AML Regulatory Challenges Facing FinTechs

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1 FinTech Regulatory Challenges and Collaborative Opportunities AML Regulatory Challenges Facing FinTechs Robert Scavone* McMillan LLP *With the generous assistance of Gerald Badali, McMillan LLP

2 Overview Fintech-specific regulatory issues Are you a reporting entity? Fintechs as MSBs In Canada requirement New KYC and Client Authentication fintech friendly or not? De-risking 2

3 The MSB Puzzle Threshold issue: Are you an MSB? How does MSB definition apply to fintechs? Foreign exchange dealing Remitting or transferring funds by any means or through any person, entity or electronic funds transfer network Issuing or redeeming money orders, traveller s cheques etc. [most likely n/a] Pending: dealing in virtual currencies prepaid card business [regs under s. 73(a)(a) Some uncertainty around specific activities 3

4 What Is Not MSB? Acting strictly as an agent for an MSB Carrying out MSB activities as part of other services for which the entity is already subject to the PCMLTFA (e.g. bank, securities dealer, etc.) Where transfer of funds simply a corollary of actual service On-line lending Gift cards program processing: BUT closed-loop cards used to transfer funds are caught Fundraising platforms 4

5 Examples of on-line MSBs Web-based service which allows clients to convert currency and transfer/remit converted funds across the border Ecommerce company facilitates cross-border transactions by matching senders to beneficiaries in their home countries Closed loop cash card where A can reload B s card with cash online or make card to card transfers Telecom company enabling customers to transfer funds to mobile wallet account of recipient mobile wallet subscriber [ Digital cash platform used for P2B payments 5

6 More examples of on-line MSBs X s Canadian business sells goods in North Africa for Tunisian dinars. X needs to repatriate dinars to Canada in CAD X posts on social media groups in Canada that he wants to sell dinars for CAD Dinar purchaser meets X and delivers CAD X authorizes rep in Tunisia to pay dinars to buyer s rep in Tunisia No fees or markups flow to X FINTRAC: X is engaged in FX dealing. Why? 6

7 Payment Processors FINTRAC position: persons engaged in: utility payments payroll and commission services, mortgage and rent payment services, certain tuition payment services, not considered MSBs because they are not engaged in the business of remitting or transmitting funds for the sake of the service. The transfer of funds is simply a corollary of their actual service. BUT: Payment processing services provided to merchant clients to pay their suppliers are MSBs 7

8 Are You an MSB In Canada? Foreign-based MSBs not required to register unless engaged in MSB business in Canada FINTRAC: MSB must have real and substantial connection with Canada Indicia of real and substantial connection : Incorporated in Canada Extra-provincial registration in province Agents in Canada Physical locations in Canada Bank account in Canada to carry out MSB activities Server in Canada to carry out MSB activities 8

9 In Canada : Amendments Amendments not yet in force bifurcate MSBs into entities with place of business in Canada and without place of business in Canada In Canada: same as now No place of business in Canada: MSBs if they provide at least one of the [MSB] services that is directed at persons or entities in Canada, and that provide those services to their customers in Canada. In theory will capture offshore fintechs providing on-line services (e.g. remittances) to Canadian customers 9

10 Virtual Currencies Amendments not yet in force will include dealing in virtual currencies in MSB definition Regs will define virtual currencies Entity dealing in virtual currencies not an MSB e.g. X buys Bitcoin from virtual currency exchange, visits local trading site that matches buyers and sellers, then sells Bitcoin for $$ BUT if Bitcoin dealings result in fiat currency remittances, they are MSB: Funds exchanged at local Bitcoin exchange, sent to foreign Bitcoin exchange to be converted back to fiat currency This is fiat-to-fiat currency remittal services à MSB 10

11 Virtual Currencies Bitcoin used as underlying internal transfer technology that allows users to send remittances online caught User accounts that hold CAD send funds through Bitcoin's payment protocol only as a method of simplified monetary movement User could ultimately request the beneficiary of a remittance to receive a fiat currency: X wants to send funds to Y in Venezuela X sends CAD to ABC Inc. ABC Inc converts CAD to Bitcoin but Y gets CAD 11

12 Client ID Issues for Fintechs KYC client ID and verification could be more online friendly FINTECH unreceptive to new technologies not acceptable to view photo identification online, through a video conference or through any virtual type of application. You cannot accept a copy or a digitally scanned image of the photo identification No mention of other technologies such as biometrics Information collected through social media not acceptable 12

13 Originals -FINTRAC s paper world If you are referring to a document in the dual process method, you must ensure that you see the original paper or electronic document and not a copy The original document is the one your client received or obtained from the issuer through posted mail or electronically. The document must appear to be valid and unaltered in order to be acceptable. [Q: How can you confirm this on line?] an original electronic document is one the client received through or by downloading it directly from the issuer's website. [Again how can you confirm this?] 13

14 On-line or face-to-face? Many of FINTRAC s examples assume face to face contact The client can show you their original paper utility statement in person or by posted mail. The client can or show you on their electronic device an electronic utility statement downloaded directly from the issuer's website. The client can print and show you the statement they downloaded from the issuer. 14

15 E-Signatures 6/17/16 Regs more e-friendly for client onboarding: signature includes an electronic signature or other information in electronic form that is created or adopted by a client... of a person or entity referred to in section 5 of the Act and that is accepted by the person or entity as being unique to that client. Signature card now includes a document that is signed by a person who is authorized to give instructions in respect of the account, or electronic data that constitutes the signature of such a person What is an is not an electronic signature: PINs, passwords: OK, because unique to the person Click to accept button: Not OK, because not unique 15

16 MSB Compliance Reporting and record keeping for sending out of Canada or receiving from outside Canada EFTs $10K Record keeping for remittances $1,000 or more Ascertain identity of person engaging in Remittance or transmission of $1,000 FX transaction of $3,000 Confirm existence of entities requiring ID Reasonable measures to confirm whether person initiating or receiving EFT of $100K or more is a PEFP (and as of 6/17/17, PEDP etc.) 16

17 Compliance challenges MSB staff may not be adequate to meet compliance needs 2016 AML benchmarking study found: Many MSBs lack documented compliance programs 59% of MSBs had deficiencies Record keeping detail insufficient No documentation of when and how to make 3 rd party determinations No definitions of PEFPs No documentation of review by senior management 17

18 FRFIs and FinTechs Federally regulated financial institutions (e.g. banks, insurance companies) partner with fintechs As financial entities, FRFIs already reporting entities Further subject to OSFI Guideline B-8 Deterring and Detecting Money Laundering and Terrorist Financing Highlights delivery risk through intermediaries... That may not be subject to AML/ATF laws and measures Use of agents to collect client ID info 18

19 : Risks and de-risking: FATF: The greatest risks of Fintech are often the lack of oversight or governance and the anonymity they can provide. 6/17/17 PCMLTFR amendments: Compliance program must consider risks from new technology -- e.g. 3 rd party fintech OSFI Guideline B-8: Accountability for client ID remains with FRFI if 3 rd parties used to ascertain identity FRFI must require agent to apply FI s ID requirements Could apply to fintechs providing services to DTIs that require AML compliance OSFI: FRFIs should consider terminating relationships with noncomplying agents Result: FIs are de-risking by shedding MSB fintechs Risk-based approach preferable 19

20 : Thank You! 20