Beneficial Ownership: New Developments
November 15, 2018
The Minister of Finance recently introduced Bill C-86, Budget Implementation Act, 2018, No. 2 (Bill C-86).
Though Bill C-86 makes some minor modifications to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) in respect of importing or exporting currency in amounts greater than C$10,000, from a regulated entity perspective, the most significant changes are the ones proposed to be made to the Canada Business Corporations Act (CBCA) in respect of beneficial ownership.
As entities regulated under the PCMLTFA are aware, one of the most daunting compliance challenges that regulated entities face is the requirement to determine the beneficial ownership of private companies. Given that there is no public registry of beneficial ownership information available at either a federal or provincial level, it is not surprising that most regulated entities under the PCMLTFA have relied on officers’ certificates to confirm beneficial ownership, whereby a senior corporate officer confirms and attests to the beneficial ownership of a private corporation.
Unfortunately, over the course of the past few years the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the regulator under the PCMLTFA, has changed its position in respect of what is an acceptable method of confirming the “accuracy of the beneficial ownership”, one of the requirements in the regulations to the PCMLTFA (Regulations). Prior to 2014 the Regulations only required regulated entities to use reasonable measures to collect beneficial ownership information. However, in 2014 amendments to the Regulations were made that required regulated entities to not only collect beneficial ownership information in respect of their clients, but also to “take reasonable measures to confirm the accuracy of the information obtained”. Although FINTRAC had previously accepted an officers’ certificate as an acceptable method of confirming beneficial ownership, it subsequently changed its view and took the position (in both its examinations of regulated entities and in its published policy interpretations) that only “official source documents” could be used to confirm beneficial ownership. As such, if regulated entities could not obtain “official source documentation” to confirm beneficial ownership, FINTRAC required that those clients be treated by regulated entities as high risk. Given that there are really no “official source documents” for private companies (other than share certificates) it is not surprising there was a lot of industry pushback to this interpretation of the Regulations.
Recognizing this, and in keeping with the commitment made by Canada’s federal and provincial Ministers of Finance in December of 2017, the Department of Finance (Department) in its review of Canada’s anti-money laundering and anti-terrorist financing regime (Review), noted that a first critical step toward improved corporate transparency was to provide clear, standardized directions to corporations as to what information corporations should record and maintain in respect of their beneficial owners. For further information about the Review, please see our February 2018 Blakes Bulletin: Department of Finance Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime.
In keeping with this theme, Bill C-86 amends the provisions of the CBCA by requiring corporations to retain specified beneficial ownership information.
Specifically, the proposed amendments to the CBCA set out the criteria required for identifying individuals with “significant control” over a corporation. An individual with “significant control” of a corporation is defined as an individual who has any of the following interests or rights (or combination thereof) in respect of a “significant number” of shares of the corporation:
- Registered shareholders
- Beneficial owners
- Those individuals with direct or indirect control or direction over shares
- An individual who has direct or indirect influence, that if exercised, would result in control of fact of the corporation
- An individual to whom prescribed circumstances apply (as may be set out in the regulations to the CBCA).
“Significant Control” also includes interests or rights held by two or more individuals jointly or who are subject to an arrangement to exercise rights jointly or in concert, in respect of a significant number of corporate shares.
A “significant number of shares” is defined to mean any number of shares that: carry 25 per cent or more of the voting rights of the corporation’s shares or 25 per cent or more of all of the corporation’s outstanding shares measured by fair market value. This 25 per cent threshold is consistent with the 25 per cent beneficial ownership threshold set out in the Regulations to the PCMLTFA.
Under the proposed amendments, a CBCA corporation will be required to maintain a register (Register) of individuals with “significant control” of the corporation. This Register is to contain, among other things:
- The name, date of birth and latest known address of each individual with significant control
- The jurisdiction of residence for tax purposes of each such individual
- The date on which such individual became or ceased to be an individual with significant control
- A description of how each individual has “significant control” including a description of each individual’s interests and rights in respect of shares of the corporation.
There is also an obligation for corporations at least once during every financial year, to take reasonable steps to ensure that the Register is kept up-to-date. In this regard, the Register itself must contain information on the steps taken by the corporation to ensure that the Register remains updated. Moreover, a corporation has a continuing obligation to make any changes to the Register if it becomes aware of any new information in respect of any individual with significant control. The proposed amendments also require corporations to take certain steps if they are unable to identify any individuals with significant control over the corporation. These steps will be set out in the regulations.
It is noteworthy that there are associated penalties for non-compliance. In addition to corporate fines, directors or officers who knowingly authorize, permit or acquiesce in a contravention of these provisions or who knowingly authorize or permit or acquiesce in the recording of false or misleading information in the Register can be subject to fines of up to C$200,000 or imprisonment for a term of up to six months (or both).
When drafted, the regulations to the CBCA will set out requirements on the form of Register and how it is to be prepared and maintained and may set out other requirements that may be imposed on corporations for the purposes of compliance with these provisions.
For any regulated entity under the PCMLTFA, these proposed amendments to the CBCA will bring welcome relief to the beneficial ownership challenges of how to “confirm” the accuracy of beneficial ownership. Given the requirement to maintain the Register, the ongoing requirement to update and correct the Register and the associated statutory penalties for non-compliance, it is very likely that a regulated entity that obtains a certified copy of the Register from its corporate client will be able to rely on it for confirmation of beneficial ownership (unless it has doubts in respect of its accuracy).
The amendments to the CBCA come into force six months after royal assent of Bill C-86, which will likely be some time in 2019.
While the proposed amendments only apply to federally incorporated corporations, given the agreement by the provincial Finance Ministers in 2017 to pursue legislative amendments to ensure corporations hold up to date information in respect of beneficial owners, and the commitment to bring these changes into force by July 2019, it is likely that the provinces will soon follow suit.
It is also noteworthy that more progress is being made in the effort to create a beneficial ownership registry. Specifically, in the report of the Standing Committee on Finance (Committee) “Confirming Money Laundering and Terrorist Financing: Moving Canada Forward” released on November 8, 2018, one of the recommendations of the Committee was that the Government of Canada work with the provinces and territories to create a pan-Canadian beneficial ownership registry for all legal persons and entities, including trusts, who have 25 per cent of total share ownership or voting rights. At this point however, it appears that this registry will not be publicly available. To learn more about the report, please see our November 2018 Blakes Bulletin: Confronting Money Laundering and Terrorist Financing: Canada Considers Vast Changes to AML Regime.
For further information, please contact:
Jacqueline Shinfield 416-863-3290
or any other member of our Financial Services Regulatory group.
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