March 1, Department of Finance L Esplanade Laurier 20 th Floor, East Tower 140 O Connor Street Ottawa, Ontario K1A 0G5

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1 March 1, 2012 Department of Finance L Esplanade Laurier 20 th Floor, East Tower 140 O Connor Street Ottawa, Ontario K1A 0G5 Attention: Ms. Leah Anderson, Director, Financial Sector Division By fcs-scf@fin.gc.ca Dear Ms. Anderson: Re: We are writing further to the Department of Finance s consultation paper entitled, Strengthening Canada s Anti-Money Laundering and Anti-Terrorist Financing Regime (the Consultation Paper ). We would like to take this opportunity to make the following comments on behalf of the following financial institutions: Amex Bank of Canada Canadian Tire Bank Capital One Bank (Canada Branch) JPMorgan Chase Bank, N.A. Walmart Canada Bank We are also members of the Canadian Bankers Association ( CBA ) and generally support the CBA submission. We wanted to provide this additional submission elaborating on areas of particular importance to our financial institutions and our customers. Also joining in this submission is TransUnion. As a consumer reporting agency and trusted partner to all of the organizations on this submission, TransUnion helps us to improve efficiency, manage risk, reduce costs and increase revenue by delivering comprehensive data and advanced analytics and decisioning. Based in Toronto, with global headquarters located in Chicago, Illinois, TransUnion provides service and support throughout Canada. An Administrative Approval Process For Keeping the System Current Our first proposal is that the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations (the PCMLTFA and PCMLTFR respectively) allow for a timely administrative approval process by the government of new identification methods for anti-money laundering and anti-terrorist financing ( AML/ATF ) regulatory measures which become available between regulatory reviews. For example, FINTRAC, alone, should have authority to approve new methods independent of any other traditional process for developing regulations. An alternative would be to establish general criteria for acceptable identification methods, which the industry and regulators would apply to emerging technologies using a risk-based approach. For example, under the USA Patriot Act, there is a principlebased standard for customer due diligence which adds the flexibility in the system we anticipate will be required for changes in technology and emerging products and services in Canada. New identification Page 1 of 12

2 methods for both individuals and entities should be seamless, electronic and mobile to meet the needs and expectations of customers and to support a competitive Canadian financial services industry. Modernization of identification methods cannot be dependent on the need for legislative change. We have included the number of each proposal in the Consultation Paper with our comments for ease of cross reference. 1.3 Non-Face-to-Face Identification Methods Review Before addressing specific provisions in the Consultation Paper, more generally, we would like to commend the government for being forward thinking by including consideration of non-face-to-face ( NFTF ) identification methods in the Consultation Paper. This is an important consideration for the future of the Canadian digital economy, generally, and for our financial institutions in particular. Flexibility in maintaining up-to-date NFTF identification methods is critical to the activities of our financial institutions, which have small or no branch network capability. Competition in the marketplace will be enhanced by enabling emerging channels. More recent entrants to the financial services market leverage these channels almost exclusively. The government s objective of promoting access to credit for creditworthy consumers and small businesses will be supported by robust electronic identification methods which enable that access, allow the financial institutions that leverage those channels to flourish and small businesses that gain access to credit as a result, to thrive. We note that the cost of credit card fraud is absorbed by the financial institutions that issue the credit. These costs affect the financial institutions bottom lines, and as such, affect the costs they share with their customers. Robust NFTF methods will help lower the risk of fraud which will help keep costs lower for consumers. Enabling remote channels serves Canadians well. Canada has a geographically disperse population. It also has an aging population. Face-to-face access for financial products is not always convenient or feasible. Improving NFTF access to financial products can also help other Canadians with mobility challenges such as Canadians with physical disabilities. We share the government s objective of safeguarding the international reputation of Canada s financial system and institutions, and promoting our continued integrity and strength. To support this objective, all Canadian financial institutions need to operate and compete on a level playing field in the global economy. To this end, we need to maintain an AML/ATF regime that is in line with those of other similar jurisdictions. New Methods Needed For All Products We feel strongly that new NFTF methods are required for all products and client types, including but not limited to credit cards. We note that the Consultation Paper focuses on credit card companies and our comments are intended to be inclusive of these other products. There is a need for new identification methods and a risk-based approach to identification that permits a broader and less prescriptive approach to identification. Today s requirements, with their emphasis on face-to-face methods and prescriptive and static measures for NFTF identification methods are not sufficiently flexible to accommodate the current state of the market and the future state we can anticipate. We note that in the publication, The Way We Pay: Transforming the Canadian Payments System, issued by the Payments Task Force appointed by the Minister of Finance, the Task Force found that AML/ATF regulatory measures, and customer identification requirements in particular, create barriers to innovative payment systems. Page 2 of 12

3 Current Identification Methods NFTF methods for ascertaining identity were an important addition when the PCMLTFR were amended in However, a few years of practical experience shows that while the current processes work well for many Canadians, additional tools are needed so that financial institutions can better serve customers and enhance competition. For example, we are concerned that a significant number of creditworthy and lawabiding applicants are not passing two of the permitted identification methods for credit cards, but for legitimate reasons. We do not believe that they are not passing because they are money launderers or terrorists. With too many applications of law-abiding citizens being rejected and limited or onerous secondary identification options, the government s policy objective of fostering the digital economy is being compromised. Telecommunications Directories We believe that challenges with using land line based telecommunications directories for identification will increase in the future. Matching names on telecommunication directory lists can be challenging for households with multiple adult individuals, only one of whom may have the household land line registered in his or her name. The younger demographic relies more on cell phones and cell phone numbers are not currently in telecommunication directory lists. We believe that over time, the use of land lines will continue to diminish. Matching names can also pose a challenge where spouses have different last names, for example, in Quebec where it is traditional for married couples to keep their own last names. We believe it is a growing trend for spouses to maintain different last names across Canada and for only one name to appear in traditional land line telecommunication directories if at all. Cheque Clearing Method The cheque clearing method is becoming less relevant as the use of cheques declines among consumers. Attestation Method The attestation method is non-electronic and is considered by applicants to be inconvenient because it requires too many steps. Identification Product Method As new to credit demographics (e.g. young persons and new Canadians) apply for credit, it becomes increasingly difficult to rely on identification methods such as the identification product method because these applicants tend to have "thin credit bureau files without sufficient credit history for the identification product method. Confirmation Of Deposit Account Method While a financial institution is permitted to verify an existing deposit account with another financial institution, we don t see this as a long term option. It requires one financial institution to invest in processes for verification for the benefit of another financial institution. These processes also tend to be cumbersome based on outdated technology like using a telephone versus electronic means. In our experience, confirmation is not provided consistently by competing financial institutions. This method of Page 3 of 12

4 identification increases the time to approve an application, which negatively impacts the customer experience and in the extreme, can affect access to credit altogether. Widespread implementation of this identification method would require infrastructure, resources and controls on the part of confirming financial institutions which may have insufficient incentive to implement these measures, given that it would facilitate the opening of a new account by a competitor. Having said that, if automation were possible, we see credit reporting agencies as well positioned to collect and store information on consumers deposit accounts, similar to how they manage credit information already. Electronic Bank Statements We support the development of the use of electronic bank statements as an identification method, either in conjunction with a second method or alone. Access To Government Databases The Consultation Paper states that its review does not include providing access to government databases that are currently restricted under other legislation, for example voters lists and lists of the provincial ministries of transportation. We believe that it would be short-sighted not to leverage these lists. In the past, government lists in Canada have been made available to the private sector (i.e. driver registration provided for purposes of Highway 407 administration in Ontario), and should be considered to support the important policy goals of combating money laundering and terrorist financing and fostering the digital economy. As regulated entities in the business of managing sensitive financial records, financial institutions have robust information security programs in place. Similarly, credit reporting agencies are in the business of protecting important financial records. These enterprises are designed to provide proper protection for the type of information in government databases. Protecting this type of information is a basic part of our businesses. Information provided from any government databases would be protected under the same quality standards in place today. As an alternative to accessing information in government databases, a system could be established through which financial entities could simply verify whether the information in their files matches the information in a government database, for example, government providing a yes/no match to a query. A similar approach exists today with the National-Do-Not-Call-List. Government databases which could be used for this purpose are: Social Insurance Number ( SIN ) Elections Canada Canada Revenue Agency Marriage Registry Land Registry Municipal Tax Roll Passport Office Ministry of Transportation / Drivers License Bureau With respect to the Elections Canada list, we note that the list of electors is published by other democracies operating under the British parliamentary system that are equally committed to combating Page 4 of 12

5 money laundering and terrorist financing, and has been published previously in Canada. Both Australia and the United Kingdom have historically made electoral registries publicly accessible for non-electoral purposes, and both countries have policies in place to allow for the publication of the list of electors for identity verification purposes. In fact, the respective national bodies responsible for overseeing elections are legally bound under anti-money laundering laws to provide a complete list to financial services companies for identity verification. We have provided at Appendix A information on other jurisdictions approaches to electoral registries, as well as information on the history of Canada s electoral registry, including the intent by the government at various times to make the registry publicly available. Allowing financial institutions and credit reporting agencies to check against the list of electors could also provide both Elections Canada and the federal government with the reciprocal service of verifying the authenticity of their own records. We believe that financial institutions and credit reporting agencies are uniquely positioned to maximize updates to the list of electors. We propose that an identification method be permitted whereby SIN may be collected (on an optional basis) for purposes of verifying against the government s SIN database as a robust NFTF identification method for AML/ATF regulation. Today, financial institutions currently collect SIN (on an optional basis) for purposes of credit bureau matching. Financial institutions can also use an applicant s SIN card for purposes of face-to-face identification, but cannot disclose the SIN number to FINTRAC. The SIN is a unique identifier that would be ideal to identify individuals. We note that social security number can currently be used in the United States for AML/ATF purposes. Additional NFTF methods We propose the following new NFTF identification methods: Access to government databases (please see above), limited to the sole purpose of identification Photocopies, scanned copies, digital submission of identification documents Micro-deposits with confirmation Enhanced identification documents (i.e. driver s licenses) Electronic bank statements as a stand-alone method (please see above) Institute reporting by cell phone providers of cell phone numbers to credit bureaus for the purpose of identification. Online identity - Google, Facebook, Twitter, Apple and others are exploring opportunities to become online identity providers. If the standard which is ultimately adopted is considered reliable using a risk based approach under the PCMLTFA, the industry should be able to leverage this as an identification method Using the Canadian Payments Association clearing system, enable financial institutions to verify electronically an applicant s information against the records of another financial institution which has already verified the person s identity. This method would only need to provide confirmation of whether or not there is a match of information Utility invoice (but not limited to credit of $1, as in the current PCMLTFR schedule) Mobile phone bill Confirmation of another financial institution product (not limited to deposit accounts) Allow financial institutions to rely on the existence of another credit card relationship on the basis that the issuing financial institution has verified and authenticated the customer Expand the options under Schedule 7 C of the PCMLTFR to non-thin-file customers (> 6 months) for consistency Page 5 of 12

6 The government could offer a digital authentication agent service (Canada Post) For a business or non-corporate entity, there is an opportunity to use commercial information databases and profiles, for example Dun & Bradstreet. Use Of A Single NFTF Identification Method The current PCMLTFR require a combination of two NFTF methods to ascertain identity. Some NFTF methods are, alone, robust ways to confirm identity, for example, the credit file method and the identification product method from credit reporting agencies. We believe that a single method is sufficient where the NFTF identification method rests on a reliable source like a credit reporting agency. Robust NFTF identification methods should be considered equal to face-to-face methods and not require a second method. NFTF methods which are considered less robust could still be combined with another method to achieve adequate assurance. Identification Of Beneficial Owners Today s available identification methods for entities and individuals are not sufficiently broad or flexible to accommodate beneficial owner identification, particularly given the number of foreign beneficial owners. The challenges include geography, language, and the ability to confirm the authenticity and validity of the documents as a means to ascertain identification. Beneficial owner identification will not be possible without new, more flexible methods. In the situation of a trust, the beneficial owner may be a minor, which raises consent issues with trying to identify them Signature Requirement Review We support the elimination of signature requirements in the PCMLTFR. Signature is not secure and has limited utility in today's electronic world. As secure mechanisms exist today (i.e. passwords / authentication / identification), there is no need for an alternative. The signature is not an identification method under the PCMLTFR and adds little additional value over the existing identification methods Politically Exposed Foreign Persons and Close Associates The identification of close associates of politically exposed foreign persons ( PEFPs ) could pose challenges for financial institutions if the PCMLTFA/R definition does not align with definitions used by commercial databases used for PEFP screening. Ensuring consistency among the legislative definitions and those of the service providers of lists is key Corporate Identification Documents Not More Than One Year Old This proposal would limit the types of corporate identification documentation considered acceptable. Articles of Incorporation, in many cases, are more than one year old. Other identification documents currently used, such as audited annual reports, may not be refreshed on a strictly annual basis. There is a need for electronic solutions (i.e. corporate databases), but these too may not meet the one year requirement. In order to retain the usefulness of current methods and to enable expansion into new electronic solutions, the time frame should be more than one year. 2.2 Prepaid Device CCD Requirements In our view, there should be denominations and / or sales size thresholds below which no Customer Due Diligence ( CDD ) is required. For example, in the U.S. legislation enacted in 2011, there is no CDD requirement for closed loop prepaid access devices sold in amounts of $2,000 or less, and generally no Page 6 of 12

7 CDD required for many reloadable products with a $1,000 daily cash access limit, subject to some limitations. Low-denomination prepaid access devices, such as gift cards, should not be captured by the concept of business relationship or otherwise be subject to CDD requirements. We propose that the government set the following limits for prepaid access devices in Canada, within which no CDD is required. These limits mitigate the risk of such devices being abused for purposes of money laundering or terrorist financing, while permitting the current low-risk prepaid devices currently in the market place and allowing new low-risk prepaid products to be developed. Limits for Prepaid Access Devices (No CCD Required) Non-Reloadable Access Devices a maximum load of less than $3,000 Reloadable Access Devices a balance of less than $3,000 at any time cumulative transactions of less than $3,000 in any one month The identification requirements for prepaid access devices which fall above these limits should be those applicable to credit cards, as well as any new methods resulting from the NFTF review (please see comments on proposal 1.3 above). An identification method that should be considered for prepaid access devices is presenting a credit card or debit card for purchase/reload, or a linkage to a credit card or deposit account. Since credit cards holders have already been identified through robust face-to-face or NFTF methods, holding a credit card should be deemed sufficient for issuance of a prepaid card. In order to create an even playing field, it is important that consistent prepaid rules apply to all participants in the prepaid and mobile issuer s space. Financial entities and money services business, which currently fall under the PCMLTFA, should not be the only entities governed by any new requirements. To mitigate against regulatory arbitrage, a consistent framework needs to be applied against all entities in this market. Where CDD is required, the onus should be placed on the issuer or seller of the access device, and not on the merchants who accept the device as a payment method. Our recommendations above are based on prepaid access devices currently offered through the consumer retail channel. We anticipate that the range of prepaid devices in the Canadian market will continue to evolve and we recommend a risk-based approach be applied in assessing the extent to which CDD is appropriate for these emerging products. A number of these products present a lesser money laundering and terrorist financing risk (e.g. because they would be corporate-funded (e.g. payroll cards) or government-funded (e.g. benefits disbursement cards)). Similar to other aspects of our submission, we believe flexibility is important to help ensure innovation is not inhibited by inappropriately prescriptive requirements Prepaid Devices and Cross-Border Currency Reporting The government has discussed with the industry a possible requirement for readers at the border to determine the value of prepaid access devices, in order to facilitate cross-border currency reporting. Whether the readers are provided by the issuer or the issuer's access devices are required to harmonize with the government's reader, this would represent a prohibitively large technology investment for issuers and is not feasible across the industry. For non-reloadable access devices, a viable alternative would be to have the maximum load value printed on the card. For reloadable access devices, number or online verification of the balance may be a viable option. Page 7 of 12

8 3.4 - Record "Reasonable Measures" As financial institutions would need the ability to record reasonable measures in multiple systems, there is a potentially large technology investment that would be needed by financial institutions to implement this proposal. The preferred approach would be for financial institutions to set policies and standards to be applied to govern this requirement. Financial institutions should not be required to record reasonable measures at an account-by-account level where a standard approach is taken for all accounts and is available in policies and standards. It would be onerous to create fields to record reasonable measures at an account level. 5.1 Countermeasures Given the breadth of the proposed countermeasures, we need further detail in order to determine the impact of these suggested changes. The potential implications of countermeasures are significant and include: sizeable systems changes, significant changes to processes and controls and a need to increase staffing. For example, applying separate rules to a potentially narrow sub-set of customers or transactions may create unwieldy complexity in our already robust AML/AFT programs. 6.1 Broadening The Requirement To Report Suspicious Transactions Broadening suspicious transaction reporting requirements could represent a significant increase in activities which could be reported as suspicious including the attempted opening of an account. This proposal could mean significant procedural changes and technology investment for the industry or an unwieldy manual review process. In particular, every declined application for a credit card due to credit reasons should not be subject to this requirement; simply applying for credit is not, in and of itself, suspicious. We would like to commend the government for being forward thinking in the Consultation Paper and collaborative in approach. All of us, government and industry, have a common interest in fostering a digital economy while keeping Canada and our businesses free from money laundering and terrorist financing. Sincerely, Scott Driscoll, Chief Compliance Officer Amex Bank of Canada Wilf Gutzin Vice President, Senior Counsel and Corporate Secretary Amex Bank of Canada Jennifer McDougall Chief Compliance Officer Canadian Tire Bank Ted Wilby Senior Director, Associate General Counsel and Chief Risk Officer, Canada Capital One Bank (Canada Branch) Page 8 of 12

9 John Rodrigue Chief Compliance Officer JPMorgan Chase Bank, N.A. Sonja Schindeler Vice President Fraud Solutions TransUnion Ronald Strathdee General Counsel and Chief Compliance Officer Walmart Canada Bank Page 9 of 12

10 Appendix Other Jurisdictions Approaches to Electoral Registries History of Register of Electors in Canada The list of electors is published by other democracies operating under the British parliamentary system, and has been published previously in Canada. Internationally both Australia and the United Kingdom have historically made electoral registers publicly accessible for non-electoral purposes. Both countries have policies in place to allow for the publication of the list of electors for identity verification purposes. The respective national bodies responsible for overseeing elections are legally bound under antimoney laundering laws to provide a complete list to financial services companies for identity verification. History of the Electoral Roll in Canada The power to create the Register of Electors was provided to The Chief Electoral Officer in 1997 when bill C-63 received Royal Assent. It replaced the old door-to-door enumeration that was required previously for each election or byelection The list of electors in each riding was displayed prominently for all to see and to verify the information contained therein. This practice was abandoned in 1982 due to privacy concerns arising from the public display of the data created from voter enumeration. The first permanent list of electors was used in the 2000 general election. So why not in Canada? At present use of the register of electors for non-electoral purposes is prohibited section 56. The Canada Elections Act provisions prohibiting the publication of the list of eligible electors to nonelection purposes is in contrast to the original anti-money laundering regulations promulgated in 2007 (SOR ). This was reflected by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) guidelines for identity verification of credit applicants, as originally published. Canada s Register of Electors How is information obtained? The National Register of Electors is updated with information (name, address, sex and date of birth) Page 10 of 12

11 Information is supplied by provincial, territorial and federal data sources between electoral events, and by electors themselves during federal electoral events. Elections Canada has signed agreements with data suppliers, including the: Canada Revenue Agency, Canada Post Corporation, Citizenship and Immigration Canada, Provincial and territorial registrars of motor vehicles and vital statistics, Provincial electoral agencies with permanent voters lists. Lists of electors from provincial and territorial elections are also used to update the Register. At any time, an elector can be removed from the Register of Electors The Australian experience The Australian Electoral Commission has been required to make a copy of the list available for public viewing since However the list is not legally considered a public document. Since 2004 the AEC has stopped the sale of the list of electors to the public and companies. Since 1940 the Commonwealth Electoral Act has required that a copy of the list be provided to organizations that identity verification obligations under certain legislation. This includes the Financial Transactions Reports Act 1988, and the Anti-Money Laundering and Counter Terrorism Act To receive a copy of the list of electors, organization must file an application with the Australian Electoral Commission for the records. After the application to review the records has been filed, the Governor General is required to publish the request as part of regulations that are presented before parliament for approval. United Kingdom The earliest records available from the United Kingdom suggest that the list of eligible electors has been by law as a public document for viewing or purchase since at least Prior to 2002 the list of electors could be purchased by any person or company for any reason. Since 2002, the list has been divided into two, one a complete list of all voters, the other a voluntary list that allows voters to chose to have their information published for sale by the Electoral Commission. Credit referencing agencies registered under Part III, section 147 of the Consumer Credit Act 1974, are permitted to purchase the complete electoral register under the Representation of the Peoples Act, Regulations 114(1), 2001; New Zealand Government has introduced a bill aimed at smoothing out some of the problems with their AML/ATF system. Page 11 of 12

12 The bill is designed to help the private sector to combat identity fraud and reduce business compliance costs, while protecting privacy of New Zealanders The bill would authorize the use of government held information to confirm identity of applicants against records held under the: Births, Deaths, Marriages and Relationships Act, 1995 Citizenship Act, 1977 Passports Act, 1992 The bill has received its first reading, and is currently undergoing committee study. Page 12 of 12