Changes to Regulations Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act – Part 1

On April 5, 2022, the Department of Finance released amending regulations (Regulations) to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). These changes were noted in the 2022 Federal Budget (Budget) and foreshadowed in the recent Order to the Emergencies Act. While the Regulations are meant to target crowdfunding platforms, the changes go well beyond that and may have significant effects on foreign and domestic money services businesses (MSBs) more generally, depending on their business models.
 
Under the Regulations, crowdfunding platform services will now be considered either foreign or domestic MSBs and, as such, will be subject to the PCMLTFA regime.
 
Crowdfunding platform services are defined as “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.”
 
A crowdfunding platform, in turn, is defined as “a website or an application or other software that is used to raise funds or virtual currency through donations.”
 
The definition of a crowdfunding platform is tied to raising funds through donations. It will not apply to platforms that provide for peer-to-peer lending likely covered by the securities dealer provisions.
 
In addition, the definition of a crowdfunding platform is broad enough to capture service providers and registered charities that allow individuals and corporations to set up personalized fundraising pages for the registered charity of their choice. While this is not the type of activity usually thought of when considering crowdfunding, the language in the Regulations is drafted broadly enough to capture this.
 
The obligations imposed on crowdfunding platforms are those that apply to money services businesses generally, with a few additions that reflect the unique nature of their business model. In that regard, crowdfunding platforms are required to keep records in respect of the person or entity to whom they are providing services (Client), the purpose for which the funds (or virtual currency) are being raised, and who the funds or virtual currency are being raised for (if not the Client). The crowdfunding platform is also required to identify the Client and any person or entity that makes a donation using the platform in an amount of C$1,000 or more.

In addition to this change, there is a significant change made to the definition of an electronic funds transfer (EFT) that has repercussions beyond crowdfunding. In this regard, the Regulations eliminate one of the exclusions from the definition of an EFT. Specifically, one of the exclusions from the definition of an EFT was any instructions for the transfer of funds “that is carried out by means of a credit or debit card or a prepaid payment product if the beneficiary has an agreement with the payment service provider that permits payments by that means for the provision of goods and services.”
 
This exception was meant to apply to merchant processing activity. In circumstances where a merchant accepted credit, debit or a prepaid card for their goods and services, payments sent to the merchant by a payment service provider (which could sometimes be a financial entity) for the purchases made with payment cards were excluded from the EFT requirements under the Regulations. This exclusion was in keeping with FINTRAC’s policy interpretations that the PCMLTFA was not meant to apply to payment processing activities.
 
The deletion of the payment processing exclusion is noteworthy for many reasons. As a starting point, although the exclusion for payment processing has been eliminated, new EFT exemptions have been added. As a result, the EFT requirements in respect of payment processing activities now apply only to MSBs. Any EFTs sent by MSBs for payment processing activities will now be subject to the following requirements:

• Extensive record-keeping for EFTs over C$1,000

• Reporting for cross-border EFTs over C$10,000 in a single transaction

• Client identification for EFTs over C$1,000

• Politically exposed person (PEP) determination for cross-border transfers of over C$100,000

• Travel rules for cross-border EFTs over C$1,000 or domestic EFTs sent by the Automated Clearing Settlement System (ACSS)

If MSBs that carry on merchant processing activities send payments to or deal with Canadian merchants outside of Canada, these new obligations may prove very challenging.
 
MSBs affected by these changes should update their policies and procedures to deal with the new obligations.
 
As indicated, the changes made to the Regulations facilitate the application of the PCMLTFA to PSPs. Specifically, the definition of an MSB in the PCMLTFA includes a person or entity that engages in the business of “remitting funds or transmitting funds by any means or through any person, entity or electronic funds transfer network.”
 
Clearly, PSP activities fall within this broad definition. PSP activities have not yet been captured by the PCMLTFA because of FINTRAC’s policy on the application of the PCMLTFA to payment processing generally. It is, therefore, possible that the government may not amend the PCMLTFA to deal with PSPs as contemplated by the Budget but instead will change its interpretation of what type of activity is now intended to be regulated.
FINTRAC provides the following caveat in more recent policy interpretations:

“... [P]lease note that FINTRAC is currently reviewing the considerations to be taken into account when determining whether certain businesses are operating as MSBs and in Canada. This review is being undertaken in light of advances in technology and the evolution of business models. However, as this review is a significant and time-consuming exercise, we do not want to delay the provision of our input and are therefore responding to you based on FINTRAC’s current position with respect to payment processing and merchant servicing activities. Any decision made will not be applied on a retroactive basis.”

It has been clear for some time that FINTRAC was looking to change its position on PSPs in respect of its interpretation of the application of the PCMLTFA. Regarding payment processors and merchant services, some of their activity is now specifically captured in the definition of an EFT, but the threshold question is whether they fall within the definition of an MSB.
 
A PSP, while not defined in the PCMLTFA, is already defined in the Retail Payment Activities Act (RPAA). It is this definition that was used in the Emergencies Act Order to deal with PSPs. Accordingly, a PSP is defined in the RPAA as an individual or entity that performs payment functions as a service or business activity that is not incidental to another service or business activity. A payment function is defined as:
 

“(a) the provision or maintenance of an account that, in relation to an electronic funds transfer, is held on behalf of one or more end users;

(b) the holding of funds on behalf of an end user until they are withdrawn by the end user or transferred to another individual or entity;

(c) the initiation of an electronic funds transfer at the request of an end user;

(d) the authorization of an electronic funds transfer or the transmission, reception or facilitation of an instruction in relation to an electronic funds transfer; or

(e) the provision of clearing or settlement services.”

The majority of these activities will fall within the ambit of “remitting or transmitting funds” so as to be caught by the MSB definition. It remains to be seen whether FINTRAC will be amending the Regulations to expand the definition of an MSB to include the above or whether it believes the current definition is sufficient after changing its policy on this issue.
 
There are other amendments from the Budget and previous budgets the government is contemplating for the PCMLTFA. These include the extension of the PCMLTFA to non-regulated mortgage lenders and armoured car companies. It is unclear, however, whether FINTRAC believes further changes are required to catch PSPs.
 
Stay tuned for further updates on guidance from FINTRAC or the Department of Finance.

For more information, please contact:

Jacqueline Shinfield                416-863-3290
 
or any member of our Financial Services or Financial Services Regulatory groups.