonds, treasury bills, and other debt obligations. The securities industry in Canada is under the jurisdiction of the provincial and territorial government and is therefore regulated at this level. However, to ensure national policy coordination between the provinces and territories, the securities regulators formed the Canadian Securities Association, which is responsible for developing a harmonized approach to securities regulation across the country. In July 2015, the federal government created the joint federal provincial initiative, the Cooperative Capital Markets Regulatory System, which aims to streamline the capital markets regulatory framework to protect investors, foster efficient capital markets and manage systemic risk while preserving the strengths of the current system.
The FATFs mutual evaluation indicated that securities dealers have a good understanding of their AML/AFT obligations, though the level of understanding is weaker in smaller securities firms.
Appearing before the Committee, the Investment Industry Association of Canada indicated that many of its members are smaller firms that carry a disproportionately high compliance burden under the regime.
During the Committee’s travels, some witnesses believed that the securities sector represents a gap in the Canadian AML regime, predominantly due to the patchwork of provincial regulators and no federal AML direction or oversight. Others noted that when securities dealers are suspected of wrongdoing, they are able to resign from their position prior to the conclusion of any internal investigation against them. These individuals then move to another company or brokerage that is unable to be informed about the allegations or unfinished investigation against that broker under Canadian privacy law. This situation allows for bad actors in the security industry to continually circumvent detection and prosecution.
Chapter 1 Recommendations
That the Government of Canada work with the provinces and territories to create a pan-Canadian beneficial ownership registry for all legal persons and entities, including trusts, who have significant control which is defined as those having at least 25% of total share ownership or voting rights.
- Such a registry should include details such as names, addresses, dates of birth and nationalities of individuals with significant control.
- The registry should not be publicly accessible, but it can be accessed by certain law enforcement authorities, the Canada Revenue Agency, Canadian Border Services Agency, FINTRAC, authorized reporting entities and other public authorities.
- To ensure that the registry is accurate and properly performing its function, it should have the capability to follow up on information submitted to it.
- The registry should take into account the best practices and lessons learned from other jurisdictions. In particular, the Committee was interested in the United Kingdom’s dual system of registration, which can be done through a legal professional or through direct online registration, as seen in the U.K.’s Companies House.
- Authorities should be granted appropriate powers to apply proportionate and dissuasive sanctions for failure to fully comply in the prescribed time frame.
- Beneficial owners of foreign companies that own property in Canada should be included in such a registry.
- That subject to Canadian law, requests by foreign governments for information sharing under a Canadian beneficial ownership registry should be considered by the Government of Canada, in cases where tax treaties or other lawful agreements or protocols exist for potential or existing money laundering, terrorist financing or criminal activity.
That the Government of Canada review, refine, and clarify through training, the statutory definition of politically exposed persons (PEP). In particular, the notion of ‘association with a PEP’ under this definition creates ambiguity and inconsistency among institutions in regards to who exactly constitutes a PEP.
That the Government of Canada move to a risk-based model of compliance for politically exposed persons, softening the requirements for those with transparent and unsuspicious financial portfolios.
Given that the legal professions in the U.K. are subject to the same AML/ATF reporting requirements as other reporting entities in all non-litigious work that is performed, the Government of Canada and the Federation of Law Societies should adopt a model similar to the U.K.’s Office of Professional Body Anti-Money Laundering Supervision.
- The Government of Canada request Reference from the Supreme Court of Canada as to whether solicitor-client privilege exists when a client requests advice on how to either launder money or structure finances for the purposes of illegal activity.
That the Government of Canada bring the legal profession into the AML/ATF regime in a constitutionally compliant way with the goal of ensuring that the Canadian standards set by the PCMLTFA protect against money laundering and terrorist financing.
That the Government of Canada consider implementing a body similar to the U.K.’s Office of Professional Body Anti-Money Laundering Supervision with respect to Canadian self-regulated professions.
That the Government of Canada amend the PCMLTFA so that the armoured car and white label ATM sector be subject the AML/ATF regime, as is the case in the United States and the province of Quebec, respectively.
That the Government of Canada amend the PCMLTFA to require all reporting entities, including designated non-financial businesses and professions, such as the real estate sector (brokers and lenders), that are now exempt from the obligation of identifying beneficial ownership, to do the following:
- determine and verify the identity of the beneficial owners;
- determine if their customers are politically exposed persons, or if they are the family members or associates of politically exposed person;
- prohibit opening accounts or completing financial transactions until the beneficial owner has been identified and their identity verified with government-issued identification.
*Consideration of the above should also be applied to foreign beneficial owners.
That the Government of Canada amend the PCMLTFA to extend the requirements for real estate brokers, sales representatives and developers to mortgage insurers, land registry and title insurance companies.
That the Government of Canada make it a criminal offence for an entity or individual to structure transactions in a manner designated to avoid reporting requirements. These provisions would be modeled on Title 31 of U.S. code section 5324.
That the Government of Canada require companies selling luxury items to be subject to reporting requirements under the PCMLTFA and report large cash transactions to FINTRAC if those transactions are not already reported through other means.
That the Government of Canada amend Canadian privacy laws with the sole purpose of permitting security regulators to fully and appropriately examine the professional record of conduct of security dealers and their employees.
That the Government of Canada develop a national view of AML by partnering with provinces and territories to train local regulators on best practices in order to prevent securities firms from being overlooked.
 A “shell corporation” is one that does not actively engage in business activities, but may be used for legitimate business purposes.
 See: FinCEN, Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, 3 April 2018.
 With a trust, an individual – known as the “settlor” – transfers legal ownership of his/her assets to a trustee, who holds those assets for the benefit of the person(s) named by the settlor. Because the settlor is no longer the legal owner of the assets, he/she has no direct tax obligations in relation to them.
 Common law is derived from custom and judicial precedent rather than statutes, and is also referred to as “case law.”
 For a discussion on this topic, see: A collaborative publication of the International Bar Association, the American Bar Association and the Council of Bars and Law Societies of Europe, A Lawyer’s Guide to Detecting and Preventing Money Laundering, October 2014.
 The participating provinces/territory under the Cooperative Capital Markets Regulatory System are British Columbia, Ontario, Saskatchewan, New Brunswick, Prince Edward Island and Yukon.