KYC Compliance in Canada & FINTRAC

In Canada, KYC Compliance plays a pivotal role in shaping the Anti-Money Laundering (AML) landscape, particularly in the context of evolving regulatory demands and technological advancements.

Canada is committed to maintaining a robust Anti-Money Laundering (AML) framework. As a founding member of the Financial Action Task Force (FATF), the nation adheres to the guidelines set by this global body. However, the FATF’s 2016 evaluation revealed some shortcomings in Canada’s KYC compliance, AML system, prompting the government to reinforce AML/Counter Financing of Terrorism (CFT) regulations.

This article aims to provide a detailed overview of the evolving regulatory landscape in Canada and offers guidance to businesses on maintaining compliance with these regulations.

Major Regulatory Changes in Canada (2016-2021)

The 2021 amendments have significantly impacted KYC Compliance, introducing stricter requirements for Canadian businesses to adhere to in order to prevent financial crimes.

Between 2016 and 2021, Canada addressed most of its deficient indices, indicating a rapidly evolving regulatory environment. It is paramount for organizations operating in this jurisdiction to stay abreast of these changes to avoid penalties. For instance, Wealth One Bank of Canada was recently fined C$650,000 over non-compliance.

Who is Affected in KYC Compliance?

Entities required to adhere to Canadian AML law and report to FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) include:

1. Financial institutions (banks, credit firms, etc.)
2. Money Service Businesses (crypto companies, forex, etc.)
3. Insurance companies
4. Real estate businesses
5. Casinos
6. Security dealers
7. Accounting firms
8. Agents of the crown
9. British Columbia notaries
10. Dealers in precious metals and stones

Notably, certain non-Canadian businesses, especially foreign Money Service Businesses with a business location in Canada, must also comply with the country’s AML requirements.

Regulatory Bodies

The primary AML regulator in Canada is FINTRAC, established in 2000 as per the Proceeds of Crime Act. Its mandate is to detect, investigate, and counter money laundering activities. Entities must submit AML-related reports to FINTRAC, which analyzes them and collaborates with other law enforcement agencies to resolve the cases.

Key Regulations

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is the primary AML regulation in Canada. The law has been amended several times since its implementation in 2000, with the latest changes proposed recently. The key objectives of PCMLTFA include establishing effective requirements for:

• Customer identification and verification
• Recordkeeping
• Monitoring
• Reporting

Compliance Measures

Effective KYC Compliance measures are essential for businesses to meet FINTRAC regulations, encompassing thorough customer identity verification and risk assessment procedures.

To maintain compliance with Canadian AML law, companies must implement a comprehensive set of procedures including:

• Appointment of a Money Laundering Reporting Officer (MLRO).
• Staff training.
• Risk assessment.
• Conducting Customer Due Diligence (CDD), Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD).
• Screening for persons on sanction lists, Politically Exposed Persons (PEPs) lists.
• Transaction monitoring.
• Ongoing monitoring of customer behavior and transactions.
• Recordkeeping for at least five years from the end of a business relationship or final transaction.
• Reporting suspicious activity.

Identity Verification Options

Canada provides companies with several options to verify the authenticity of clients:

• Government-issued photo identification: Companies must record the name, date of verification, type of document, ID number, the country of issuance, and expiration date.
• Credit file: Companies can obtain a client’s credit file directly from the Canadian credit bureau or a service provider. The information to be collected includes the name, credit file number, name of the bureau or service provider that has the file, and the date when the business’s employee consulted the file.
• Dual-process: Companies can access information from two different sources (e.g., bureau and bank).

Penalties for Non-compliance

Fines for AML record-keeping violations in Canada range from C$1 to C$500,000 per violation, depending on the severity of the breach.

Recent Developments

In 2021, businesses had to adapt to Canada’s new regulatory requirements, which included several crucial changes, especially in the realm of crypto transactions.

Businesses must now keep a “large virtual currency transaction record” and report to FINTRAC if they receive C$10,000 or more in cryptocurrency within 24 hours.

The recent amendments have also simplified transaction reporting. Businesses can now create a single report for all transfers made by a customer within 24 hours, known as the 24-hour rule.

Final Words

As the regulatory environment evolves, staying current with KYC Compliance best practices is crucial for Canadian businesses to mitigate risks and adhere to FINTRAC guidelines.

Evidently, Canada is dedicated to developing a more comprehensive AML system, and it is expected that this will continue in the coming years. Companies operating in this jurisdiction must stay informed about the regulatory changes and ensure compliance to avoid penalties.

Implementing an efficient AML solution, consisting of transaction monitoring and Know Your Customer checks, can significantly minimize the risks of criminal activity and uphold a company’s reputation.

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