Terrorist Financing and Anti Money Laundering in Canada

By Christine Duhaime

Terrorist financing provides funds for terrorist activity.  The main objective of terrorist activity is to intimidate a population or compel a government to do something by killing, seriously harming or endangering one or more persons; causing substantial property damage that is likely to seriously harm one or more persons; or seriously interfering with or disrupting essential services, facilities or systems.

There are two main sources of terrorist financing – financial support from countries, organizations or individuals, and revenue-generating activities that may include criminal activities.

The second source, revenue generating activities, may involve drug trafficking, human smuggling, theft, robbery and fraud to generate money.  Funds raised to finance terrorism usually have to be laundered and thus anti-money laundering processes in banks and other reporting industries are important in the identification and tracking of terrorist financing activities in Canada.

Money laundering is a process whereby the proceeds of crime are transformed into apparently legitimate money or other assets.  It is said that the term ‘money laundering’ was coined from the practice of the American mafia who, at one time, channelled the cash proceeds of crime through laundrettes to legitimize the cash.  Whether this is true or not, the term ‘money laundering’ is now widely used.

Money laundering has traditionally been viewed as a three stage process.

1. In the first, or placement, stage proceeds of crime are introduced into the Canadian financial system.  Placement usually occurs by breaking up large amounts of cash into smaller sums that are then deposited into various accounts at financial institutions or used to purchase a series of monetary instruments (travellers’ cheques, money orders, etc.).
2. In the second, or layering, stage money is converted (or moved) through a web of transactions to disguise it from its source and ownership.  Money may be channelled through the purchase and sale of investment instruments, or wired through a series of accounts at various banks across the globe.
3. In the third, or integration, stage the money is re-entered into the Canadian economy as apparently legitimate funds and may be used to purchase real estate or luxury assets or to invest in business ventures.

Federal government to regulate bitcoin and other digital currencies

As was widely anticipated, the federal government announced today that it will amend federal legislation to require the regulation of digital currencies like bitcoin in order to eliminate the potential risks of digital currencies being used for terrorist financing and money laundering.

Interestingly, the proposed legislation will aim at eliminating, rather than reducing the financial crime risks, which suggests that businesses involved in the exchange of bitcoin will become “reporting entities” under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the ”PCMLTFA“), similar to money services businesses, and accordingly, will be required to be registered by the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC“) and comply with the reporting requirements under the PCMLTFA by, inter alia, monitoring and reporting suspicious transactions and implementing compliance regimes based on site specific risk assessments.

The announcement was made as part of Canada’s 2014 federal budget released today. Bitcoin and other digital currencies were identified as “emerging risks that threaten” anti-money laundering and counter terrorist financing efforts in Canada.

Although few details have been provided, Canada said it would remove the anonymity associated with bitcoin and other digital currency transactions that have any connection to Canada.

Under anti-money laundering laws generally, correspondent banking relationships mean that these changes will apply externally to Canada.

Greater scrutiny of all electronic payment systems including PayPal

And related to this, the government also intends to regulate all electronic payments generally, including PayPal, by amending the Canadian Payments Act to have oversight authority over the Canadian Payments Association and to authorize the Bank of Canada to oversee electronic payments pursuant to the Payment Clearing and Settlement Act.

Canada not a bitcoin “wild west” 

Earlier in 2013, FINTRAC reportedly issued letters to several bitcoin exchange businesses that expressed the position that the PCMLTFA did not apply to their operations. If such opinions exist, they appear inconsistent with both the PCMLTFA and provincial Securities Acts which, by definition, make bitcoin a securities and therefore subject to that legislation as well as the money services businesses provisions under the PCMLTFA, particularly in respect of bitcoin issued by ATMs.

The content of the letters reportedly from FINTRAC were widely published by bitcoin advocates online and provided to the media, resulting in headlines that Canadian regulators were “welcoming bitcoin” when other G8 countries were taking regulatory enforcement action against digital currencies over money laundering and terrorist financing concerns, as well as consumer protection concerns. A Canadian law firm subsequently published advice on the topic of bitcoin and the PCMLTFA that bitcoin was not subject to regulation and Canada was somewhat of a “wild west” environment.

Contrary to the foregoing, Canada is not the “wild west” – bitcoin exchanges and transactions have always been subject to a variety of regulations in Canada, both federally and provincially.  The only issue has ever been the extent to which such transactions trigger the registration requirements under the PCMLTFA for money services businesses.

The Québec government takes the position that bitcoin ATMs, for example, are governed by the Securities Act (Loi sur les valeurs mobilières), the Derivates Act (Loi sur les instruments dérivés) and the Money Services Businesses Act (Loi sur les entreprises de services monétaires) and it has expressed an intention to prosecute violations in respect thereof involving bitcoin.

Internet charities and the regulation of online gambling sites by FINTRAC

Incidentally, the government also announced proposed changes to the Criminal Code of Canada to permit charities to operate lottery schemes through or on a computer (i.e., become i-gaming operators for charitable purposes).

It also announced additional changes to the gambling regime in Canada with amendments to the definition of a “casino” in the PCMLTFA to require the registration with FINTRAC of i-gaming or Internet gambling companies operating in Canada.

Although pari-mutuel wagering is no less susceptible to risks of money laundering and terrorist financing, particularly Internet pari-mutuel wagering at hundreds of venues in Canada, there are no plans to regulate that form of gambling in Canada under the PCMLTFA, in its land-based or online forms.

Antitrust concerns?

The proposed regulation of bitcoin and other digital currencies, and the proposed exemption of pari-mutuel wagering from regulatory burdens imposed on other forms of gambling enterprises raise anti-trust concerns that may warrant further consideration in the months to come as draft legislation is released for comment. The latter concerns were raised in submissions made to the Minister of Finance by the casino industry during the review of the proposed amendments to the PCMLTFA in 2011 and 2012.

Source:  http://www.antimoneylaunderinglaw.com/2014/02/canada-announces-regulation-of-bitcoin-digital-currencies-and-internet-gambling-sites-under-anti-money-laundering-laws.html