KYC: Know Your Crowdfunder - Regulatory Amendments Affecting Crowdfunding Platforms and Payment Service Providers in Canada

On April 5, 2022, amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the “PCMLTFR”) and the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations (the“PCMLTFAMPR” and together with the PCMLTFR, collectively, the “Amended Regulations”), came into force. The Amended Regulations make crowdfunding platforms and certain payment service providers subject to the requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”) for money service businesses (“MSB”) and foreign money services businesses (“FMSB”).

Background

In the Government of Canada’s most recent update to the Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada report, the risks associated with crowdfunding platforms and payment service providers were assessed as being medium and high, respectively. These risks were highlighted by the illegal blockades and occupations that took place across Canada in early 2022, which were financed, in part, through the use of crowdfunding platforms and payment service providers. Measures broadly similar to those imposed by the Amended Regulations were temporarily implemented in response to the blockades by the Emergency Economic Measures Order, which was in effect from February 14, 2022 until February 23, 2022. The Amended Regulations now serve as a permanent response to mitigate the money laundering and terrorist financing risks posed by crowdfunding platforms and payment service providers.

Implications for Crowdfunding Platforms

1. “Crowdfunding Platforms” that provide “Crowdfunding Platform Services” are now expressly regulated under the PCMLTFA as MSBs or FMSBs, as applicable.

Crowdfunding platforms are defined in the Amended Regulations as websites or software used to collect donations through virtual or fiat currency. Crowdfunding platform services include the offering of a crowdfunding platform for use by others for fundraising for themselves or specified beneficiaries.

The obligations applicable to crowdfunding platforms that provide crowdfunding platform services pursuant to the PCMLTFA include:

• Registration with the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”);
• Reporting requirements (including suspicious transactions and large-value transactions);
• Record-keeping;
• Customer due diligence; and
• Developing a compliance program.

These requirements apply to domestic entities, as well as foreign entities directing their services to Canadians.

The chart below, derived from the Government of Canada website, outlines whether an entity offering crowdfunding platform services to the public is required to register with FINTRAC as either an MSB or an FMSB:

 2. Additional record-keeping requirements have been implemented for the provision of crowdfunding platform services.

In addition to existing requirements for MSBs and FMSBs, the Amended Regulations have added new record-keeping requirements for MSBs in connection with crowdfunding platform services that they provide, and FMSBs in connection with crowdfunding platform services that they provide to persons or entities in Canada. These MSBs and FMSBs are now required to: (a) keep an information record of persons/entities to whom they provide services; (b) keep a record of the purpose for which funds are raised; and (c) identify any beneficiary if the funds are being raised for someone other than the person/entity using the service.

The Amended Regulations have added a new corresponding monetary penalty to the PCMLTFAMPR which provides that contravention of the record-keeping requirements constitutes a minor violation of the PCMLTFA, subject to a penalty ranging from $1 to $1,000. A series of minor violations identified on a notice of violation will be considered a serious violation if the total of the penalties for the violations set out in the notice is equal to or greater than $10,000.

3. Additional identity verification requirements have been implemented for the provision of crowdfunding platform services.

MSBs and FMSBs are now required to verify the identity of a person, corporation or other entity to whom they provide a crowdfunding platform service, or a person, corporation or other entity that donates $1,000 or more virtual or fiat funds through that crowdfunding platform.

Implications for Payment Service Providers

1. Certain payment service providers facilitating electronic funds transfers are now considered MSBs or FMSBs, as applicable, and regulated under the PCMLTFA.

The Amended Regulations capture a broader range of payment service providers by virtue of removing exemptions for the payment processing of credit, debit and prepaid products under the definition of “electronic funds transfer.” As such, these service providers are now required to register as MSBs or FMSBs, as applicable, and comply with the PCMLTFA and Amended Regulations, including registration, reporting, record keeping, due diligence and compliance program requirements.

Importantly, the Amended Regulations expressly exempt the application of certain provisions of the PCMLTFR where funds are electronically transferred by means of a credit/debit card or prepaid payment product if the beneficiary has an agreement with payment service providers for goods and services.

2. Certain payment service providers providing merchant services and payment processing services are now considered MSBs or FMSBs, as applicable, and regulated under the PCMLTFA.

In connection with the Amended Regulations, FINTRAC has also retracted its policy interpretation 7670 (“PI-7670”) which previously exempted entities that provide merchant services (i.e., the provision of settlements directly to merchants on behalf of the merchant’s customers for the purchase of goods and services), as well as payment processing for utility bills, mortgage and rent, payroll, and tuition, from being classified as MSBs and FMSBs, as applicable. These entities are now also required to register and comply with the provisions of the PCMLTFA and Amended Regulations.

If you have any questions with respect to the matters discussed above, please contact Geoffrey Cher at [email protected], Katie Drury at [email protected] or Brendan Wu at [email protected]. The authors gratefully acknowledge the assistance of articling student Ana Savic in the preparation of this update.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.