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

June 21, 2022

Written By Simon Grant, Karly Descoteaux and Asif Zalfackruddin

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 changes that came into force April 5, 2022 to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), repealing key provisions of the definition of electronic funds transfers (EFTs) 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 the "freedom convoy" protests that we previously wrote about in Mareva Injunction over Cryptocurrencies in the Freedom Convoy Class Action.

As a result of the Amendments, certain payment services and merchant settlement activities are now considered EFTs under the Amendments and are captured under the definition of money services businesses (MSBs) and foreign money services business (FMSBs). Payment services providers and merchant settlement providers that are now considered MSBs under the PCMLTFA must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) in addition to requiring certain verification, reporting and recordkeeping obligations in respect of certain funds transfers. As part of the Amendments, crowdfunding platforms are also now considered MSBs and must register with FINTRAC. Below, we provide a summary of the changes and implications to applicable businesses.

The Amendment repealed a portion of the definition of EFTs that applied to payments "carried out by means of a credit or debit card or a prepaid payment product if the beneficiary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 payment by that means for the provision of goods and services." These payment transfers, including credit, debit and prepaid payments, are now considered EFTs. This deletion, coupled with FINTRAC's bulletin, makes it clear that those who process merchant transactions must now register with FINTRAC as MSBs, institute a compliance program, report suspicious transactions and observe other applicable AML and ATF obligations for ETFs, such as know-your client, reporting and recordkeeping.

In connection with the Amendments and as part of the shift in FINTRAC guidance, FINTRAC has also retracted 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 business involved "remitting or transmitting 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 tuition payment services.

As a result, businesses that were previously exempt under PI-7670 such as merchant services (i.e., the provision of settlements directly to merchants on behalf of the merchant’s 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 within the definition of MSB or FMSB, as applicable and be required to comply with related requirements including the following obligations:

1. Register with FINTRAC
2. Develop and maintain a compliance program
3. Carry out Know Your Client requirements, including verifying the identity of persons and entities for certain activities and transactions
4. Keep certain records, including records related to transactions and client identification
5. Report certain transactions to FINTRAC

These regulatory amendments take effect immediately, although FINTRAC specifically stated in its bulletin that it understands:

…that there will be challenges in meeting 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 in order to increase their awareness, understanding and compliance with their obligations.

As such, the immediate requirement is to register with FINTRAC, after which a payment service provider can build its compliance program and observe applicable EFT obligations.

In addition, crowdfunding platforms are now considered MSBs (or FMSBs, applicable, depending on their location). The Amendments added the following definitions:

Crowdfunding platform services means a "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 an application or other software that is used to raise funds or virtual currency through donations."

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

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

We continue to assess the changes in the Amendment and guidance posted by FINTRAC. If you have any questions about the information in this blog post or regarding registering as an MSB or FMSB, please contact the authors.

Authors