Equity crowdfunding portals (funding portals) operating in Canada may be subject to anti-money laundering (AML) and anti-terrorist financing (ATF) obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and associated regulations. The Criminal Code of Canada (CCC) also has provisions relating to AML / ATF.
Consequences of Non-Compliance
Failure to comply with the PCMLTFA and CCC could result in legal proceedings and significant fines, jail sentences, and reputational harm to the funding portal and those associated with it. Funding portals should develop and implement a robust AML / ATF compliance regime.
What is Money Laundering?
The United Nations defines money laundering as “any act or attempted act to disguise the source of money or assets derived from criminal activity.” Essentially, money laundering is the process whereby— money generated through criminal activity (i.e. dirty money) is transformed into money that the criminal origin of which is difficult to trace (i.e. clean money). There are three recognized stages in the money laundering process: (a) placement, which involves placing the proceeds of crime in the financial system; (b) layering, which involves converting the proceeds of crime into another form and creating complex layers of financial transactions to disguise the audit trail and the source and ownership of funds (including through the buying and selling of securities); and (iii) integration, which involves placing the laundered proceeds back in the economy to create the perception of legitimacy. The money laundering process is continuous, with new dirty money constantly being introduced into the financial system.
What is Terrorist Financing?
Terrorist financing provides funds for terrorist activity. The main objective of terrorist activity is to intimidate a population or compel a government to do something. It typically involves killing, harming or endangering people or causing property damage that is likely to harm people. It may also involve interfering with or disrupting essential services, facilities or systems. Terrorist activity is undertaken for political, religious or ideological purposes. The fundamental aim of terrorist financing is to obtain resources to support terrorist activities. The sums needed to mount terrorist attacks are not always large and the associated transactions are not necessarily complex (and may include the selling of securities).
FINTRAC
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is the government agency responsible for ensuring that entities with responsibilities under the PCMLTFA comply with those obligations.
Proceeds of Crime (Money Laundering) and Terrorist Financing Act Obligations
The PCMLTFA gives rise to two key categories of obligations for funding portals that are subject to it, namely: (a) to implement and maintain an up-to-date and effective AML / ATF compliance regime; and (b) to take certain steps in prescribed circumstances.
With respect to the required AML / ATF compliance regime, a funding portal’s obligations would include: (i) designating a Compliance Officer to be responsible for the implementation and maintenance of the funding portal’s compliance regime; (ii) developing and implementing written policies and procedures for the funding portal’s compliance regime; and (iii) assessing and documenting the risks inherent in the funding portal’s business as it relates to money laundering and terrorist financing.
With respect to the requirement to take certain steps in prescribed circumstances, a funding portal’s obligations would include: (a) verifying client identify; (b) collecting and keeping records; and (c) preparing and submitting reports to FINTRAC, including suspicious transaction reports and terrorist property reports.
Application of Proceeds of Crime (Money Laundering) and Terrorist Financing Act to Funding Portals
As registered dealers operating funding Portals are authorized under provincial legislation to engage in the business of dealing in securities they are deemed “securities dealers” for purposes of the PCMLTFA and therefore have obligations under the PCMLTFA to help combat money laundering and terrorist financing in Canada. Funding Portals relying on the registration exemption in subsection 3(1) of National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions operate under an exemption from the requirement to register as a dealer by satisfying certain conditions and, technically, are not authorized under provincial legislation to engage in the business of dealing in securities (but exempt from such requirement). Exempt funding portals therefore may not be deemed to be “securities dealers” for purposes of the PCMLTFA, in which case they would not be subject to the PCMLTFA.
The FINTRAC website is a good reference: https://fintrac-canafe.canada.ca/re-ed/sec-eng