Changes to AML and Virtual Currency Regulations for Reporting Entities and Money Service Businesses

March 29, 2021

Written By Simon Grant and Aylmer Wang

Entities dealing in "virtual currencies", money services businesses (MSBs) and other reporting entities (REs) to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) will become subject to new compliance obligations with respect to transfers of virtual currency exceeding C$10,000 and know-your-client (KYC) recordkeeping, as updates to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its associated regulations come into force June 1, 2021.¹

Since 2020, MSBs have been required to:

1. report suspicious money transactions; and
2. complete other KYC verification when exchanging or transferring money as prescribed by the regulations.

Effective June 1, 2021, the above obligations of MSBs will extend to virtual currency transactions. MSBs will also be required to maintain and submit transaction records for transfers of virtual currency exceeding C$10,000 in a single transaction, or exceeding C$10,000 over multiple transactions in a 24-hour period (Large VC Transactions), and report those Large VC Transactions to FINTRAC.

Furthermore, the following KYC obligations will be expanded to apply to all REs: 

1. Business relationships: all REs must determine once a business relationship has formed with a client and keep records of such business relationships.
2. Politically exposed persons: all REs must determine if clients are "politically exposed persons" and provide additional risk assessments regarding such clients. 
3. Beneficial ownership: all REs must keep records on and verify the identity of, collect information on ownership, control structure, and director's names of, an entity. 
4. Ongoing monitoring of all KYC information by all REs. 

Background

The above changes are part of a larger multi-step revision in the AML regulatory framework aimed at addressing novel challenges brought about by the emerging cryptocurrency industry in Canada, and are in line with aspects of the Canadian Securities Administrator's three-year business plan to modernize the regulatory regime for crypto-trading and crypto-assets in Canada. 

The first major revision came into effect June 1, 2020, with persons or entities "dealing in virtual currency" being required to register as a MSB with FINTRAC. This means those currently engaged in virtual currency transfer or exchange services were already required to be registered as MSBs. MSBs have ongoing reporting, recordkeeping, KYC and compliance requirements; the upcoming changes are designed to ensure the activities of new MSBs from the first update are captured under general obligations required of all MSBs, and harmonize the ongoing obligations of REs to virtual currency transactions in addition to traditional monetary transactions.

Beginning June 1, 2021, "virtual currency" will be defined in the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations (SOR/2001-317) and Proceeds of Crime (Money Laundering) and Terrorist Financing Regulation as:

(a) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or

(b) a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (a).

Applicable entities that deal in virtual currencies should take steps to ensure they are in a position to comply with the rules when they take effect. The Bennett Jones Fintech and Blockchain team can advise and assist in navigating these and other changes to the crypto-regulation regime.

Notes:

1. See https://canadagazette.gc.ca/rp-pr/p2/2019/2019-07-10/html/sor-dors240-eng.html and https://canadagazette.gc.ca/rp-pr/p2/2020/2020-06-10/html/sor-dors112-eng.html for the full text of the changes.

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