AML regulations - A global backdrop
No doubt, money launderers have stepped up levels of activity and sophistication, so organised crime is even harder to spot. The digital economy has created more opportunities to exploit financial infrastructures.
Banks and other institutions are always responding with anti-money laundering (AML) measures to deal with financial crime. Tools at their disposal include rigorous customer onboarding processes and AML checks. However, it can be hard to keep up with the pace of change in threat and regulatory compliance. This is especially if RegTech systems supporting regulatory compliance are complex to update.
Covid has naturally exacerbated the AML issue. Criminals have taken advantage of the economic uncertainty and the boom in digital financial products, which has given birth to a whole new wave of online financial crime.
However, the global fight against money-laundering continues to grow in might. And, since the unforgettable events of 2001, this fight includes combatting the finance of terrorism.
The International Monetary Fund (IMF) defines money-laundering as “the processing of assets generated by criminal activity to obscure the link between the funds and their illegal origins.” Though it is mostly distinct from terrorism financing, both exploit weaknesses in financial systems.
Regulators around the world are therefore introducing stronger AML measures and closing loopholes. The US corporate transparency act and the 6th Money Laundering Directive (6MLD) in the EU are just two examples. Canada has also recently introduced new AML regs and our article summaries what those changes are.
Essentials of the Canadian AML Regs
In June 2021, new Canadian anti-money laundering regulations changes came into force. Amendments are being made to regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The biggest changes are around reporting and whose job it is to do this reporting.
There are a number of key changes to the Canadian regulations, particularly around virtual currencies.
Since 2020, money service businesses (or MSBs) have been obliged to report suspicious financial transactions and complete KYC (know your customer) verification during money exchanges or transfers. However, from 1 June 2021, this extends to virtual currency – such as cryptocurrency – transactions too. They will also be required to keep and submit records of all virtual transfers over CA$10,000 (in a single transaction or over a 24-hour period). These transactions must also be reported to The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
There are also new obligations around prepaid payment products (PPP) or prepaid payment product accounts (PPPA). A PPP is a product that enables a person or entity electronic access to funds or to virtual currency paid into a PPP account ahead of a transaction taking place. Financial entities (FE) will now have to record information for every PPPA holder, every authorised user, every PPPA application, every debit and credit memo and every account statement.
There are changes to how relationships are managed and recorded. Previously, it was only financial entities, securities dealers, MSBs and life insurance companies that had to make the call on whether their customers were likely to be politically exposed or heads of international organisations (terrorist property reports are required to be filed “immediately''). The new legislation means this obligation now extends to people such as accountants, anyone who accepts deposit liabilities, sells money orders to the public, deals in precious metals, casinos, notaries and real estate brokers, to name a few. For example, Casinos must now keep a record of transactions made by their customers of more than CA$3,000.
Beneficial ownership requirements
Because corporate structures can be multi-layered and registered across several jurisdictions, this makes beneficial ownership a good way for money-launderers to deflect enforcement. Again, previously it was only financial entities, securities dealers, MSBs and life insurance companies that were subject to beneficial ownership requirements (details about the individual who directly or indirectly exercises “substantial control” over a reporting company) when verifying identities. Now, this extends to corporations, trusts and not-for-profit organisations - and strict records must be kept on all the information obtained.
Why are the changes happening?
The new regulations in Canada are part of a wider, global collective fight against money laundering, made necessary by the fast growth of cryptocurrencies in particular.
Back in 2020, Europe introduced two new pieces of AML legislation, one fast replacing the other; the Fifth Money Laundering Directive (5MLD) and Sixth Money Laundering Directive (6MLD). The legislation included cryptocurrencies and virtual assets, ramping up the responsibilities of firms in this industry. 6MLD updates this, with tougher penalties and a standard set of definitions. It became law on 3 June 2021.
In making these changes, Canada is upgrading its already impressive AML efforts. Corruption doesn’t present huge obstacles in Canadian business currently, with facilitation payments, gift-giving and foreign bribery criminalised and punishable under the Corruption of Foreign Public Officials Act (CFPOA). There are clear-cut regulations in place, along with transparency in the court process and good mechanisms for investigating corruption. However, in recent years, there have been calls for greater measures, based on reports that suggested approximately CAN$46.7bn was laundered through the Canadian economy in 2018. The country is a member of the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, and is committed to implementing the standards set out by the body.
Customer onboarding and AML
The new regulations will go a long way to fighting financial crime globally, but the implications on customer onboarding are not to be taken lightly. Increased reporting and verification means increased vigilance, and new regulatory changes can mean entire system updates. There is also the need for new data provision for individual and company checks, updated risk policies, changes to case management and additional staff training.
According to Juniper research, nearly 330 million new bank accounts will be opened via digital onboarding in 2025, up from 184 million in 2020. This means businesses around the world will need to re-think or rebuild their KYC, AML and onboarding processes to ensure regulatory compliance or risk losing out to more digitally savvy startups.
RegTech solutions using a risk-based approach to AML enable companies to adapt more easily to changing regulations. When new regulations come into effect, financial institutions can make an agile response or launch new products with the appropriate compliance mechanisms in place.
Get in touch
PassFort provides a single SaaS solution to manage compliance and financial crime across every customer lifecycle, including customer onboarding. Our platform is used by regulated firms, financial services and compliance professionals across the world. The flexible RegTech solution makes it easy to digitally transform KYC and AML processes in any jurisdiction.
Get in touch to discuss how we can support your business and efficient execution of its AML processes. We would love to talk.