Fintech companies currently have a poor understanding of their anti-laundering obligations under Canadian law, according to FINTRAC documents acquired by The Globe and Mail via an Access to Information request.
This weak grasp of regulatory fundamentals, along with a lack of crucial mitigating measures, has placed fintechs at greater risk of money laundering, FINTRAC added.
The most important of these rules require financial institutions and companies to maintain strict compliance programs, to ensure that clients are readily identifiable, and to report any suspicious transaction.
The government has instituted tighter monitoring of electronic transactions, but this is still some time away: Virtual currency exchanges will fall under FINTRAC’s jurisdiction only by June 1, 2020.
More importantly, even this expanded scope will not be enough if FINTRAC does not receive proper support.
“FINTRAC’s resources for examinations are largely constrained,” according to Matthew McGuire, co-founder of anti-laundering think-tank The AML Shop. “You could continue operating as a fintech for a very long time before you run into the regulator.”
Canada has approximately 30,000 reporting entities, but FINTRAC is able to conduct only around 300 examinations annually.
Among the most susceptible fintech sub-sectors are alternative lending, electronic payments, virtual currencies, and online gambling – all of which have vulnerabilities that have yet to be addressed by further legislation.
“[Peer-to-peer] payments will remain one of the most important money laundering/terrorist-financing vulnerabilities to monitor in this segment,” the FINTRAC documents reported.
“While recognizing that not all transactions that use mixing services are illicit and that some users have legitimate reasons to seek greater anonymity, the capacity of mixers to break and hide the links between users and their transactions make them attractive tools for illicit actors,” a FINTRAC spokesperson told The Globe and Mail in an e-mail.