Financial businesses operating in Canada must adhere to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to assist in detecting criminal activities and anti-money laundering efforts. This includes Foreign Money Service Businesses (FMSBs), which may operate outside Canada, and domestic Money Service Businesses (MSBs). Both entities must obtain FSMB or MSB licenses, register with FINTRAC, and fulfill reporting and recordkeeping responsibilities to comply with Canadian law.
Regulatory Framework for MSB and FMSB in Canada
Legislation for MSB and FMSB in Canada necessitates strict adherence to anti-money laundering and counter-terrorism financing laws. Financial service providers, including MSBs and FMSBs, must:
- Register with FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), Canada’s financial intelligence unit.
- Comply with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
- Ensure all transactions and activities meet high standards of financial integrity and transparency.
- FINTRAC, under the Department of Finance, analyzes financial reports and transactions to prevent and detect money laundering and terrorism financing. Non-compliance with these rigorous regulations can lead to significant fines and legal consequences.
- Therefore, businesses must secure the Canada finance licence, ensure full compliance, and regularly train staff on the latest AML/CTF practices.
Commencing on June 1, 2020, international firms involved in funds transfer must also enroll with FINTRAC, adhering to mandatory reporting and documentation obligations.
Activities that Will Be Available with the MSB License of Canada
If a company in Canada wants to provide specialized financial services, it will need to obtain a Money Services Business license (MSB) for this purpose:
Currency exchange
The ability to exchange one currency for another.
Money Transfer
Transferring money electronically or by other means from one party to another.
Negotiable instruments
Processing transactions related to money orders, traveler’s checks, and other financial products.
Virtual currency trading
The ability to exchange and transfer virtual currency
Who Qualifies as a Money Services Business (MSB)?
A business qualifies as a Money Services Business (MSB) and may require an MSB financial license under the Canadian framework if it meets specific criteria:
- Offers any of the following MSB services to clients:
- Conducting currency and foreign exchange transactions.
- Facilitating various funds transfers and financial intermediation.
- Acting as an intermediary for bill payments, utilities, and other financial obligations.
- Engages in the issuance or redemption of negotiable instruments like money orders and traveler’s checks.
- Provides services tied to virtual currencies, such as currency exchanges, transfers, or maintaining crowdfunding platforms.
- Operates within Canada, maintaining a physical presence, employing staff, and establishing branch offices.
In addition to these primary criteria, a company might also be classified as an MSB if:
- It holds a relevant license or registration related to the above MSB services.
- It actively attracts customers through advertising its MSB services across various channels, including media, the Internet, and outdoor advertising.
- It publicly advertises its engagement in MSB services through various means, including newspapers, television, the Internet, or outdoor advertising.
- Even if a business does not actively advertise its services, it could still be considered an MSB if it conducts substantial financial transactions. These could include foreign exchange transactions exceeding $1,000 with a single customer in a single transaction and issuing and redeeming money orders or similar instruments of more than $1,000 per transaction with a single customer.
Who Qualifies as a Foreign Money Services Business (FMSB)?
The enterprise might qualify as a Foreign Money Services Business (FMSB) if it provides MSB-type services to Canadians without establishing a physical base. For clarity, consider the following criteria:
Your business needs registration, a physical location, or personnel within Canadian borders.
You engage with Canadian clients, evident through:
- Targeted advertising within Canada.
- Operation under a “.ca” domain.
- Listing in the Canadian Business Directory.
Your services extend to individuals:
- With a Canadian residential address.
- Holding Canadian government-issued documents.
- Using bank cards from Canadian banks.
- Temporarily residing in Canada for work, study, or leisure.
Key Benefits of the Canada MSB License
Below are some of the significant benefits of an MSB financial license in Canada:
- It ensures legitimate activities in compliance with regulatory requirements, which helps protect investors by reducing the risk of fraud.
- What sets this country apart from others is that obtaining an MSB financial license in Canada does not require a cash deposit.
- Canada is already known for having a stable and reliable financial sector, which provides a comfortable environment for entrepreneurial activity. This is highly conducive to innovation and opportunity.
- Obtaining an MSB license in Canada will be faster than many European licenses.
- Thanks to this permit, you can provide many services, increasing the attractiveness and versatility of the business.
- Having an MSB financial license opens the door to international expansion for business people, ensuring compliance with legal requirements and legal recognition on a global scale.
- It is becoming possible to provide services in cryptocurrency. For example, in Europe, cryptocurrency and fiat transactions require different licenses. That is why Canada has such a significant advantage.
What are the Responsibilities of MSB License Holders in Canada?
Businesses that have successfully obtained a Canada financial license must:
The company must verify customers with Politically Exposed Person (PEP) status for the origin of funds. This is important to ensure that the process of receiving or transferring money does not violate the anti-money laundering and terrorist financing laws.
Collecting and storing information about customers who use the company’s services is necessary. Additional verification is required if a customer makes a transaction of USD 10,000 (approximately CAD 13,800) or more.
Financial records must be kept for five years after the customers’ verification.
Companies must know the financial market and the regulatory framework to obtain an MSB license in Canada.
Canada MSB License Requirements
To meet MSB license requirements, businesses must:
- Initiate a physical workspace within Canada.
- Ensure official registration with Canada’s financial intelligence unit.
- Develop and follow Anti-Money Laundering and Counter-Terrorist Financing policies alongside risk management and monitoring systems.
- Maintain stringent client identification, record-keeping, and reporting practices.
- All associated personnel, including founders, shareholders, and employees, must maintain a clean criminal record and be in reputable standing.
- Designate an officer to oversee and enforce AML/CTF compliance.
- Diligently monitor transactions and promptly report any anomalies to the authorities.
- Appoint at least one economically savvy director to the company’s leadership.
Procedure and Timeline for Obtaining an MSB License in Canada
Client Documentation & Preliminary Analysis
- Collect initial details and legal paperwork from the client.
- Conduct KYC procedures and outline the business model.
- Start drafting AML/CTF policies.
Business Registration in Canada
- Decide on and secure the company’s name and legal address.
- Lease office space and establish share capital.
- Prepare legal documents and hire financially savvy employees.
Bank Account Setup
- Authenticate necessary documents and initiate discussions with payment institutions.
- Finalize share capital contributions and open a corporate bank account.
Pre-Application Preparation & Submission
- Refine documents specific to AML/CTF for cryptocurrency operations.
- Hire, train, and integrate new employees into the company.
- Submit the Money Services Business license application and provide any additional information as requested by FinTRAC.
License Registration & Finalization
- Forward all required paperwork to FINTRAC and actively engage with the regulatory body.
- Support the client throughout the registration process until the MSB license is granted and the company is officially listed in the license registry.
Assistance in Business Establishing
In addition to FINTRAC MSB registration, our services will show you customized approaches to your problems:
Documentation services:
- Thanks to our extensive experience obtaining licenses, our team of experts can create a complete package of documents. This will require your input, managing the project until submission, and ensuring compliance.
- A more cost-effective option for a quick process is to evaluate and improve your existing business plan, risk assessment, and financial statements.
- The third option is integration with a White Label.
What concerns the staff:
- Access to core staff, such as the local director and MLRO, is provided.
- Additionally, there are application specialists that will fit your business model.
Technical compliance:
Professional IT analysis to ensure that the software meets regulatory standards. There are proven software solutions such as BAAS or SAAS. We significantly often work with such platforms as Crasula or Canopus.
Card issuance:
We recommend a White Label solution with partners such as DECTA and Wallester. This is a faster and, most importantly, more profitable way than direct VISA or MasterCard membership.
Taxation
Tax laws closely regulate transactions involving cryptocurrencies because they are classified as assets. The classification puts them under the Income Tax Act (ITA) jurisdiction. Thus, tax rates vary from 15% to 33%.
Companies with a Money Services Business license are required to comply with tax regulations.
Cryptocurrency transactions:
- These transactions are classified as barter when used for services or goods.
- They must be declared as income.
Provincial tax rates:
- Certain provinces will have specific rates, and companies should know and comply with them.
- The value of cryptocurrency should be reported in Canadian dollars for tax reporting to be accurate.
British Columbia and its favorable conditions:
- Only income within this province is subject to taxation.
- For income exceeding CAD 300,000, the corporate tax will be 12%.
- If the income is less than CAD 300,000, additional tax credits can reduce the tax rate to 2%.
- All companies are subject to a federal tax rate of 15%.
Reporting obligations for licensed companies:
- Businesses are advised to make reports on cryptocurrency activities regularly.
- According to the ITA, 100% of the profits from cryptocurrency as a business should be taxed. If the reporting is submitted as capital gains, only 50% is taxable.
- The dates of transactions and their value in CAD must be reported comprehensively.
What are the Possible Penalties?
If organizations fail to comply with the PCMLTFA and related regulations, FINTRAC may impose AMP (administrative monetary penalties). This is necessary to ensure that the requirements are strictly adhered to and to protect the Canadian financial system from money laundering and terrorist financing. A company that is not law-abiding can be fined up to several million dollars. In addition, the regulator can impose other sanctions on violators. FINTRAC may request additional documentation or other information from an organization and be ordered to correct violations. Criminal charges will be brought if violations are not fixed, or there is no cooperation with the regulator.
To summarize, compliance is an essential aspect of business strategy for companies wishing to obtain a Canada Finance License.
FAQ
Can you give an example of a Money Service Business (MSB)?
Entities like Western Union and MoneyGram are prime illustrations of MSBs, offering services enabling global money transfers. Broadly, MSBs facilitate financial transactions such as electronic payments, currency exchanges, and remittance services. These can range from sprawling financial entities to nimble fintech startups.
Who would not be classified as an MSB or a Foreign Money Service Business (FMSB)?
Entities acting purely as agents providing MSB services, like a broker for financial transactions, or operating outside the scope of MSB activities, such as securities dealers, are not considered MSBs or FMSBs. Additionally, traditional financial institutions like banks and investment firms typically are not categorized as MSBs or FMSBs due to their distinct regulatory and licensing frameworks.
What are the Anti-Money Laundering (AML) concerns associated with MSBs?
MSBs face AML challenges, including the risk of exploiting their platforms for illicit purposes such as money laundering or terrorist financing. They are also susceptible to fraud and cyber threats. Non-compliance with AML regulations can result in severe repercussions, including financial penalties, loss of licensing, or even criminal charges, underscoring the importance of robust AML strategies and adherence to legal standards.
What privileges does an MSB license confer in Canada?
Holding an MSB license in Canada authorizes businesses to engage in various financial services, such as processing money transfers, conducting currency exchanges, and managing remittances. This license permits transactions in Canadian and foreign currencies, serving clients across borders, including individuals and corporate entities, paving the way for business growth and a diversified client portfolio.
