Canada Overhauls Sanctions and Anti-Money Laundering Compliance and Penalties and Further Targets Russian Assets

Canada Overhauls Sanctions and Anti-Money Laundering Compliance and Penalties and Further Targets Russian Assets

The Government of Canada’s 2024 Fall Economic Statement foreshadows substantial additional reforms to Canada’s economic sanctions and anti-money laundering (“AML”) regimes.

Canadian Financial Institutions Take Note: Anticipated “Windfall Profit” Mechanism

Canada plans to expand its sanctions regime to further target Russian assets, aiming to support Ukraine’s war efforts and reconstruction. The 2024 Fall Economic Statement announces a “Made-in-Canada” version of the European Union’s windfall profit mechanism.[1] This new “targeted charge” will redirect interest accrued on frozen Russian assets held by Canadian financial institutions to support Ukraine.

In February 2024, the EU introduced a windfall profit mechanism to support Ukraine by reallocating profits derived from frozen Russian assets exceeding €1 million.[2] The Council of the European Union requires Central Securities Depositories (“CSDs”) holding more than €1 million of the Central Bank of Russia’s assets to account for extraordinary cash balances separately and prohibits them from disposing of any net profits.[3] CSDs must contribute net profits on these accounts to the European Union on a bi-annual basis to be distributed to Ukraine.[4] The first payment of €1.5 billion was transferred to Ukraine in July 2024.[5]

Canada’s windfall mechanism is expected to align with the EU’s approach, redistributing profits generated from property frozen but not seized or forfeited. It is not yet known how the windfall mechanism will operate, including the types of assets and profit streams that will be caught and the processes involved in transferring them from the FRFIs to the Government. It could, however, potentially capture securities held by Canadian FRFIs, but additional details are not yet available.

Canada’s existing asset forfeiture regime is designed to target sanctioned assets for re-distribution. It permits the Canadian government to seize property that is owned, held or controlled by a sanctioned person (see our previous bulletin here). A notable seizure under this regime is the Antonov-124 cargo plane owned by Volga-Dnepr, which has been held at Toronto’s Pearson Airport since February 2022.[6] After seizure, the Government may commence legal proceedings leading to a forfeiture of the property (after addressing potential interests of non-sanctioned third parties in the property).

Further Expansion of Canada’s AML Regime: Company Service Providers and Steeper Penalties

The 2024 Fall Economic Statement also announces further changes to Canada’s AML regime. These changes expand reporting entities and introduce stronger penalties under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”).[7] These changes are in addition to the current consultations regarding proposed enhancements to Canada’s AML regime (see our previous bulletin here).

(a) New reporting entities: company service providers

Canada will include “company service providers” (“CSPs”) as reporting entities under the PCMLTFA.[8] The Financial Action Task Force has identified CSPs as posing a risk of money laundering.[9] CSPs are companies that participate in the creation, administration, and management of corporations. The 2024 Fall Economic Statement does not contain further details on the extent to which CSPs will be captured by the PCMLTFA.

(b) Mandatory FINTRAC enrollment for all reporting entities

All reporting entities that are not already registered will be required to register with the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”). This change seeks to enhance compliance with the AML regime and to improve FINTRAC’s investigative and information-sharing capabilities.

(c) Increased Penalties

Canada plans to significantly increase penalties for violations of AML requirements. The 2024 Fall Economic Statement outlines the following notable changes:

• Increase Administrative Monetary Penalties (“AMPs”): Maximum AMPs increased by 40 times the current amount.
• Establish Penalty Limits: Penalty limits for all AMPs issued in a single Notice of Violation will be set to the greater of:
  • $4 million for an individual and $20 million for an entity; and
  • 3 per cent of annual worldwide gross revenue.
• Refusal or Revocation of Registration: The ability to refuse or revoke the registration of a money services business with an outstanding AMP.
• Increased Fines for Criminal Offences: Maximum fines for criminal offences will be increased by 10 times the current amount, along with increased prison terms.
• Compliance Agreements: Reporting entities will be required to enter into a compliance agreement with FINTRAC following the issuance of an AMP.
• Public Compliance Orders: The FINTRAC Director will be required to issue public compliance orders if the compliance agreement is not adhered to, with additional corresponding AMPs.[10]

These changes reflect Canada’s commitment to strengthening its AML and anti-terrorist financing regime, in order to promote compliance and facilitate enforcement to protect against the use of the financial system for illicit activities.

Recent Sanctions Designations with Respect to China, Russia, and Venezuela

Companies and compliance professionals must stay vigilant: the 2024 Fall Economic Statement, as well as Canada’s new sanctions designations made with respect to additional individuals under the Russia, China, and Venezuela sanctions regulations demonstrate that economic sanctions and AML compliance remain a dynamic field:

• Russia: On December 10, 2024, nine individuals were designated under the Special Economic Measures (Russia) Regulations;[11]
• China: On December 2, 2024, 8 individuals were designated under the Special Economic Measures (People’s Republic of China);[12]
• Venezuela: On December 17, 2024, 5 individuals were designated under the Special Economic Measures (Venezuela) Regulations.[13]

McMillan regularly reports on sanctions updates (see our bulletin on Global Affairs Canada’s guidance on the application of economic sanctions in the Special Economic Measures Act, and our bulletin on Canada’s recent changes to sanctions enforcement), and will continue to publish input as new developments occur.

McMillan is available to assist companies get ahead of the anticipated changes mentioned in the 2024 Fall Economic Statement.

[1] Department of Finance Canada, 2024 Fall Economic Statement at p 170.
[2] European Council, “Immobilised Russian assets: Council decides to set aside extraordinary revenues” (12 February 2024).
[3] ibid.
[4] European Council, “Extraordinary revenues generated by immobilised Russian assets: Council greenlights the use of net windfall profits to support Ukraine’s self-defence and reconstruction” (21 May 2024).
[5] European Commission, “First transfer of €1.5 billion of proceeds from immobilised Russian assets made available in support of Ukraine today” (26 July 2024).
[6] Government of Canada, “Order Respecting the Seizure of Property Situated in Canada (Volga-Dnepr Airlines or Volga-Dnepr Group): SOR/2023-120” C Gaz II, Vol 157, No 13.
[7] Proceeds of Crime (Money Laundering) and Terrorist Financing Act, SC 2000, c. 17, as amended.
[8] Department of Finance Canada, 2024 Fall Economic Statement at p 171.
[9] Financial Action Task Force, FATF Report: Money Laundering Using Trust and Company Service Providers, (October 2010).
[10] Department of Finance Canada, 2024 Fall Economic Statement at p 173.
[11] Regulations Amending the Special Economic Measures (Russia) Regulations, SOR/2014-58.
[12] Regulations Amending the Special Economic Measures (People’s Republic of China) Regulations, SOR/2021-49.
[13] Regulations Amending the Special Economic Measures (Venezuela) Regulations, SOR/2017-204.

by Neil Campbell, William Pellerin, Tayler Farrell, Nicole Davidson (Articling Student)

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2024