Expanding Anti-Money Laundering Rules to Include Payment Service Providers and Crowdfunding Platforms

Payment service providers and crowdfunding entities that were not previously subject to anti-money laundering (AML) and anti-terrorist financing (ATF) legislation in Canada should be aware of the changes that are came into force on April 5, 2022 to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (RPCFAT), repealing key provisions of the Electronic Funds Transfer (EFT) definition and expanding the scope of applicable Canadian AML and ATF legislation and reporting obligations to include a wider variety of payment services and Merchant Settlement Activities (collectively, the Amendments).

The amendments follow on from the demonstrations of the ‘freedom convoy’ which we have already mentioned in Mareva cryptocurrency injunction in Freedom Convoy class action lawsuit.

As a result of the Amendments, certain payment services and merchant settlement activities are now considered EFTs under the Amendments and fall within the definition of Money Services Businesses (MSBs) and Foreign Money Services Businesses (FMSBs). ). Payment service providers and merchant settlement providers who are now considered MSBs under the PCMLTFA must register with the Financial Transactions and Reports Analysis Center of Canada (FINTRAC) in addition to requiring certain verification, reporting and record keeping obligations with respect to certain transfers of funds. As part of the changes, crowdfunding platforms are also now considered MSBs and must register with FINTRAC. Below, we provide a summary of the changes and implications for affected businesses.

The amendment repealed part of the definition of EFT that applied to payments “made by means of a credit or debit card or prepaid payment product if the payee has entered into an agreement with the payment service that authorizes payment by that means for the supply of goods and services.” These payment transfers, including credit, debit and prepaid payments, are now considered EFTs. ​​This deletion, together with the bulletin of FINTRAC, makes it clear that those who process merchant transactions must now register with FINTRAC as an MSB, implement a compliance program, report suspicious transactions, and comply with other applicable AML and FATs for ETFs, such as know-your-customer, reporting, and record keeping.

As part of the Amendments and as part of FINTRAC’s change in direction, FINTRAC has also withdrawn its Policy Interpretation 7670 (PI-7670). PI-7670 previously set out certain exceptions relied on by payment processors and merchant settlement providers that exempted payment processors and merchant settlement providers from being MSBs if their activity involved “the remittance or transmission of funds by any means or through any person, entity or electronic funds transfer network”, including utility payments, commission services, mortgage and rent payment services and certain payment services tuition.

As a result, businesses that were previously exempt under PI-7670, such as merchant services (i.e. providing settlements directly to merchants on behalf of merchant customers for the purchase of goods and services), as well as payment processing for utility bills, mortgage and rent, commission services and tuition, will now fall under the definition of ESM or FMSB, as applicable. and shall comply with related requirements, including the following obligations:

  1. Register with FINTRAC
  2. Develop and maintain a compliance program
  3. Execute know-your-customer requirements, including verifying the identity of individuals and entities for certain activities and transactions
  4. Maintain certain records, including records related to transactions and customer identification
  5. Report certain transactions to FINTRAC

These regulatory changes are effective immediately, although FINTRAC specifically stated in its bulletin that it includes:

…that there will be difficulties in respecting certain obligations. FINTRAC will be reasonable in its assessment and enforcement approach and is committed to working with reporting entities subject to the PCMLTFA and its regulations to increase their awareness, understanding and compliance with their obligations.

Thus, the immediate requirement is to register with FINTRAC, after which a payment service provider can develop its compliance program and meet applicable EFT obligations.

Additionally, crowdfunding platforms are now considered ESMs (or FMSBs, depending on their location). The amendments added the following definitions:

Crowdfunding platform services means “the provision and maintenance of a crowdfunding platform for use by other persons or entities to raise funds or virtual currency for themselves or for persons or entities specified by them”.

Crowdfunding platform means a “website or application or other software used to raise funds or virtual currency through donations”.

Crowdfunding platforms that offer crowdfunding platform services must now register with FINTRAC as an MSB and will have the following obligations that generally apply to MSBs:

  • implement and maintain a compliance program;
  • to know your customer’s requirements, including verifying the identity of persons and entities for certain activities and transactions;
  • retain certain records, including records related to transactions and customer identification; and
  • report certain transactions to FINTRAC.

We continue to assess changes to the amendment and guidance issued by FINTRAC.

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Elaine R. Knight