On June 19, 2014, the Parliament of Canada approved the world’s first national law on digital currency exchanges, and certainly the world’s first treatment in law of digital currency financial transactions under national anti-money laundering law.
Canada’s Governor General gave Royal Assent to Bill C-31, An Act to Implement Certain Provisions of the Budget Tabled in Parliament on February 11, 2014 and Other Measures (“Bill C-31“). Bill C-31 amends Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act, S.C. 2000, c. 17 (“PCMLTFA“) to legislate over digital currency financial transactions as a matter of anti-money laundering law.
Five Key Changes
The five most important aspects of Bill C-31 as they relate to digital currencies (such as Bitcoin) are as follows:
- Regulates digital currency exchanges as MSB – The activity of digital currency dealing, more specifically referred to as “dealing in virtual currencies” in Bill C-31, will be subject to the record keeping, verification procedures, suspicious transaction reporting and registration requirements under the PCMLTFA as a money services business.
- Does not define “dealing in virtual currencies” – The phrase “dealing in virtual currencies” was not defined and it is not known what the defined term will encompass in terms of transactions but the government has clarified that it will apply only to digital currency exchanges (“Digital Currency MSB“).
- Registration with FINTRAC – Digital Currency MSBs will be required to register with FINTRAC and if successfully registered, to implement a complete anti-money laundering compliance regime.
- Captures foreign Digital Currency MSBs targeting Canada – Bill C-31 extends to: (a) entities that have a place of business in Canada; and (b) entities that have a place of business outside Canada but who direct services at persons or entities in Canada. Digital Currency MSBs in Canada, however, that provide services to persons or entities outside of Canada are exempt from Bill C-31 for those external services.
- Prohibits banks from opening accounts for Digital Currency MSBs if unregistered – Under Bill C-31, banks will be prohibited from opening and maintaining banking relationships with Digital Currency MSBs that are not registered with FINTRAC.
Under Canadian law, the fact that legislation received Royal Assent does not necessarily make it in force. Certain parts of Bill C-31 come in force on dates set in the Bill, and others come in force on a date determined by the Governor General.
Pursuant to the amended PCMLTFA, Digital Currency MSBs will be required to undertake the following obligations:
A. Report Suspicious Transactions
Digital Currency MSBs will be required to report to FINTRAC every suspicious financial transaction and attempted suspicious financial transaction. There is no monetary threshold (i.e., dollar amount) that triggers the requirement to report a suspicious transaction.
B. Report Terrorist Property Transactions
Digital Currency MSBs will have to file with FINTRAC, a terrorist property report when it has property in its possession or control that it knows is owned or controlled by or on behalf of a terrorist or terrorist group; and when it has property in its possession or control that it has reason to believe is owned or controlled by or on behalf of a listed person.
Digital Currency MSBs are prohibited from dealing with terrorist property in any manner or providing any financing or related services in connection with terrorist property. Terrorist property is required to be immediately frozen.
C. Large Cash Transactions
Digital Currency MSBs will be required to report to FINTRAC when they receive an amount of $10,000 or more in cash in the course of a single transaction, unless the funds are received by a public body or a financial entity. Two or more cash transactions of less than $10,000 each that are made within 24 consecutive hours that together total $10,000 or more, are considered one transaction of $10,000 or more if the Digital Currency MSB knows that the cash transactions are conducted by, or on behalf of, the same person or entity.
D. Electronic Funds Transfers
The Digital Currency MSB will be required to report to FINTRAC when it sends out of Canada at the request of a person, an electronic funds transfer of $10,000 or more in a single transaction or receives from outside Canada at the request of a person, an electronic funds transfer of $10,000 or more in a single transaction.
E. Politically Exposed Persons
When a Digital Currency MSB sends or receives an international money transfer of $100,000 or more, it must determine if it involves a politically exposed person (“PEP“) inside or outside of Canada, and if it determines that the funds involve a PEP, it must confirm the source of funds. Determining PEPs is a difficult part of anti-money laundering compliance because the obligation is a worldwide one.
F. Ascertaining ID
Digital Currency MSBs will have to undertake obligations to ascertain the identity of persons and companies using their services to complete certain financial transactions.
G. Records Retention
Digital Currency MSBs will be subject to fairly onerous record-keeping obligations under the PCMLTFA. They must keep large cash transaction records, records regarding third parties when certain transactions are conducted for third parties. They must also retain client identification information and client account documents such as signature cards, deposit slips, account operating agreements and debit and credit memos. They also have to keep transaction ticket records for every foreign currency exchange regardless of the amount, and keep records of PEPs.
H. Risk Assessments
Digital Currency MSBs will have to undertake a risk assessment to evaluate and identify, in the course of its activities, the risk of the commission of money laundering offences and terrorist activity financing offenses. If the risk is high, the Digital Currency MSB must implement measures in writing to:
- Keep client identification information up to date.
- Monitor activities to detect suspicious transactions.
- Mitigate the identified high risks.
Risk assessments should involve an analysis of potential threats and vulnerabilities to money laundering and terrorist financing crimes to which the business is exposed. It should involve gathering information on the nature and extent of money laundering and terrorist financing crimes, and identifying weaknesses in anti-money laundering systems and controls that may make the business attractive to money launderers and persons engaged in terrorist financing.
I. Compliance Regime
Digital Currency MSBs will be required to implement a compliance program to meet reporting, record keeping and client identification obligations under the PCMLTFA. A compliance program is intended to help ensure that a Digital Currency MSB has an ethical and compliant culture, and to minimize risks to the business and its directors, officers and employees of criminal, civil or administrative liability.