Eternity Law International News AML compliance in Canada: Regulation of Payment Service Providers

AML compliance in Canada: Regulation of Payment Service Providers

Published:
November 15, 2021

Payment service providers (PSPs) in Canada must put a risk-based AML/CFT program in place to comply with an AML Law, otherwise, they face regulatory risks. Find out how money services businesses (MSBs) and PSPs fall under AML regulations and what compliance represents for these businesses.

The FINTRAC has updated the Money Laundering Laws. These regulations set up increased oversight and expand the monitoring regime to cover recent innovations. As currently drafted, the regulations apply to MSBs, among other institutions. Given the increased focus on addressing AML/CFT compliance, and the significant penalties for noncompliance, MSBs, and PSPs in Canada should be familiar with their regulatory obligations, and know how to deploy appropriate AML/CFT measures to detect and prevent money laundering cases.

According to the Canadian AML law, an MSB is an institution that delivers any of these services:

  • Foreign exchange dealing;
  • Money transfer;
  • Dealing in virtual currency,
  • Account issuance,
  • Merchant acquiring.

Under the new regulation, such institutions now are required to follow certain rules, one of with is registration with FINTRAC and compliance with certain MSB obligations under the regulatory framework.

The point of contention

Money transferring often leads to many discussions and seems to have not enough clarity. Specifically, there arises a question of whether a PSP is treated to be involved in money transfer and whether, because of this service, they are deemed to be an MSB which will make them comply with the same regulations applicable to such service provisions.

Overview of current regulations in Canada

Payment service businesses, defined as 3rd-party entities that assist commercial customers to accept a variety of online payment methods, are not determined in the PCMLTFA, related regulations, or by the regulatory body FINTRAC, and thus would only fall under the regulation if they satisfy the criteria of a defined reporting organization. Given that PSPs efficiently handle funds transfers between a buyer and a seller; it has not been clarified whether this offering is regarded as a funds transferring service and whether this would make a PSP considered an MSB.

As to FINTRAC, an establishment handling money transfers for the sake of the service is deemed as an MSB, while an establishment transferring funds to carry its actual services is not. For instance, companies that make money transfers under utility, payroll, lease, or other payments are not regarded as MSBs, as the funds dealing is an outcome to their main activity. Similarly, companies that offer settlement services to traders in the name of their customers for the acquirement of products or services, are not deemed as MSBs, because the transfer of funds is accomplished solely to maintain the company’s merchant services.

Based on FINTRAC’s explanation, PSPs that do not deliver money transfers for the sake of the service, are not MSBs and are not obliged to follow specific requirements. Nevertheless, not officially regulated, financial establishments and other 3rd parties often view PSPs to be involved in a business that features higher ML/TF risks, and consequently, they regularly require PSPs to register as an MSB.

Mоnеy Lаundering and Tеrrorist Finаncing Vulnerabilities of PSPs

The Financial Action Task Force equates payment business the services of which include funds used for purchases within a limited amount of merchants with a limited value for products and services with closed loop cards. Thus the guidance on AML/CFT regulation is not intended to apply to these services. Hence, the FATF regards these types of payment service businesses as having lesser risk for criminal proceeds.

Other PSPs that do not cover by this definition are unprotected from higher ML/TF risks. Their exemption from the PCMLTFA and related regulations in Canada does not coincide with the FATF’s approach to the risks connected with such businesses. The risks related to these types of PSPs can be substantial:

  • Anonymous transaction

Services that deliver an opportunity to a customer to buy, register, or use payment methods without any identification elevate the risk the customer is not the person they state they are.

  • Time of operation

Services that are done via the Internet and allow any transfer or acceptance of payments, can be used to move money quickly around the globe. This creates difficulties in tracing the origin of capital.

  • Scope of reach

Services that enable the transfer of funds globally can be used for ML/TF purposes, especially if such offerings are available in countries with undeveloped AML CFT regimes.

  • Different jurisdictions – different rules

The PSP may be registered in one jurisdiction while customers are based in another and therefore ruled by different AML CFT regimes; this is particularly important if the business operates in a jurisdiction with weakened AML CFT controls.

  • Source of financing

Services that allow 3rd-party funding from faceless sources are at a higher risk for ML/TF as the origin of capital can be complicated to control.

  • Decentralization extent

Such business models that are based on a certain number of parties in the supply chain are causing anxiety when the parties belong to different AML CFT regimes or when some of them come from sectors not covered in ML/TF regulations.

  • No direct relationship with an underlying customer

Lack of such relations can make it difficult for PSPs to estimate the value and volume of transactions made by the underlying customer, to rate whether this coincides with expectations for that customer or serves as a sign or indication of fraud or a money laundering or terrorist financing operation. Besides, the PSP must focus on due diligence measures. As payment service providers cannot determine the source of capital and identify the customer, they could bear the risk of infringing AML and sanctions regulations in their jurisdiction.

  • Credit risk

If an underlying customer is involved in credit card fraud, etc., the PSP will take the responsibility for covering those losses.

  • Risk of reputational damage

In the case of accidentally becoming associated with a money laundering or terrorist financing scheme, PSPs may face negative reactions by a large number of people.

Not only do PSPs face risks, the organizations that hold accounts with a PSP also are at risk under this relation. Particularly, the financial institutions must undertake customer diligence measures; they cannot identify the underlying customer, track the source of money, or the nature of the relations on their own. Moreover, as the financial institutions eventually process the transactions, they may unintentionally process false or illegal transactions and for that reason are exposed to the risk of AML CFT breech.

Summing up

Since payment service providers are now not regulated, there are no specific requirements to have an AML program, unless at the insistency of your financial business partner or another 3rd-party. But, even so, these businesses should develop an AML/CFT program to control the ML/TF risks related to their business to prepare for future regulatory changes.

Contacts

For more information about compliance with anti-money laundering rules in Canada or another jurisdiction you are interested in, please contact our specialists. You can also see our offers in the category “Ready-made companies” and “Licenses for sale”.

You could be interested

Business in 2021: how did companies manage to weather the global crisis?

What technologies can be used to prevent it in the future? Tech Week 2021, an annual conference dedicated to the introduction of digital technologies into the business sphere, will bring together leaders from companies operating in the technology industry. They will discuss how small, medium and large enterprises can grow and continue to function steadily...

Corporate services in Italy

Italy has a stable economic situation. Therefore, this country provides a favorable investment climate for starting a business. Today many large companies are striving to cooperate with top Italian companies. The best option to establish communication with such companies is to register your company in this market. In this case, Italy Corporate Services comes to...

Investment Citizenship in St. Kitts and Nevis

A perfect way for citizenship-getting is an “offshore paradise”, which impresses with nature and friendly people. Special opportunities give people a possibility to possess rights as citizens do. Legislation allows local authorities to run a program when citizenship’s given to candidates meeting standards created by relevant ministry. Let us analyze investment citizenship in St. Kitts...

Company formation in Austria

Finance, commerce, and IT are three of the most sought-after investment industries in Austria, which draws international investors from all corners of the world. The law also supports new businesses, and with the assistance of our Austrian company formation experts, international investors may take benefit from a straightforward and adaptable business enrollment process. Typology of...

The leading of business in Czech Republic

In a time to come for most jurisdictions the term of filing the tax return for 2020 year is very close. If one of the parties of the business chain is a representative of the Czech jurisdiction, then it may be necessary to provide a document that would confirm the tax residence of the legal...

The best electronic wallet

The best electronic wallet is quite a debatable issue in 2020. There are plenty of various options available on Internet sites, but there are not so many services worthy of attention in terms of total conditions. The issue of election can be solved as follows: Finding an e-wallet by trial, but it is fraught with...
Fill the blank:

Zurich

Dreikonigstrasse, 31A, Stockerhof

Kyiv

Baseina street, 7

London

Grosvenor Gardens, 52

Washington

1629 K St. Suite 300 N.W.

Vilnius

Gediminas Avenue, 44A

Tallinn

Kesklinna linnaosa, Tuukri 19

Edinburgh

Lochrin Square, 1

Nicosia

Jacovides Tower, 5 floor

Riga

Esplanade, 7 floor

Hong Kong

18 Harbour Road, 35/F, Central Plaza, Wanchai

Singapore

Level 42, Suntec Tower Three, 8 Temasek Boulevard

Sydney

20 Martin Place

Porto

2609 Avenida da Boavista

Tbilisi

Revaz Tabukashvili Str., N 45, area N 7