This is the third entry in our series of blogs examining cryptocurrencies’ regulatory and business landscape in Canada and Ontario. In our first entry, we wrote about the status of crypto trading platforms in Canada and the tighter requirements imposed for Ontario businesses offering Ontario residents access to crypto trading by the Ontario Securities Commission (“OSC”). Our second post reviewed the recent guidance issued by Canadian Regulators outlining the regulatory requirements and parameters for acceptable marketing practices for businesses that operate crypto trading platforms.
Our latest article reviews the registration requirements for businesses that offer virtual currency exchange and virtual currency transfer services. These businesses are classified as Money Services Businesses (MSB) in Canada and, as such, must not only register as MSBs but also comply with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and associated Regulations, to help combat money laundering and terrorist activity financing in Canada.
If your business deals with virtual currencies and offers either virtual currency exchange services or virtual currency transfer services, then your business is considered an MSB. Unlike the more narrow discussion of when crypto-currencies are and are not considered securities, which discussion we touched on in our previous crypto posts, for anti-money laundering, the Canadian Government has defined virtual currency in a very broad manner.
Virtual currency in Canada is any “digital representation of value, or the private key of a cryptographic system that enables access to a digital representation of value, that can be used for payment or investment purposes.” Whether the virtual currency does not play into the general requirement that any business that deals with virtual currencies in Canada must register as an MSB.
The specific services that would result in a requirement to register as an MSB include the following:
- funds for virtual currency
- virtual currency for funds, or
- virtual currency for another virtual currency.
- transferring virtual currency at the request of a client, or
- receiving a transfer of virtual currency for remittance to a beneficiary.
To legally operate an MSB in Canada, you need to register with Canada’s Financial Transactions and Reports Analysis Centre (FINTRAC).
FINTRAC is “Canada’s financial intelligence unit. Its mandate is to facilitate the detection, prevention and deterrence of money laundering and the financing of terrorist activities while ensuring the protection of personal information under its control.”
FINTRAC requirements generally fall within six general categories. We provide a short summary of each category below:
Every MSB operating in Canada must create a detailed Compliance Program. A properly written Compliance Program outlines and therefore enables the MSB to meet all required reporting, record-keeping, client identification and other know-your-client requirements under the PCMLTFA and associated Regulations. As part of creating a Compliance Program, an MSB will also need to:
- Appoint a Compliance Officer
- Conduct Risk Assessments
- Create a Compliance Training Program for Employees
MSBs must comply with Know-Your-Client regulations, which include verifying client identities, keeping track of the possible involvement of third parties, identifying politically exposed foreign persons and other requirements.
MSBs must keep careful and detailed records of all transactions that they facilitate and report suspicious transactions, transactions involved in suspected terrorist activity, and large virtual currency transactions. Like with fiat currency, large virtual currency transactions are defined as those with a value equivalent to $10,000 CDN or more.
FINTRAC outlines eleven separate categories of records that MSBs must keep in an easily accessible place and format to enable an MSB to produce the relevant record for FINTRAC within thirty days of a production order.
The Travel Rule outlines the type of information that MSBs must keep relating to an Electronic Funds Transfer, including information relating to the sender and the recipient.
Finally, MSBs must also comply with Ministerial Directives issued, including restrictions on transactions with a specific foreign entity or country.
FINTRAC is empowered by legislation to issue administrative monetary penalties. It is also empowered to refer matters of non-compliance to law enforcement which can lead to criminal penalties. Examples of possible criminal penalties include:
- Failure to report a large cash transaction or an electronic funds transfer: up to $500,000 for the first offence, $1 million for subsequent offences
- Failure to meet record-keeping requirements: up to $500,000 and/or 5 years imprisonment
- Failure to provide assistance or provide information during compliance examination: up to $500,000 and/or 5 years imprisonment.
- Disclosing the fact that a suspicious transaction report was made or disclosing the contents of such a report, with the intent to prejudice a criminal investigation: up to 2 years imprisonment.
You can view a list of penalties imposed by FINTRAC here. The highest administrative penalty imposed since late 2020 was an administrative monetary penalty of $701,250 imposed on ICBC (Canada) following three compliance violations in 2019.
Running a business involves an infinite number of both daily and long-term decisions, all of which will impact your venture. The business law team at Bader Law has decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it as a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289) 652-9092.