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Financial Services Law

Analysis and Updates for the Canadian and Cross-Border Financial Community

Oil and Gas Lease a Proprietary Interest Under the Alberta PPSA

By Andrea Lockhart on Posted in Bankruptcy, PPSA

Last week we discussed the decision of the Alberta Court of Queen’s Bench in Kasten Energy Inc. v. Shamrock Oil & Gas Ltd., 2013 ABQB 63 and, in particular, the Court’s concise summary of the applicable test for the appointment of a receiver.

The Court also considered whether a security interest granted by Shamrock Oil & Gas Ltd. (“Shamrock”) in all of its present and after acquired personal property pursuant to a general security agreement (“GSA”) included a petroleum and natural gas lease it held for the development of an oil well.

Shamrock contended that the authority of a receiver only extended to personal property but not to the lease or sale of the well. Shamrock submitted that the lease was a profit à prendre, which was an interest in land excluded under the Personal Property Security Act (Alberta) (the “PPSA”). The Court found that the lease was a property interest covered by the PPSA and the GSA, relying heavily on the Supreme Court of Canada’s reasoning in Saulnier v. Royal Bank of Canada, 2008 SCC 58. In that case, the Supreme Court of Canada considered the term “property” in the context of a commercial fishing license under the BIA and the Nova Scotia PPSA. In its reasoning, the Supreme Court of Canada stated that “the subject matter of the license (i.e. the right to participate in a fishery that is exclusive to license holders) coupled with a proprietary interest in the fish caught pursuant to its terms, bears a reasonable analogy to rights traditionally considered at common law to be proprietary in nature …”. In this instance, the Court noted that the oil and gas lease was analogous, as Shamrock had a licence to access, drill and extract substance from the ground which was coupled with a proprietary interest under the licence in the extracted resource. Such right was transferable, and fell within the power and authority of the receiver, subject to the terms of the oil and gas lease with the Crown.

Relevant Factors When Considering an Application to Appoint a Receiver

By Andrea Lockhart on Posted in Bankruptcy

In Kasten Energy Inc. v. Shamrock Oil & Gas Ltd., 2013 ABQB 63, the Alberta Court of Queen’s Bench considered the application of Kasten Energy Inc. (“Kasten”) to appoint a receiver over all of the assets and undertakings of Shamrock Oil & Gas Ltd. (“Shamrock”). The decision in this case presents a useful and concise summary of the applicable test for the appointment of a receiver.  

The Court also considers the novel issue of whether a debtor can grant security over an oil and gas lease.  We will discuss the receivership issue in this entry and will address the security issue in a subsequent entry. 

The Facts

The debtor, Shamrock, had a petroleum and natural gas lease to develop an oil well. It entered into a contract with Premier CAT Service Ltd. (“Premier CAT”) for the construction of a road to the well site. Shamrock became indebted to Premier CAT in the amount of approximately $570,000 bearing interest at 24% pursuant to the terms of the contract. Shamrock granted Premier CAT a security interest in all present and after acquired personal property as security for repayment of the indebtedness pursuant to a general security agreement (“GSA”). Ultimately, Premier CAT assigned the outstanding debt and the GSA to Kasten.

Approximately six months later, Shamrock issued a notice of intention to make a proposal under the Bankruptcy and Insolvency Act (Canada) (the “BIA”). Under Shamrock’s BIA proposal, Stout Energy Inc. (“Stout”), a grandparent company of Shamrock, agreed to operate the well pursuant to a joint operating agreement with Shamrock. The proposal contemplated that after recovery of Stout’s capital investment, 80% of the net revenue from operations would be paid to secured creditors until payment in full and the remaining 20% of such net revenue would be paid to unsecured creditors until payment in full. Although Kasten rejected the proposal, it was approved by the requisite majorities of creditors and the Court in conformity with the BIA. Shortly thereafter, Kasten issued a demand for payment and a notice of intention to enforce security under section 244 of the BIA. As at the date of demand, the total indebtedness owing to Kasten had increased to approximately $800,000.

The Receivership Application

Kasten brought an application before the Court for the appointment of a receiver. In considering such application, the Court noted that the applicable test was whether it was just or convenient that such an order be made. The Court outlined several factors to take into consideration when making such determination, including:

  • whether irreparable harm may be caused if no order was made;
  • the risk to the security holder taking into consideration the size of the debtor’s equity in the assets and the need for protection or safeguarding of the assets while litigation takes place;
  • whether the security documentation provided for the appointment of a receiver; and
  • the balance of convenience of the parties.

Kasten argued that following the approval of the BIA proposal, Shamrock’s expenses exceeded revenues by a substantial margin and that it was unlikely that Shamrock would be able to repay the indebtedness in a timely manner. In addition, Kasten noted that it had the right to appoint a receiver under the terms of the GSA, and that there was a risk of waste under the operating agreement as Stout was incurring significant expenses for well operations while channelling revenues in a selective manner. In Kasten’s view, the balance of convenience favoured the appointment of a receiver who would be better positioned to distribute revenues equitably to all interested parties.

In response, Shamrock submitted that Kasten had not demonstrated irreparable harm, and that Stout had injected significant resources to improve the revenue potential of the well. In addition, Shamrock contended that if a receiver was appointed, there was a risk that Stout would cease such funding and noted that it had initiated a sale process and did not perceive any risk if Kasten waited until completion of such process.

The Reasons

The Court noted that a remedial order to appoint a receiver should not be lightly granted. With respect to Shamrock’s submission that Kasten had not shown irreparable harm, the Court noted that such a finding was not essential for the appointment of a receiver. In addition, the Court was not persuaded that Stout would cease funding Shamrock’s operations, as this would likely amount to a breach under the joint operating agreement in respect of which Shamrock could seek a remedy. The Court noted that it was apparent that Shamrock had not made any substantial payments to Kasten from revenues, and that Kasten had a justifiable basis to believe that it would likely encounter difficulties with Shamrock. Further, the Court noted that no formal bids were received in connection with the sales process as at the bid deadline.

Accordingly, after considering all of the relevant factors, including whether other remedies short of a receivership could protect Kasten’s interests, the Court concluded that it was just, convenient and appropriate in the circumstances to appoint a receiver. However, such appointment would be delayed for four months in order to allow a potential sale of the well. If no sale occurred within such time period, the receivership appointment would automatically take effect.

Bill C-60 Includes Amendments to Residency Requirements for Financial Institution Board Committees

By Kashif Zaman on Posted in Bank Act, Legislation

On April 8th 2013, we described proposals for the regulation of Canadian financial institutions set out in the 2013 federal budget. The first bill to implement the budget has been introduced in Parliament. Bill C-60, titled the Economic Action Plan 2013 Act, No. 1, includes amendments which would allow Canadian financial institutions greater flexibility to appoint non-residents as members of board committees.

By way of example, this would be achieved in the Bank Act (Canada) by removing references to a “committee of directors” from section 183 which prohibits a bank from transacting business at a meeting of directors or a committee of directors meeting unless a majority of the directors present are resident Canadians. For banks that are subsidiaries of a foreign bank, at least one half of the directors present must be resident Canadians. There are similar amendments proposed for the Insurance Companies Act (Canada), the Cooperative Credit Associations Act (Canada) and the Trust and Loan Companies Act (Canada). In all cases, the residency requirements for board meetings will remain.

Please contact any one of Stephen D.A. Clark, Kashif Zaman and Victoria Graham if you have any questions on the above.

Update – Letter from LSTA, American Bankers Association Requests Time for Implementation of Final Guidance on Leveraged Lending

By Andrew Herr on Posted in Debt Markets, Regulation

This entry updates our entry of April 9, 2013 and this corresponding Osler Update by Andrew Herr regarding the Final Guidance on Leveraged Lending. 

On April 11, 2013, the Loan Syndications and Trading Association (LSTA) and the American Bankers Association (ABA) issued a joint letter to Office of the Controller of the Currency, the Board of Governors of the Federal Reserve System  and the Federal Deposit Insurance Corporation (collectively, the Agencies) requesting that the “compliance date” of May 21, 2013 listed in the final guidance be removed and that the guidance be revised to provide for up to twelve months for affected institutions to implement the Agencies’ suggestions.  In the letter, the LSTA and ABA stated that more time is required for member institutions to make changes to their policies, procedures and management information systems in order to meet the recommendations in the final guidance.  They also indicated that there are interpretive questions remaining in respect of the final guidance that still need to be addressed.  These include whether the guidance is essentially a binding rule (notwithstanding the Agencies’ statements to the contrary).

 

Government Announces New Complaints Regulations for Bank Customers, Oversight by Federal Consumer Agency of Canada

By Kashif Zaman on Posted in Bank Act, Consumer Credit, Regulation

On April 10, 2013, the Canadian federal government announced the final publication of new regulations that will govern the system for resolving complaints regarding products or services provided by banks and authorized foreign banks in Canada (the “Complaints (Banks, Authorized Foreign Banks and External Complaints Bodies) Regulations”). The regulations (which were first published for comments in July 2012), and the corresponding amendments to federal banking legislation, will come into effect on September 2, 2013.

External Complaint Bodies

Bank customers are currently able to refer unresolved complaints regarding a bank’s products or services to an external complaint body that will seek a resolution impartially. Banks operating in Canada are already members of such external complaint bodies. The new regulations seek to entrench standards for the operation, impartiality and transparency of all external complaint bodies that provide services in Canada’s banking sector. The regulations include criteria for receiving and maintaining Ministerial approval to act as an external complaint body. They also establish certain service standards for such bodies, including a requirement to issue final written recommendations to parties to a dispute within 120 days after the proper referral of complaint.

The Federal Consumer Agency of Canada

The Financial Consumer Agency of Canada Act (Canada) has been amended to expand the role of the Federal Consumer Agency of Canada (FCAC) to include oversight of the regulation of customer complaints and the activities of external complaint bodies. The FCAC has published an Application Guide for External Complaint Bodies for use by entities seeking to serve that role.

Impact for Banks

Banks in Canada already have dedicated procedures and personnel for addressing customer complaints, in accordance with industry standards and legislation and regulations currently in effect. As a result, banks are generally well positioned to meet the new regulatory requirements. The new regulations do set out standards for information disclosure to ensure consistency across the banking sector. This includes providing certain information regarding their complaints procedures and external complaints bodies to its customers as well as annual public disclosure regarding complaints addressed internally by the bank.

Please contact any one of Stephen D.A. Clark, Kashif Zaman and Victoria Graham if you have any questions on the above.

U.S. Regulators Issue Final Guidance on Leveraged Lending

By Andrew Herr on Posted in Debt Markets, Regulation

Andrew Herr has published an Osler Update titled “U.S. Regulators Issue Final Guidance on Leveraged Lending.”  You can read the full update here on Osler.com.

On March 22, 2013, U.S. regulators, consisting of the Office of the Controller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC and, collectively with the OCC and the Federal Reserve, agencies), issued their final interagency guidance on leveraged lending.

The final guidance updates and replaces existing guidance from 2001 and forms the basis of the agencies’ supervisory focus and review of supervised financial institutions. These institutions include national banks, federal savings associations and federal branches and agencies supervised by the OCC; state member banks, bank holding companies, S&L holding companies and all other institutions for which the Federal Reserve is the primary federal supervisor; and state nonmember banks, foreign banks having an insured branch, state savings associations and all other institutions for which the FDIC is the primary federal supervisor. Institutions subject to the final guidance include U.S. branches and agencies of foreign banking organizations. The compliance date for the final guidance is May 21, 2013.

The final guidance outlines, for agency-supervised institutions, high-level principles related to safe-and-sound leveraged lending activities, including underwriting considerations, assessing and documenting enterprise value, risk management expectations for credits awaiting distribution, stress testing expectations, pipeline portfolio management and risk management expectations for exposures held by the institution. Although the final guidance was not adopted as a rule, actions taken by a supervised institution inconsistent with the guidance would, at a minimum, be subject to supervisory criticism.

The final guidance does not provide a bright-line definition of leveraged lending, instead urging supervised institutions to ensure that their policies include criteria to define leveraged lending that are appropriate to the institution. However, the final guidance does provide certain common definitions of leveraged lending, including the following:

  • transactions whose proceeds are used for buyouts, acquisitions or capital distributions (e.g., so-called dividend recaps)
  • transactions in which the borrower’s total debt/EBITDA exceeds 4 to 1 or senior debt/EBITDA exceeds 3 to 1 (in each case measuring debt on a gross basis rather than net of cash on hand).

Importantly, the final guidance does not consider asset-based loans (ABL) to be leveraged loans unless such loans are part of the entire debt structure of a leveraged obligor. In addition, the final guidance does not consider so-called fallen angels (loans that do not meet the definition of leveraged lending at origination, but migrate into that definition at a later date due to changes in the borrower’s financial condition) to be leveraged loans, on the basis that a loan should be designated as leveraged only at the time of origination, modification, extension or refinancing. Loans to investment grade borrowers were not categorically excluded in the final guidance from being leveraged loans. The final guidance does, however, indicate that its references to leveraged lending and leveraged loan transactions do not include “bond and high-yield debt.”

Click here to read the entire Updated on Osler.com, including highlights of the final guidance.

The Canadian Federal Budget and Financial Institutions

By Kashif Zaman on Posted in Regulation

The recently published federal budget (titled “Canada’s Economic Action Plan 2013”) included high level guidance regarding the Government’s priorities for the regulation of financial institutions, services and markets. The details of how these areas will be regulated will become clear only when the applicable legislation and regulations are introduced.  Below is a brief overview of the main points of emphasis in the budget as they apply to financial institutions.

Developing a Financial Consumer Code

The Government intends to develop a “comprehensive financial consumer code” that would consolidate financial consumer protection rules that now appear in various legislation and related regulations. The code would be administered by the Financial Consumer Agency of Canada (FCAC). We can expect consultation with stakeholders to begin in 2013.

Domestic Systemically Important Banks

In March, 2013, the Office of Superintendent of Financial Institutions (OSFI) issued an advisory designating Canada’s six major banks as domestic systemically important banks (DSIBs). Due to the potential impact that the failure of a DSIB could have on the domestic economy, each DSIB will be subject to a risk-weighted capital ratio requirement equal to a 1% common equity surcharge as well as enhanced supervisory and disclosure requirements.

The budget also described the Government’s intention to implement a “bail-in” regime for DSIBs, including provision for the “very rapid conversion of certain bank liabilities into regulatory capital” in the event a DSIB’s viability is threatened. Following questions regarding the meaning of “certain bank liabilities”, the Department of Finance has clarified that it is referring to regulatory capital of the bank (which includes preferred shares and subordinated debt) which will be converted into common equity of the bank in case of a “bail-in”.  Such a conversion will be consistent with the Basel III capital rules now in effect in Canada which require that any regulatory capital (other than common equity) issued by banks should be convertible into common equity upon the occurrence of certain events.

Canadian Payments System

The Government intends to continue its review of elements of Canada’s payments system following the report of the Task Force for the Payments Systems Review. Recently, the FCAC issued Commissioner’s Guidance to clarify three issues related to the Code of Conduct for the Credit and Debit Card Industry in Canada (the “Code”). The budget includes the Government’s intent to finalize an addendum to the Code regarding mobile payments and to review the governance framework for the payments sector generally together with the Bank of Canada.

Canadian Financial Institutions in a Global Marketplace

The Government has indicated its intention to promote the strategic expansion of Canadian financial institutions internationally. In recognition of the global nature of financial markets, it will also propose allowing Canadian financial institutions greater flexibility to appoint non-residents as members of board committees, though the requirement that a majority of members be Canadian residents will remain.

The Role of Mortgage Portfolio Insurance

The Government will continue to address the role of mortgage portfolio insurance in Canada’s housing market. It intends to do so by:

  • Limiting the insurance of low-ratio mortgages to those that are used in conjunction with securitization programs sponsored by the Canada Mortgage and Housing Corporation (CMHC); and
  • Prohibiting any use of any CMHC insured mortgage as collateral in any securitization program other than those sponsored by CMHC.

Please contact any one of Stephen D.A. Clark, Kashif Zaman and Victoria Graham if you have any questions on the above.

Canada’s Largest Six Banks Designated as Systemically Important by OSFI

By Kashif Zaman on Posted in Regulation

In conjunction with A framework for dealing with domestic systemically important banks issued by the Basel Committee on Banking Supervision (BCBS), the Office of the Superintendent of Financial Institutions Canada (OSFI) has issued an Advisory, “Domestic Systemic Importance and Capital Targets – DTIs.” The Advisory identifies each of Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada as systemically important banks in Canada.

As indicated in the BCBS framework, a bank’s systemic importance is related to the impact that its failure could have on the domestic economy. The criteria applied by OSFI in determining a bank’s systemic importance included the following:

  • Size – The six banks identified as systemically important account for over 90% of total Canadian banking assets;
  • Inter-connectedness – The six identified banks have, by far, the highest level of claims against, and obligations to, other financial institutions.  Those ties or “inter-connections” between institutions may increase the risk of problems spreading through the financial system; and
  • Substitutability – The six identified banks are also the dominant participants in financial markets and systems such as underwriting, large value transfers, foreign exchange and clearing and settlement systems for payments and securities transactions. This makes each bank more difficult to replace as a participant in the event of any failure.

The ramifications of being identified a systemically important bank include:

  • A risk-weighted capital ratio requirement equal to a 1% common equity surcharge commencing January 1, 2016;
  • Continuation of an enhanced level of supervisory intensity as reflected in OSFI’s Supervisory Framework; and
  • Enhanced disclosure requirements including those recommended by the Financial Stability Board’s Enhanced Disclosure Task Force.

OSFI will continue to review matters covered by the Advisory and make any required updates, including to the list of systemically important banks and the related equity surcharge level.

This entry was authored by Stephen D.A. Clark, Kashif Zaman and Victoria Graham.

 

Code of Conduct for Credit and Debit Card Industry – Guidance Issued by FCAC Commissioner

By Stephen Clark on Posted in Payments, Uncategorized

On February 13, 2013, the Financial Consumer Agency of Canada (FCAC) issued Commissioner’s Guidance (the Guidance) to clarify three issues related to the Code of Conduct for the Credit and Debit Card Industry in Canada (the Code). The Guidance applies to payment card network operators (PCNOs) that operate in Canada and their participants, including independent sales organizations (ISOs) and other service providers (e.g. processing, terminal leasing). The full text of the Guidance can be accessed here.

The Code, introduced in April 2010, is meant to help promote greater transparency for Canadian merchants and consumers who use credit and debit cards. The Guidance is meant to help merchants, payment card network operators, card issuers and acquirers better understand their obligations under the Code.

The Guidance focuses on three major issues identified by FCAC through its supervisory work: 

  1. inappropriate sales and business practices;
  2. disclosure to merchants in multiple provider agreements; and 
  3. multiple contract cancellation penalties, costs or fees.

Sales and business practices

The Guidance notes that the FCAC has received a number of complaints related to sales practices that did not promote increased transparency and as such are not in accordance with the Code. Examples of the types of practices include:

  • failing to provide merchants with complete copies of the merchant-acquirer agreement in a timely manner (e.g. not providing a copy of applicable transaction and processing fees and rates at the time the merchant enters into the agreement); 
  • unilaterally modifying a merchant-acquirer agreement governing payment card transaction processing without providing advance notice (e.g. 30 days or more before the changes);
  • sales representatives advertising and promising rates and fees that participants are not able to honour;
  • inconsistencies between the information disclosed in the merchant-acquirer agreement and the merchant’s monthly statements (i.e. different terminology used to describe fees and rates or different fees / rates in agreement and statements); and 
  • misrepresenting contractual terms.

In order to address these complaints, the Guidance notes that the following actions should be taken by PCNOs:

  • PCNOs will work directly with their participants to promptly address sales or business practices within their networks that are inconsistent with the requirement to provide clear and simple disclosure to merchants or that may be misleading to merchants.
  • PCNOs will work with their participants to establish appropriate time frames within which to address concerns raised by merchants in connection with sales or business practices within a participant’s network and to develop appropriate processes to address such issues within a reasonable time period. PCNOs will also work with their participants to ensure that appropriate remedies are implemented in a timely manner, including amending or voiding contracts that were entered into through such sales practices.

Disclosure in Multiple Service Provider Agreements

The Guidance notes that merchants often find multiple service provider agreements opaque and difficult to understand in part because of the many different but interconnected payment services they require. Therefore, it is difficult for merchants to make reasonable and informed decisions. In order to address this issue, the Guidance notes that the following actions should be taken by PCNOs:

  • PCNOs will work with their participants to improve the clarity of disclosure to be provided to merchants before they enter into a multiple ISO / service provider agreement or agreements where there is a business connection between the participant and ISO / service providers, by requiring that key information be presented in a manner that is easy for merchants to find and understand.
  • Specifically, PCNOs and their participants will work together to ensure that the following information is provided to merchants, in a consolidated fashion, such as a cover page to the multiple service provider agreement or agreements, before they are entered into by the merchant: (a) the name, coordinates, contact information of each service provider and the nature of the services being provided by each; (b) the effective date of each agreement; (c) information on the expiry and renewal (e.g. whether the contract automatically renews if not cancelled before a specific date) for each agreement; (d) detailed information on any applicable fees and rates for each participant; (e) information on how statements will be provided to merchants (e.g. on paper or online); (f) the cancellation terms of each agreement entered into with the merchant, including specific information on any cancellation fees that could apply; (g) if point-of-sale services are offered to a merchant, general information on buying, leasing or renting options of point-of-sale hardware to enable merchants to make an informed decision; and (h) the complaint-handling process for each participant; including how a merchant can contact the complaints department of each.

The Guidance notes that participants are strongly encouraged to adopt an “information summary box” cover page format in their disclosure (the Guidance includes a sample of such disclosure).

Multiple Contract Cancellation Penalties, Costs or Fees

The Guidance notes that the FCAC has encountered situations where merchants, who have signed a merchant-acquirer agreement with a participant, later discover that they had actually entered into additional contracts for related services (related service contracts) that each contained different cancellation clauses and related penalties, fees or costs. When a merchant sought to cancel the merchant-acquirer agreement without penalty following a transaction fee increase or the introduction of a new fee, as permitted under the Code, the merchant was able to cancel the contract with the participant without penalty, but often faced additional costs or penalties to terminate related service contracts. In some cases, the merchant did not exercise its right to cancel the merchant-acquirer agreement without penalty because of these penalties under the other contracts. As a result, these penalties undermine the rights granted under the Code. In order to address this issue, the Guidance notes the following:

  • The principal of Element 3 of the Code relating to merchants’ right to cancel without penalty under certain circumstances should not only apply to the merchant-acquirer agreement, but also to any related service contracts with service providers. In situations where there is a business connection between the participant and the service providers, services should be considered related and as a single service package.
  • PCNOs will work with their participants to ensure that, consistent with Element 3 of the Code, merchants will be permitted to cancel the merchant-acquirer agreement and all related service contracts without penalty, following notification of any new or increased fees by any participant or related service providers.
  • The only exception is in a situation where a merchant, on its own initiative, enters into separate contractual arrangements with unrelated service providers. In such situations, the contract(s) with the separate service provider(s) should be treated as separate agreement(s).
  • If the participant or one of the related service providers introduces or increases a fee, the merchant may terminate the contracts with the participant and any related service providers without penalty, in accordance with Element 3 of the Code. However, any agreement separately entered into between the merchant and an unrelated service provider would not be covered by Element 3 of the Code, and as such, the merchant could be subject to a cancellation penalty if it wished to cancel this contract.

Implementation and Timing

The Guidance notes that the FCAC expects that (a) all PCNOs will publicly commit to this Guidance and incorporate the required amendments into their operating rules within 90 days of the date of the Guidance, and (b) all participants will comply with the Guidance and will incorporate any required changes to improve documentation, processes or approaches within 180 days of the date that PCNO operating rules are amended.

This entry was written by Stephen D.A. Clark, Kashif Zaman and Victoria Graham.

Amendments to Anti-Money Laundering Regulations

By Kashif Zaman on Posted in Anti-Money Laundering, Regulation

On February 13, 2013, the Government of Canada published in the Canada Gazette certain amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the “Regulations”).  These amendments will come into force one year after their publication (i.e., in February 2014).

The full text of the amendments can be found here.  In summary, these amendments (a version of which was previously published in October 2012 for comment) are meant to address certain deficiencies identified by the Financial Action Task Force (“FATF”) in the customer identification and due diligence provisions of the Regulations. The FATF is the international standard setting body for AML/ATF activities.  Canada is a founding member of the FATF.  In its 2008 evaluation of Canada, the FATF identified deficiencies in Canada’s requirements relating to customer identification and due diligence, and Canada was found to be non-compliant with FATF Recommendation 5.  The stated purpose of these amendments are:

  • to ensure that the reporting entities clearly understand their customer due diligence (“CDD”) obligations;
  • to improve Canada’s compliance with Recommendation 5; and
  • to promote the continuing strength of Canada’s AML/ATF regime.

The amendments to the Regulations make the following clarifications to the CDD provisions of the Regulations:

  • The term “business relationship” would now be defined in the Regulations. The Regulations will also be amended to clarify that, in order to meet their obligations to identify and report suspicious transactions, reporting entities should conduct ongoing monitoring of business relationships with clients, using a risk-based approach, and should obtain information on the purpose of a business relationship when entering into a business relationship with a client.
  • The circumstances in which reporting entities should take enhanced CDD measures in respect of high-risk customers, activities or transactions will be clarified to clearly indicate that enhanced measures should be taken in respect of all high-risk clients and activities, and a list of enhanced measures from which reporting entities could choose will be added. The measures will include keeping client information up to date and conducting enhanced ongoing monitoring.
  • The Regulations require certain reporting entities to obtain identification information, in designated circumstances, from all persons who own 25% or more of a corporation or other entity. The amendments specifically clarify that those reporting entities should also obtain documentary evidence from the client that confirms the beneficial ownership information that they have obtained.
  • The Regulations will be amended to clarify that no exceptions exist to reporting entities’ current obligations to conduct CDD measures in respect of any transaction or activity which gives rise to a suspicion of money laundering or terrorist financing.

Before these amendments to the Regulations come into force, the Financial Transactions and Reports Analysis Centre of Canada (Canada’s financial intelligence unit) and the Office of the Superintendent of Financial Institutions (responsible for administering the federal financial institutions statutes in Canada) will provide updated guidance in order to address the comments provided by stakeholders on the previous version of these amendments published in October 2012.