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Canadian anti-money laundering laws – Some traps for the unwary

By Kashif Zaman and Carey O’Connor

money-laundering-trapsCanada has had legislation in place to detect and deter money laundering since 1991. Contrary to what some may expect, the legislation (which has been amended several times over the last 24 years or so) applies (rightly) only to “reporting entities” and not all business entities or transactions.

Over the next few weeks, we will be reporting on issues related to this legislative regime, as well as similar legislative regimes in other countries, and how they may affect particular industries.

As was set out in a recent Osler Update, the reporting entities include what one would typically expect to be covered by anti-money laundering (AML) legislation (e.g., financial institutions, money services businesses, casinos, etc.). However, certain types of businesses may become subject to the AML legislation as “reporting entities” even though there is no useful purpose for such businesses to comply with the legislation.

For example, dealers in precious metals and stones are subject to AML legislation. The rationale for this application is that some criminals use precious metals and gems to launder money. A dealer in precious metals and stones means an individual or an entity that buys or sells precious metals, precious stones or jewellery in the course of its business activities. A dealer becomes subject to the Canadian legal requirements if it ever engages in the purchase or sale of precious metals, precious stones or jewellery in an amount of $10,000 or more in a single transaction. Precious metals include gold, silver, palladium or platinum whether in coins, bars, ingots, granules or in any other similar form. Precious stones include diamonds, sapphires, emeralds, tanzanite, rubies or alexandrite. Jewellery includes items made of precious metals, precious stones or pearls intended for personal adornment, such as earrings, bracelets, rings, necklaces, brooches, watches, etc.

Although there are legitimate reasons for requiring dealers in precious metals and stones to comply with Canadian AML legislation, the definition of dealers in precious metals and stones is so broad that it could include manufacturers who use certain precious metals in their manufacturing processes for industrial purposes only and have no dealings with consumers or the public at large in respect of such precious metals. In the United States, there is an industrial use exemption for such manufacturers. In Canada, however, there is currently no such exemption for industrial manufacturers. There are exemptions for jewellery manufacturers but oddly if you are a manufacturer of industrial products and use precious metals in your production and cross the $10,000 monetary threshold (which most manufactures of any significant size would easily cross), you would become subject to the Canadian AML legislation.

Being subject to Canadian AML legislation means that, in addition to having to comply with the reporting, record-keeping and client identification requirements, you are also required to have in place a compliance regime that meets the requirements under the Canadian AML legislation.

Until the Canadian AML legislation is amended to include an industrial use exemption similar to what is available in the United States, any manufacturers who use precious metals or stones will need to comply with the current requirements under the Canadian AML legislation.

Osler, Hoskin & Harcourt LLP

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In addition to our regular guest bloggers, Inside Internal Controls blog published by First Reference, provides occasional guest post opportunities from various subject matter experts on the topics of risk management and best practices in finance and accounting, information technology, environmental issues, corporate governance, sales/marketing and operations, not-for-profits and business related issues in Canada. If you are a subject matter expert and would like to become an occasional blogger, please contact Yosie Saint-Cyr at editor@firstreference.com. If you liked this post and would like to subscribe to Inside Internal Controls blog click here.
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