AML/ATF Update

By Terrance S. Carter, Sean S. Carter and Urshita Grover

Nov 2023 Charity & NFP Law Update
Published on November 30, 2023



FATF Publishes Revised Recommendation 8 on Non-profit Organizations and Related Best Practices Guidance Paper

The Financial Action Task Force (“FATF”), which is the global money laundering and terrorist financing watchdog, published revised Recommendation 8 and its Interpretive Note on non-profit organisations (“NPOs”) on November 17, 2023, along with a new Best Practices guidance paper (the “Best Practices Paper”) on the implementation of Recommendation 8. As reported in our June 2022 Charity & NFP Law Update, the FATF held a plenary from June 14-17, 2022 which, among other things, included an agreement to start new work to update the FATF best practices paper on combating the abuse of NPOs in relation to terrorist financing.

The previous significant changes to FATF Recommendation 8 from 2016 were discussed in our September 29, 2016 Anti-terrorism and Charity Law Alert No. 46, some of which are still relevant today, such as FATF’s definition of NPOs and the shift towards a risk-based approach. The new amendments made to the 2016 Recommendation are tracked as follows:

Countries should review identify the adequacy of laws and regulations that relate to non-profit organisations which the country has identified as being vulnerable to fall within the FATF definition of non-profit organisations (NPOs) and assess their terrorist financing abuse risks. Countries should apply have in place focused and, proportionate and risk-based measures, without unduly disrupting or discouraging legitimate NPO activities, in line with the risk-based approach, to such non-profit organisations. The purpose of these measures is to protect them such NPOs from terrorist financing abuse, including:

  1. by terrorist organisations posing as legitimate entities;
  2. by exploiting legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset-freezing measures; and
  3. by concealing or obscuring the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.

The Interpretive Note to Recommendation 8, which has been revised substantially, makes it clear that:

It is not in line with Recommendation 8 to apply measures to organisations working in the not-for-profit realm to protect them from [terrorist financing] abuse when they do not fall within the FATF’s functional definition of NPOs. It is not in line with Recommendation 8 to implement any measures that are not proportionate to the assessed [terrorist financing] risks, and are therefore overly burdensome or restrictive. NPOs are not reporting entities and should not be required to conduct customer due diligence.

FATF’s functional definition of an NPO “refers to a legal person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types of ‘good works’.”

The key updates in Recommendation 8 require countries to periodically identify organisations that fall within this “functional” definition of NPOs and assess the terrorist financing risks posed to them. Among these, only a small portion of NPOs may be facing a “high risk” of terrorist financing abuse. Recommendation 8 requires countries to have in place focused, proportionate and risk-based measures to address terrorist financing risks identified. This risk-based approach is essential, as opposed to a “one-size-fits-all”, which would be inconsistent with the risk-based approach given the diversity within the domestic NPO sector and the varying degrees of risk of terrorist financing abuse they face. Further, many NPOs may already have adequate self-regulatory measures and related internal control measures to mitigate terrorist financing risks, so as not to necessitate additional measures from national authorities. According to Recommendation 8, countries should be mindful of the potential impact of measures on legitimate NPO activities as disproportionate obligations on NPOs may hinder their legitimate activities and the delivery of much needed services, thus affecting economic and other human rights. It also clarifies that countries should ensure oversight or monitoring of NPOs, but they need not designate and supervise NPOs as reporting entities or require them to conduct customer due diligence.

The new Best Practices Paper on the implementation of Recommendation 8, which has been recently published has taken into account input from NPOs, financial institutions, banks and other relevant stakeholders. Reflecting the recent amendments to Recommendation 8, the Best Practices Paper describes the effective approach through which countries can combat terrorist financing abuse of NPOs through the identification, assessment and understanding of terrorist financing risk and how to mitigate it, in addition to including a section on how NPOs can protect themselves. Whether a particular measure is a good practice for an NPO that partially or fully mitigates the specific risk involved requires taking into context the unique circumstances of the NPO, and such a determination includes the level and type of terrorist financing risk by virtue of the type of NPO, its activities, characteristics, the type of funds or assets being distributed, the geographical context, and other controls and due diligence measures in place, among other considerations.

Further, the Best Practices Paper incudes examples of bad practices and specifically explains how not to implement the FATF’s requirements, which can be of significant relevance to the purposes of charities because as stated in the Best Practices Paper:

Complying with the FATF Recommendations should not contravene a country’s obligations under the Charter of the United Nations, and international law, in particular, international human rights law, international refugee law and international humanitarian law.... Implementation of [Recommendation] 8 should respect and observe fundamental human rights and freedoms, such as freedom of opinion, expression, religion or belief, and freedom of peaceful assembly and of association.

Bill C-42 Receives Royal Assent to Change AML/ATF Aspects of Other Acts

Bill C-42, An Act to amend the Canada Business Corporations Act and to make consequential and related amendments to other Acts, received Royal Assent on November 2, 2023. The stated intention of Bill C-42 is to strengthen “the government’s commitment to the implementation of a publicly accessible beneficial ownership registry of corporations governed under the Canada Business Corporations Act (“CBCA”) in furtherance of its efforts to bolster Canada’s anti-money laundering and anti-terrorist financing regime.” In addition to amending the CBCA, Bill C-42 will amend the Access to Information Act, the Income Tax Act, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, and the Budget Implementation Act, 2022, No. 1.

Federally incorporated corporations pose a risk for money laundering due to their ability to conceal ownership. While information on directors is publicly accessible, it may not distinguish between the legal and beneficial owners, and the absence of a centralized registry makes it challenging to obtain beneficial ownership details. As stated in the Legislative Summary of Bill C-42:

A ‘legal owner’ of an asset holds the legal title to that asset in their own name, while a ‘beneficial owner’ possesses certain benefits of ownership even if they do not appear on its legal title. For example, someone who is not the legal owner of a corporation might directly or indirectly have the power to influence the actions of that company and may therefore be considered its beneficial owner. Notably, legal and beneficial ownership are not mutually exclusive.

The FATF emphasizes beneficial ownership transparency in its recommendations, specifically in Recommendation 10, requiring financial institutions to conduct customer due diligence, including identifying and verifying the identity of beneficial owners, with a focus on understanding the ownership and control structure of legal persons and arrangements. Various international jurisdictions establish different thresholds for defining a “beneficial owner”. The FATF does not mandate a specific threshold but it considers a 25% control threshold through ownership interest, voting rights, or the ability to change corporate board members, as acceptable.

In response to the need for accurate information on beneficial owners, federal and provincial/territorial ministers of finance in Canada, as of December 11, 2017, committed to legislative amendments in corporate statutes to ensure corporations maintain updated information on beneficial owners, which can be accessed by law enforcement and tax authorities. Federal amendments, notably in the CBCA since 2018, mandate federally incorporated businesses to establish and maintain a list of “individuals with significant control” (“ISCs”). The CBCA defines an ISC based on interests or rights in a significant number of shares, specifying details for the ISC register, including names, addresses, and descriptions of their control. The corporation must ensure accuracy, completeness, and transparency of this information and disclose it to authorities, shareholders, and creditors upon request or affidavit.

The amendments to the CBCA by Bill C-42 include expanding the information collected in the ISC register to encompass citizenship and address for service, requiring corporations to update the ISC register annually and upon request, and empowering the Director to determine necessary ISC register information, penalizing non-compliance. The amendments also establish offences for directors and officers who knowingly permit contravention of beneficial ownership obligations, with increased penalties following committee amendments. Furthermore, the amendments introduce a publicly accessible beneficial ownership registry for CBCA-governed corporations, specifying information to be made public, exemptions, and a provision allowing ISC individuals to request non-publication under certain circumstances. Other changes empower the Director to dissolve non-compliant corporations, repeal sections allowing shareholder and creditor access to ISC register information, grant the Director authority to provide ISC information to provincial authorities, and introduce whistleblower protections. Additional amendments address definitions, prescribing influence parameters, and granting the Director authority to request records and information related to CBCA compliance.

In Clause 17 of Bill C-42, section 241(4)(u) is added to the Income Tax Act, authorizing the communication of specific taxpayer information to a Department of Industry official solely for the purpose of verifying and validating data required under section 21.21 of the CBCA concerning the corporate beneficial ownership registry. Clause 18 amends section 73(1)(c) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to broaden the Governor in Council's regulatory authority regarding the reporting of discrepancies in information on the beneficial ownership or control of an entity to government institutions or agencies. Lastly, Clause 19 repeals section 434 of the Budget Implementation Act, 2022, No. 1.

Bill C-42 comes into force on a day or days to be determined by order of the Governor in Council.


Read the November 2023 Charity & NFP Law Update