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Understanding the New Canadian AML Regulatory Changes in 2024

Resolver
September 4, 2024 · READ

In 2023, Canada faced a staggering $113 billion in estimated laundered money— a wake-up call even for a banking system considered one of the world’s safest and most stable. This eye-popping figure makes it clear: Canadian Anti-Money Laundering (AML) regulatory changes need a serious upgrade in 2024 and beyond. Enter the latest amendments, SOR/2023-194, introduced in September 2023 and set to take effect on October 11, 2024.

Marking a major shift in how Canada tackles financial crime, these AML amendments will introduce stricter controls across the Canadian financial industry, putting mortgage brokers, correspondent banks, and those managing politically exposed persons (PEPs) under the microscope. More changes will arrive in 2025, with proposed amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) announced in Budget 2024, ensuring that financial institutions remain vigilant.

We get it — keeping up with more rules can feel overwhelming. But staying ahead of these Canadian AML changes is more than just about avoiding hefty fines. It’s also about protecting your organization’s reputation and contributing to a safer financial ecosystem. Fortunately, there are clear steps you can take to navigate these changes smoothly, and this guide will help you every step of the way.

In this article, we’re going to break down these new regulations into bite-sized pieces. We’ll show you:

Whether you’re a seasoned compliance pro or new to the AML game, we’ve got you covered. So grab your favorite caffeinated beverage and let’s dive into the world of SOR/2023-194 compliance. Trust us, by the end of this, you’ll be the office expert on Canadian AML regulatory changes for 2024 and be prepared for what’s coming in 2025.

What is Anti-Money Laundering (AML) in Canada in 2024?

Now that we understand the urgency of these changes, let’s dive deeper into what Anti-Money Laundering (AML) means in the Canadian context for 2024. AML in Canada encompasses a comprehensive set of laws and regulations designed to detect, prevent, and deter the laundering of illicit funds through the financial system. These regulations target financial crimes, including drug trafficking, human trafficking, and terrorist financing, which continue to pose significant threats.

In 2024, Canada’s AML framework is undergoing significant changes to address these growing concerns. The updated regulations are a direct response to the increasing sophistication of financial crime and the need for stronger, more proactive measures across all sectors. “Canada is waking up to the fact that the country is being used to launder criminal funds, including assets gleaned from abhorrent crimes such as drug trafficking, human trafficking, and terrorist financing,” a recent Toronto Star op-ed by Martin Kenney states.

This stark reality is underscored by the ongoing scrutiny of Canadian banks, like Toronto-Dominion (TD) Bank, which allocated more than $3 billion USD to cover anticipated fines related to AML compliance failures in the United States in early 2024. Kathy Thompson, OSFI’s Assistant Superintendent, reinforced this urgency in a June 2024 keynote speech, stating, “We have seen in the past that significant illicit activities related to money laundering can impact the reputation of financial institutions — and in turn negatively impact the integrity of our financial system.”

Understanding the implications of AML regulations in Canada for 2024 is essential for financial institutions. Continue reading to learn more about the specific amendments and how they impact different sectors of the Canadian financial industry.

Also read: OSFI’s Guideline E-21: Ensuring Operational Resilience, Risk Management and Compliance in Canadian Financial Institutions

SOR/2023-194: Key changes in Canadian AML regulations for 2024

The SOR/2023-194 amendments, effective in 2024, introduce significant updates to Canadian Anti-Money Laundering (AML) regulations, enhancing the financial sector’s defenses against money laundering and terrorist financing. These changes bring increased scrutiny and impose new compliance requirements across multiple sectors. Here’s a breakdown of the key changes and their impact:

  • Expanded Compliance Requirements: The new regulations enforce stricter controls on sectors previously considered lower risk, such as mortgage brokers, virtual asset service providers, and entities managing politically exposed persons (PEPs). This broadened scope acknowledges that money laundering risks extend beyond traditional institutions, such as banks, to all corners of the financial landscape.
  • Enhanced Due Diligence: Institutions must now adopt more rigorous due diligence practices, especially for high-risk customers like PEPs. This includes thorough background checks and continuous monitoring to detect and prevent suspicious activities more effectively.
  • Real-Time Reporting to FINTRAC: The amendments mandate real-time reporting of suspicious transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). This requirement aims to reduce the time frame in which illicit activities can occur undetected, thereby bolstering Canada’s overall anti-money laundering efforts.

What is FINTRAC?

FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) is Canada’s financial intelligence unit. It serves as the central agency for collecting, analyzing, and disclosing financial intelligence to combat money laundering and terrorist financing. Financial institutions and other reporting entities must report suspicious transactions, large cash transactions, and other mandated reports to FINTRAC under Canadian AML regulations.

Why these changes matter

The new regulatory updates are in response to increased scrutiny of Canadian financial institutions, especially as they expand into U.S. and global markets. As Rita Trichur highlighted in her Globe and Mail OpEd, the downfall of Riggs Bank in the U.S. is a stark reminder of the severe consequences of inadequate AML compliance. For Canadian banks, robust AML practices are crucial not just for avoiding substantial fines but also for maintaining customer trust and protecting the integrity of Canada’s financial system.

Read: 5 Surprising Truths About Risk and Compliance Management Software Solutions

Implications of Canada’s 2024 AML regulatory changes

Now let’s understand why these changes matter and how they apply to different sectors:

1. Stricter AML controls in the mortgage industry

Overview: The mortgage sector is particularly affected by the new AML regulations due to the high potential for money laundering in property transactions. Stricter requirements are now in place to enhance scrutiny:

  • Enhanced Due Diligence: Lenders must conduct more thorough background checks, especially for high-risk transactions involving large sums or unusual activity patterns.
  • Real-time Reporting: Mandatory reporting of suspicious activities to FINTRAC, ensuring swift monitoring of potential money laundering schemes.
  • Comprehensive Compliance Programs: Development of tailored AML compliance programs, integrating new guidelines into existing workflows.

2. Tighter monitoring and reporting in correspondent banking

Overview: Correspondent banking relationships, which involve cross-border transactions, have come under increased scrutiny due to the complexity and risk associated with these financial arrangements. The new regulations mandate more stringent oversight and risk management.

  • Detailed Risk Assessments: Particularly crucial for institutions in jurisdictions with weaker AML controls to minimize money laundering risk.
  • Real-time Transaction Monitoring: Swift detection and reporting of suspicious activities, including seemingly innocuous transfers, that could indicate layered money laundering schemes.
  • Enhanced Reporting Standards: Ensuring all transactions comply with Canada’s new 2024 regulatory framework, focusing on transparency and accurate record-keeping.

What is correspondent banking?

Correspondent banking is a financial arrangement where one bank (the correspondent) provides services on behalf of another bank (the respondent), typically across borders. This enables the respondent bank to conduct international transactions and access global financial networks without having a physical presence in the region. Due to the complexity and risks involved, especially concerning money laundering and terrorist financing, correspondent banking relationships require stringent AML and KYC measures to ensure compliance and mitigate risks.

3. Strengthened AML regulations for the virtual currency sector

Overview: With the rapid growth of digital assets, the virtual currency sector is increasingly viewed as a high-risk area for money laundering. The new AML regulatory changes introduce measures to enhance transparency and prevent illicit activities.

  • Transaction Transparency: Implementation of procedures to verify the identities of parties involved in virtual currency transactions.
  • Threshold Reporting: Virtual currency exchanges must report transactions to FINTRAC when they exceed $10,000, in line with the new Canadian AML regulations for 2024 (SOR/2023-194).
  • PEP Scrutiny in Virtual Space: Increased monitoring of virtual currency transactions involving politically exposed persons (PEPs) to prevent money laundering through new technologies.

4. Expanded oversight of Politically Exposed Persons (PEPs)

Overview: Under Canadian AML regulations, Politically Exposed Persons (PEPs) include individuals who hold or have held significant public roles, along with their family members and close associates. PEPs are considered higher risk for potential involvement in money laundering due to their positions of influence. The Canadian 2024 AML regulations expand the definition of PEPs and enforce stricter compliance requirements and has updates that introduce:

  • Continuous Monitoring: Financial institutions must implement ongoing monitoring of PEP accounts.
  • Enhanced Due Diligence: More rigorous background checks are required to mitigate money laundering risks associated with PEPs.
  • Expanded Scope: The definition of PEPs has been broadened, affecting a wider range of entities in the financial sector. (Don’t worry. We get into the nitty gritty of this below.)
  • Risk Management: Institutions must develop specific strategies to manage the unique risks posed by PEPs, including their potential use of complex financial structures or international transactions.

These measures aim to balance the need for heightened scrutiny of PEPs with maintaining their access to essential financial services.

“Experience teaches us that inconsistent assessment of non-financial risks is usually the root cause of financial instability at an institution.” — Kathy Thompson, Assistant Superintendent at the Office of the Superintendent of Financial Institutions (OSFI). 

Canada’s 2024 definition of Politically Exposed Persons (PEPs)

The 2024 amendments to Canadian AML regulations (SOR/2023-194) significantly expand the definition of Politically Exposed Persons (PEPs), broadening the scope of individuals and entities subject to enhanced due diligence and monitoring.

Previous Definition of PEPs Under PCMLTFA:

  • Public Officials: Ministers, parliamentarians, judges, senior civil servants.
  • Family Members: Spouses, children, and parents of public officials.
  • Close Associates: Individuals with close personal or professional relationships with public officials.
  • Foreign PEPs: Foreign officials with significant connections to Canada.
  • Former PEPs: Individuals previously holding prominent public functions may still be considered PEPs for a specified period, depending on the risk.

Expanded Definition for 2024:

  • Domestic PEPs: Now includes additional domestic officials such as mayors of large cities, heads of crown corporations, and leaders of political parties at federal and provincial levels.
  • Extended Time Frame: The period during which an individual is considered a PEP after leaving office has been extended from five years to seven years.
  • Broader Family Definition: Expanded to include aunts, uncles, nieces, nephews, and first cousins.
  • Close Associates: More clearly defined to include business partners and individuals conducting financial transactions on behalf of a PEP.
  • Heads of International Organizations: Explicitly includes heads of international organizations and their senior management, regardless of nationality.

Learn more: The Ultimate Guide to Regulatory Compliance Software: Everything You Need to Know

Implementing a proactive AML culture in Canadian financial institutions

The 2024 amendments to Canadian AML regulatory changes call for a fundamental shift in how financial institutions approach compliance. Recent commentary Toronto Star and the Globe and Mail highlights a critical truth: AML practices require more than just following rules — they demand a transformative approach that embeds compliance into the organizational DNA.

Effective AML compliance requires a holistic, organization-wide approach. According to Pooja Azhalavan, Product Marketing Manager at Resolver: “Compliance doesn’t exist without good culture. Culture is the backbone that drives good employee conduct.”

To foster a compliance-centric culture, financial institutions should:

  • Extend Responsibility: Shifting from a compliance department-centric approach to one where all employees, from frontline staff to the C-suite, understand and engage in compliance efforts.
  • Integrate Compliance into Strategy: Aligning compliance with the organization’s strategic planning and operational processes, ensuring it’s a shared priority across all levels.
  • Encourage Active Participation: Fostering a collaborative environment where compliance is viewed as a collective responsibility, not just a regulatory requirement.

“Compliance is a team sport,” Azhalavan emphasizes. This collective approach strengthens the institution’s defenses against financial crime.

A proactive AML culture is one that is always evolving, continuously learning from past experiences, and adapting to new challenges. This involves:

  • Regular Training and Education: Keeping all employees informed about the latest AML regulatory changes and best practices for compliance.
  • Encouraging a Feedback Loop: Creating channels for employees to report potential compliance issues and suggest improvements without fear of retaliation.
  • Leveraging Historical Data: Using historical incident and loss data to inform future risk assessments and compliance strategies, helping to prevent repeat failures.

By embedding compliance into their organizational culture and leveraging cutting-edge technologies, Canadian financial institutions can foster a proactive AML culture. Paired with advanced tools that simplify compliance, organizations can be better prepared to handle the complexities of financial crime and maintain the trust of their customers and stakeholders.

Also read: What is Compliance Management Software? 7 Benefits and Key Features

AML compliance checklist for Canadian financial institutions in 2024

To ensure full compliance with Canada’s 2024 AML regulations, financial institutions should integrate the following elements into their compliance framework:

  • Technology Integration: Implement AI and machine learning solutions for advanced pattern recognition in transaction monitoring. Understand how new advances like RegTech can help simplify your team efforts so you remain compliant with ease.
  • Cross-Departmental Collaboration: Establish protocols and onboard compliance management solutions for seamless information sharing between compliance, risk management, and customer-facing teams.
  • Scenario-Based Training: Develop role-specific training programs using real-world scenarios to prepare staff for complex compliance challenges.
  • Compliance Metrics Dashboard: Create a centralized dashboard to track key compliance indicators and identify areas needing improvement.
  • Vendor Due Diligence: Enhance third-party risk management processes to account for expanded AML responsibilities in the