The Federal government, in line with other states internationally, is considering steps to strengthen the anti-money laundering (“AML”) legislative regime, specifically the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. AML laws in Canada and elsewhere target payment systems and financial institutions with reporting and transparency requirements.
A noteworthy issue on which the Government sought consultation was the regulation of prepaid cards, such as gift cards and reloadable travel cards. The main issuers of these cards are credit card companies and other lenders, who service retailers offering a branded gift card for shopping in their stores or on their website.
Following comments in the 2011 Interim Report of the Special Senate Committee on Anti-Terrorism, the money-laundering potential of retail gift cards, which are often non-traceable and resold online at a discount, was noted as being a risk worth regulating. The majority of chain retailers in Canada offer gift cards for sale, and prepaid debit cards have largely replaced travellers cheques as a means of traveling with money. These latter cards can be refreshed and converted to cash at ATMs.
Consultation on what changes might be necessary to the AML regime finished in March 2012. The Federal government sought input from financial institutions on a variety of issues, including whether to extend customer due diligence obligations to sellers of prepaid cards.
The Government received 27 responses to its consultation request, the majority of which were from recognizable financial services sector participants and associations. The case against extending AML regulation to prepaid cards was made in detail. Generally, the low cash value of most gift cards (common ceilings are $500 or $1000), their limited reusability, and the fact that, on their face, they are only redeemable for goods or services, were presented as reasons that prepaid cards are an ineffective means of money-laundering. The secondary market for these cards, which flourishes online (but costs the money-launderer in the form of a discount on the face value of the card) was not widely considered.
Reloadable charge cards and travel cards pose a more obvious risk for money-laundering, particularly as the cards can be purchased in one jurisdiction and converted to cash in another. Industry responders noted that these types of cards are almost exclusively the preserve of credit card companies and banks, who are already subject to anti-money laundering regulation and client identification requirements. The reload of these cards requires a transfer of cash from an existing account, in contrast to the relative anonymity of using gift cards (which are redeemed with ease, and purchased as an ordinary retail transaction).
The Federal Government is also considering a reporting requirement on individuals crossing the border or leaving the country with monetary instruments — including prepaid cards. Responses noted that such a system would be impractical, as cardholders may not know the balance of cards they have partially used or received as a gift.
Although instituting due diligence requirements for prepaid cards might appear to be an unrealistic imposition on retailers, financial services providers, and the cardholders themselves, the Federal government’s December 2011 consultation paper notes that the United States has already taken similar measures.
Having received the consultation responses, the Government’s task now is to seek a balance between easy commerce and fighting crime in their attempt to firm up Canada’s AML regime. If reform of the Act is seen as a priority, a bill to amend it could be expected as soon as the autumn 2012 legislative session.
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