Reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) will soon be subject to a new requirement to report transactions suspected to be related to sanctions evasion to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). As noted in its June 25, 2024 special bulletin, this adds to the longstanding obligations to report transactions suspected to be related to money laundering or terrorist financing.

In force as of August 19, 2024, these new obligations importantly create what may be viewed as a de facto civil sanctions compliance regime by bringing economic sanctions violations under FINTRAC’s administrative monetary penalty (AMP) scheme. This expands the Canadian Government’s available tools to monitor and enforce sanctions compliance and reinforces the trend of increased focus both in Canada and abroad on sanctions and signals that Canada continues to move towards more active enforcement.

Canada’s Regulatory Reporting Framework

Administered by FINTRAC, Canada’s financial intelligence reporting unit, the PCMLTFA imposes monitoring and reporting obligations on businesses and individuals in the following industries:

• financial institutions (e.g., banks, credit unions, caisses populaires, trust and loan companies, and federal credit unions);
• life insurance companies;
• securities dealers;
• money services businesses (including crowdfunding platforms);
• casinos (both physical casinos and internet-based ones);
• real estate;
• armoured cars;
• mortgage sector entities;^[1]
• dealers in precious metals and stones;
• accountants and accounting firms;
• legal professionals;
• trust and company service providers;
• virtual currency exchanges; and
• non-profit organizations.

The foregoing categories of reporting entities have had a longstanding obligation to report a “suspicious transaction” to FINTRAC where there are reasonable grounds to suspect that the transaction is related to money laundering or terrorist financing. Additionally, under Part 1.1 of the PCMLTFA, the Minister of Finance has issued three directives requiring reporting entities to abide by further monitoring and reporting rules with respect to financial transactions associated with Russia, Iran, and North Korea. Each of these directives requires reporting entities to treat financial transactions associated with these countries as high-risk and imposes additional administrative requirements.

Under the existing PCMLTFA framework, FINTRAC may impose an AMP where it has reasonable grounds to believe that a reporting entity has violated a requirement under the PCMLTFA or its regulations. Importantly, there is a lower standard of proof (balance of probabilities) to impose an AMP than is needed to obtain a criminal conviction. Over the last year, FINTRAC has imposed 12 AMPs against various reporting entities, ranging from C$33,000 to C$9,185,000 million.

Canadian Economic Sanctions

Canada maintains economic sanctions that restrict or prohibit trade in certain goods and services to certain entities, individuals, or geographic areas. Generally, these prohibitions apply to Canadian persons and individuals and businesses located or operating in Canada. Violating such prohibitions (e.g., by dealing or transacting with a designated person) is a criminal offence with severe penalties, including imprisonment for individuals.

The new sanctions evasion amendments to the PCMLTFA implicate three statutes, administered and enforced by Global Affairs Canada (GAC) and the Minister of Public Safety (through the RCMP), which form the basis of Canada’s economic sanctions regime:^[2]

• The United Nations Act (the UN Act): Canada enacts regulations under the UN Act to give effect to sanctions decisions passed by the United Nations Security Council (the UNSC). These regulations impose economic and trade sanctions directed towards sovereign states the UNSC determines committed an act of aggression or a breach of peace. Sanctions under the UN Act also include measures targeting several terrorist organizations including the Taliban, ISIL (Da’esh) and Al-Qaida.

• The Special Economic Measures Act (SEMA): Canada may impose economic sanctions on foreign jurisdictions and designated individuals:
  • where an international organization to which Canada belongs calls on its members to take economic measures against a foreign state;
  • where a grave breach of international peace and security has occurred and is likely to result in a serious international crisis;
  • where gross and systematic human rights violations have been committed in a foreign state; or
  • where a national of a foreign state, who is either a foreign public official or an associate of such an official, is responsible for or complicit in acts of significant corruption.

• The Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) (the Sergei Magnitsky Law): Canada may sanction foreign nationals who, in the Canadian Government’s view, are responsible for, or complicit in, gross violations of internationally recognized human rights, or who are responsible for, or complicit in, acts of significant corruption.

Each of these economic sanctions laws already impose their own obligations on businesses and individuals. The PCMLTFA amendments simply add to these administrative requirements.

Violations of sanctions are criminal offences, and until the changes to PCMLTFA come into force on August 19, the Government’s only remedy is criminal prosecution of violators. While the penalty for such a conviction may be severe, with penalties ranging up to five years imprisonment under SEMA and the Sergei Magnitsky Law, and up to ten years under the UN Act, criminal prosecutions have been rare in Canada. Over the last 20 years, there has been only one recorded conviction under the UN Act, one (1) guilty plea under SEMA, and no successful prosecution under the Sergei Magnitsky Law. Unlike in the United States, there is no civil framework under which the Government of Canada my pursue civil penalties. The new reporting obligations under the PCMLTFA may change this.

New Reporting Obligations Under the PCMLTFA

Pursuant to the changes set out in Bill C-59, effective August 19, 2024, reporting entities will be required to report to FINTRAC any transaction in respect of which there are reasonable grounds to suspect that the transaction is related to the commission or the attempted commission of a sanctions evasion offence. Bill C-59 further defines “sanctions evasion offence” as an offence arising from the contravention of a restriction or prohibition established by an order or a regulation made under the UN Act, SEMA, or the Sergei Magnitsky Law.

In effect, reporting entities could be subject to AMPs for failing to report transactions which contravene Canada’s sanctions laws. While reporting entities could have been theoretically prosecuted under the criminal provisions of the applicable sanctions law for not reporting such transactions (which as described has never happened), the Government of Canada will now be able to pursue reporting entities for such violations through a FINTRAC imposed AMP. The option to seek criminal charges under the applicable sanctions law also remains.

Additionally, under other proposed changes to the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations, reporting entities may soon also have to file a “Terrorist Property Report” (TPR) with respect to any property owned, held, or controlled by persons sanctioned under Canada’s terrorism provisions of the Criminal Code as well as SEMA, the UN Act, and the Sergei Magnitsky Law. Such TPRs are currently required with respect to property owned, held, or controlled by persons listed under the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism, so the proposed amendments significantly expand the scope of such reports. This is in addition to the existing obligations under those laws to notify the Canadian Government of any such property. These proposed changes are still under consultation until August 5.

In effect, this set of changes to the PCMLTFA and its regulations creates an avenue for the Government of Canada to impose civil penalties against reporting entities as a mechanism to promote sanctions compliance. While these specific changes apply only to reporting entities, they represent a significant step forward in terms of Canadian sanctions enforcement.

At Risk Transactions

To assist businesses recognize at risk transactions, in its June 25 special bulletin, FINTRAC detailed characteristics of financial transactions associated with sanctions evasion and circumvention, including the following.

• Use of Intermediary Jurisdictions. The circumvention of sanctions often involves the use of intermediary jurisdictions to conceal the origin or ultimate destination of a good or service. FINTRAC explicitly highlights the United Arab Emirates, Türkiye, China, Hong Kong, and countries of the Commonwealth of Independent States as common intermediary jurisdictions involved in sanctions evasion, but there are others known to be high-risk jurisdictions, including Cyprus and Lebanon.

• Evasion of Import and Export Controls. Because certain of Canada’s sanctions laws prohibit the export or import of prescribed goods or services to specific jurisdictions, the circumvention of sanctions often involves the evasion of complementary import and export laws. Similarly, there is a higher risk of sanctions evasion when dealing in a good or service known for also being at a high risk of attempted sanctions circumvention (g., dual use military goods, nuclear materials and equipment, and other products specified in Canada’s export control list).

• Use of Opaque Corporate Structures. The circumvention of sanctions often involves the use of opaque or complicated corporate structures to conceal the beneficial ownership of a business.

• Non-resident banking. Because financial institutions in Canada and the United States typically comply with economic sanctions laws, the circumvention of sanctions is often associated with financial institutions in higher risk jurisdictions or jurisdictions different from that where a business is organized. This helps sanctions evaders hide the origin or destination of payments.

• Use of Proxies and Enablers. The circumvention of economic sanctions often includes the use of family members or other close associates (who are not designated under any of Canada’s sanctions laws) to conceal the beneficial ownership of a business.

• Virtual Currencies and Other Alternative Financial Channels. Cryptocurrency and other alternative payment methods, especially those with minimal regulatory oversight, are at a higher risk of sanctions evasion and circumvention.

Further details on potential risk factors are outlined in FINTRAC’s special bulletin and information on how to report suspicious transactions to FINTRAC is outlined in its guidance here.

Business Takeaway

The proliferation of sanctions over the past several years is part of a growing trend towards tighter control over international trade worldwide. The soon to be in force PCMLTFA requirement to report suspected sanctions evasion represents a new tool the Canadian Government may use to enforce compliance with its sanctions prohibitions.

If you have any questions about FINTRAC reporting requirements or Canadian economic sanctions, please contact the author or another member of the Stikeman Elliott regulatory group for assistance.

[1] Entities in the mortgage sector become reporting entities under the PCMLTFA on October 11, 2024.

[2] In addition to the specified laws, references to Canada’s sanctions regime also usually include the provisions set out in Part II.1 (Terrorism) of the Criminal Code and Freezing Assets of Corrupt Foreign Officials Act, but since neither of these statutes is implicated by the new sanctions evasion regulatory changes, there is no further discussion of them in this article.

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