New emergency measures: implications for financial service providers – Finance and banking


Canada: New emergency measures: implications for financial service providers

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In response to ongoing blockades and protests against pandemic restrictions, on February 14, 2022, the federal government invoked the Emergencies Act for the first time since that law was passed in 1985. The February 15, the Proclamation declaring a state of public emergency was published in the Canada Gazette, with the Emergency Economic Measures DecreeSOR/2022-22 (the Order) and the Emergency Measures Regulations, SOR/2022-21 (the Regulations). These measures, which came into force on February 15, impose additional obligations on certain reporting entities that are already subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and extend obligations to entities that are not currently subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. PCMLTFA, such as crowdfunding platforms and payment service providers.

Who is affected by these measures?

Section 3 of the Order lists entities that have additional obligations with respect to Designated Persons engaged in Prohibited Activities, as set out in the Regulations. These include certain entities already subject to the PCMLTFA, namely banks and authorized foreign banks, credit unions, insurance companies, trust and loan companies, securities dealers and money services businesses.

The Decree also includes within its scope two categories of entities that are not currently subject to the PCMLTFA:

  • Entities that provide a platform to raise funds or virtual currency through donations (crowdfunding platforms); and

  • Entities that perform any of the following payment functions (payment service providers):
    • the provision or maintenance of an account which, in the context of an electronic funds transfer, is held in the name of one or more end users,

    • holding funds on behalf of an end user until withdrawn by the end user or transferred to another person or entity,

    • the initiation of an electronic funds transfer at the request of an end user,

    • authorizing an electronic funds transfer or transmitting, receiving or facilitating an instruction relating to an electronic funds transfer, or

    • the provision of clearing or settlement services.

Payment service providers who have closely followed the Retail Payment Business Act will recognize the list of entities that perform payment functions set out in Article 3(l) of the Ordinance, which reflects the definition of “payment service providers” in the Retail Payment Business Act. (the RPAA). We have already written about the RPAA.

What are the main obligations?

Obligation to cease trading

All entities subject to the order have an immediate obligation to cease: trading in any property owned, owned or controlled by a Designated Person or by a person acting on behalf of or under the direction of such Designated Person (collectively, designated persons); facilitate any transactions relating to these transactions; make assets, including funds or virtual currency, available to Designated Persons; or provide any financial or related service to or for the benefit of Designated Persons.

A person is a designated person if they are a person or entity that engages, directly or indirectly, in an activity prohibited by sections 2 to 5 of the Regulations, including:

  • participate in a public assembly that can reasonably be expected to disrupt the movement of people or goods or interfere with commerce, interfere with the operation of critical infrastructure, or support the threat or use of acts of serious violence against persons or property, and

  • use, collect, make available or invite any person to provide any property to facilitate or participate in such gathering or for the purpose of benefiting any person who facilitates or participates in such activity.

This means that all entities subject to the order must freeze or suspend any account associated with a named person – no court order is necessary.

Obligation to determine

All entities subject to the order must determine on an ongoing basis whether they are in possession or control of property that is owned, held or controlled by or on behalf of a designated person. Although the Order does not specifically define how these entities must discharge their obligation of “ongoing determination”, the Office of the Superintendent of Financial Institutions (OSFI) has established guidelines for regulated financial institutions federal regarding similar sanctions checks which may provide useful background information. OSFI expects sanctions reviews to be conducted at least weekly, or more frequently in certain high-risk circumstances or for large institutions. Beneficial owners and third parties should be included in controls to the extent that this information is available to the controlling institution. Although not directly applicable, OSFI’s guidance can be a useful starting point for entities subject to the Order, as it quickly expedites internal control processes to comply with the Order.

Registration

If a crowdfunding platform or payment service provider determines that it is in possession or control of property owned, held or controlled by or on behalf of a Designated Person, the crowdfunding platform or the payment service provider must register with the Financial Transactions and Reports Analysis Center of Canada (FINTRAC). Under ordinary circumstances, only Money Services Businesses (MSBs) are required to register with FINTRAC. We expect crowdfunding platforms and payment service providers that determine they are required to register to follow the ESM registration process.

Reporting obligation

Crowdfunding platforms and payment service providers that must register with FINTRAC have the reporting obligations set out in sections 4(2) and (3) of the Order, which include the following:

  • report suspicious transactions,

  • report large cash or virtual currency transactions ($10,000 or more in cash or virtual currency in a single transaction or in a series of transactions within a 24-hour period), and

  • report certain international electronic funds transfers ($10,000 or more in a single transaction or series of transactions within a 24-hour period).

These entities will need to quickly become familiar with these types of reports and will need to develop comprehensive procedures to identify, investigate, escalate and submit all reportable transactions. We expect entities that do not have access to FINTRAC portals to be required to report using paper-based methods.

In addition, all entities subject to the Order are required to promptly disclose to the Commissioner of the Royal Canadian Mounted Police or the Director of the Canadian Security Intelligence Service:

  • the existence of property in their possession or control which they have reason to believe is owned, held or controlled by or on behalf of a named person, and

  • any information about a transaction or a proposed transaction with respect to such goods.

Next steps

The measures taken under the Emergencies Act are meant to be temporary and will expire after 30 days unless the declaration is prematurely revoked or later extended by the House of Commons and the Senate. However, it has been reported that the government is introducing legislation that would amend the PCMLTFA to permanently consider crowdfunding platforms and payment service providers as reporting entities subject to FINTRAC’s regulation. This situation is evolving and we will continue to monitor it closely.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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