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The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), recently updated the Anti-Money Laundering regulation applicable to Financial Entities (FE’s) that need to validate customers in Canada. Below is a breakdown of the changes to existing regulation for Identity Verification and for politically exposed person (PEP) screening.

Identity Verification

Canada has some of the most prescriptive Identity Verification regulations in the world. As opposed to the United States or United Kingdom where there is principle-based verification, FINTRAC explicitly spells out which methods FE’s must take when validating customers in Canada. The new identity verification regulations do not make validating a user any easier, and some regulations make it more cumbersome, even though only one method is required. Listed below are the new acceptable ways to validate customers, including how they’ve changed:

  • Identification document containing a photograph that is issued by a federal or provincial government or by a foreign government, verifying that the name and photograph are those of that person. There are three stipulations that make this more cumbersome for FE’s:
    • The requirement for a photograph; previously any government-issued identification was acceptable
    • The requirement that the FE verify that the name and photograph are those of that person.
    • Prohibition on scanned copies of identification.
  • Referring to information concerning the individual being identified on request from a federal or provincial government body that is authorized in Canada to ascertain the person’s identity and by verifying that either the name and address or the name and date of birth contained in the information are those of the person whose identity is being verified. This method is not available to use as no government body in Canada is “authorized to ascertain the identity of persons”.
  • Referring to a person’s Canadian credit file that has been in existence for at least three years and verifying that the name, address and date of birth contained in the credit file are those of the person whose identity is being verified. Previously the credit file needed to be in existence for only six months and a three-year requirement prevents the onboarding of recent arrivals into the country.
  • Confirming that an affiliated entity (including a member of the same financial services cooperative or credit union central) that is regulated under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), or a non-Canadian entity that carries on a similar business outside of Canada has previously ascertained the person’s identity in compliance with any of the permitted methods and by verifying that the name, address and date of birth contained in such entity’s records are those of the person whose identity is being verified. This is great for larger FE’s who have seen a customer previously. It also stipulates that FE’s can rely on other institutions, however there is no mechanism for other institutions to easily share this data. In addition, relying on another institution is always a large regulatory concern, who takes the blame if something goes wrong?
  • By doing any two of the following:
    • Referring to information from a reliable source containing the name and address of the person being identified and verifying that the name and address are those of the person.
    • Referring to information from a reliable source that contains the name and date of birth of the person being identified and verifying that the name and date of birth are those of the person.
    • Referring to information that contains the name of the person being identified and confirming that the individual has a deposit account or credit card or other loan account with a Canadian financial entity and verifying that information.

This method stipulates that the data sources be different, an extremely onerous requirement unless you have two data sources, or one entity that can prove the data comes from different sources.

These new methods remove the “attestation” and “cleared cheque” methods that were previously acceptable. These methods were used less often in the past several years, especially “cleared cheque.” However, we have seen from our clients that they were still being used and now systems will have to be reconfigured to discontinue these methods until June 17, 2017.

Screening for Politically Exposed Persons (PEPs)

Canada has introduced new screening requirements that treat domestic PEPs similar to Foreign PEPs. Listed below are the requirements that FI’s must follow:

  • Must take reasonable measures to determine whether the account is being opened for a Foreign or Domestic PEP, a family member of one of those persons, or a person who is closely associated with a PEP. This is similar to other countries (US, UK) that demand knowledge of beneficial ownership. While more diligence is required upfront, this is the only way FE’s can determine if a PEP ultimately controls an account.
  • FE’s and securities dealers are required on a periodic basis, to determine if an existing account holder is a PEP or PEP Related Person. This periodic monitoring requirement applies to all account holders. It is a new requirement that all account holders must face periodic screening. Periodic isn’t defined, but the range we’ve seen is every week to every eight weeks. It depends on risk, product lines, and regulator commentary.
  • When a fact is detected that could “be expected to raise reasonable grounds to suspect that a person” is a PEP Related Person, the financial entity must take “reasonable measures” to determine whether this is true. This is a new requirement and there are no guidelines for what “reasonable grounds” or “reasonable measures” means, however FINTRAC will expect some action to be taken. A remediation to this finding would be performing Enhanced Due-Diligence on the customer.
  • FE’s must determine the source of funds, obtain senior management approval to keep the account open, and engage in enhanced ongoing monitoring for all foreign PEPs and their family members and close associates. This has not changed. We have seen clients pair ongoing monitoring of foreign PEPs with stricter transaction monitoring controls to ensure early detection of suspicious activity.
  • Domestic PEPs, heads of international organizations, family members or close associates of such persons, when the regulated entity considers the risk of a money laundering or terrorist activity financing offence is high must determine the source of funds to be deposited in the account, to obtain senior management approval to keep the account open, and to engage in enhanced ongoing monitoring. This is a new requirement and shows that FINTRAC is removing the boundary between Domestic and Foreign PEP for high-risk customers.
  • Regulations in respect of transactions of C$100,000 or more that apply to FI’s, money services businesses (MSBs) and life insurance companies parallel the changes made regarding accounts. Accordingly, regulated entities will now be required to determine if a triggering transaction for C$100,000 or more is undertaken by any PEP Related Person. This is a new requirement and one that illustrates the need to automatically detect and flag transactions above certain dollar amounts.
  • PEP determinations must be conducted within 30 days. This has been increased from 14 days which is great news. Not that it works now, but going forward the excuse that FE’s didn’t have enough time to research a customer will no longer stand.

We Can Help

IdentityMind can help FI’s in Canada follow FINTRAC’s new regulatory requirements.

Identity Verification – IdentityMind’s solution provides KYC options to validate customers per FINTRAC’s requirements including the following:

  • Document Verification including picture – IDM provides Document Verification service that enables automatic review of documents and confirmation that client data matches data in the document.
  • Name and Address Validation – IDM provides Name and Address validation without relying on the customer whose identity is being verified, a requirement in the new regulation.

Name and Date of Birth Validation – IDM provides Name and Date of Birth validation without relying on the customer whose identity is being verified, a requirement in the new regulation.

Screening for Politically Exposed Persons (PEPs) – IdentityMind provides PEP screening to FE’s to ensure they can:

  • Screen Canadian PEPs differently from Foreign PEPs.
  • Periodically screening all PEPs, either automatically or when required. PEPs already flagged and deemed non PEP’s will not reappear each time a review is taken.
  • Provide Know Your Customer services to prove “reasonable measures” have been taken to validate a customer when there’s suspicion they have become a PEP .
  • Document all PEP alerts in a case management system.

For more detail, click here to view the new regulations.