Open for Consultation: Canada’s AML Regime Proposed to Apply to Factoring Companies, Cheque-Cashing Companies and Financing & Leasing Companies

Open for Consultation: Canada’s AML Regime Proposed to Apply to Factoring Companies, Cheque-Cashing Companies and Financing & Leasing Companies

Canada continues to expand the application of its anti-money laundering (“AML”) and anti-terrorist financing (“ATF”) regime. Last time around it was mortgage brokers, mortgage administrators, mortgage lenders and armoured car companies. Up next are factoring companies, cheque-cashing businesses and certain leasing and financing companies.

The Department of Finance has opened consultations on proposed regulations (the “Proposed Regulations”) amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations to add these entities as reporting entities under Part 1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”).[1] According to the Department of Finance, almost 900 businesses are expected to be affected by this change. Interested stakeholders can submit comments on the proposed changes (as well as sanctions-related changes discussed in our previous bulletin) until December 30, 2024.

These requirements are expected to come into force in nine months, on October 1, 2025.

1. Factoring Companies and Financial Entities Providing Factoring Services

Factoring companies will be subject to Part 1 of the PCMLTFA, including record keeping, client due diligence, transaction-reporting requirements and establishing a compliance program.

Under the proposed changes, “factor” is defined as a person or entity that is engaged in the business of factoring, with or without recourse against the assignor.[2] There is no definition provided for “factoring” in the Proposed Regulations. The definition of factoring provided by the Supreme Court of Canada is “[a] factoring of accounts receivable is…in effect a sale by a company of its accounts receivable at a discounted value to the factoring company for immediate consideration.”[3] Applying this definition, the purchaser in a merger or acquisition which is structured as an asset purchase would be a factor since, along with other assets, the vendor’s accounts receivable are purchased (and often at a discount).

Based on the assessment of the Department of Finance that only 65 entities will be considered factors under the proposed definition, it must be concluded that the “business of factoring” is limited to engaging in the purchase of accounts receivable as a primary commercial activity and not incidentally in connection with other commercial activity. It would be useful if either the Department of Finance clarified this in the next draft of the Proposed Regulations or if it was included as part of the guidance on factoring companies to be published by the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”).

Entities, such as financial entities, that are already subject to Part 1 of the PCMLTFA will have additional factor-specific obligations, including new requirements to verify the identity of every party with which they enter into a factoring agreement and to keep associated records.

Factoring companies will be required to keep a record of payments to clients for the purchase of invoices and a receipt of funds record for each payment of $3,000 or more received from the payer of a factored invoice.

There will be exemptions for transactions with public bodies.

2. Financing or Leasing Entities

Financing or leasing entities will also be subject to Part 1 of the PCMLTFA. Entities or persons are captured if they are engaged in the business of financing or leasing property for business purposes (other than real property or immovables), passenger vehicles in Canada, or property valued at $100,000 or more (other than real property or immovables).[4]

The new obligations specific to financing or leasing entities include new requirements to verify the identity of every party with which a financing and leasing entity enters into a financing or leasing arrangement and to keep associated records. There will be exemptions from having to verify the identity or keep records for invoices paid by public bodies and large publicly traded corporations.

3. Cheque-Cashing Businesses

Businesses that offer clients the ability to cash a cheque immediately for a fee will also be added as reporting entities under the PCMLTFA. Currently, money service businesses that offer cheque cashing and other services (such as payday loans and tax rebate discounting) are already reporting entities under the PCMLTFA. Stand-alone cheque-cashing businesses will be regulated as money-services businesses under the PCMLTFA, and the existing obligations for money-services businesses will apply to this sector.[5] Obligations specific to cheque cashing will be introduced, including new requirements to verify the identity of a client who cashes a cheque valued at $3,000 or more and to keep associated transaction records.

4. Conclusion

By integrating these entities into the regulatory framework, Canada aims to align its AML/ATF regime with international standards set by the Financial Action Task Force. Businesses captured by the proposed amendments should review the amendments and submit comments by December 30, 2024.

Our team is available to assist companies with navigating these new compliance obligations. If you have any questions, please contact us.

[1] Canada Gazette, Part1, Volume 158, Number 48: Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist  Financing Administrative Monetary Penalties Regulations (November 30, 2024).
[2] “Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations”, C Gaz I, Vol 158, No 48 (2024) at ss 1(2).
[3] Alberta (Treasury Branches) v. M.N.R.; Toronto-Dominion Bank v. M.N.R., [1996] 1 S.C.R. 963 at 985-986.
[4] “Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations”, C Gaz I, Vol 158, No 48 (2024) at  ss 1(2).
[5] FINTRAC, “Money services businesses” (18 September 2024), online: https://fintrac-canafe.canada.ca/msb-esm/msb-eng; “Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations”, C Gaz I, Vol 158, No 48 (2024) at header “Cheque-cashing businesses”.

By Shahen Mirakian, Maria Sagan, William Pellerin, Tayler Farrell, and 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