s and Ethics Advisory Network Record of Discussions & Decisions DATE: December 11, 2013 4. Opening Remarks ° ° ° ° Discussion about Bitcoins as a reportable asset and potential conflict of interest; s.21(1)(b) Members asked to identify alternate members; Overview of statistics relating to Values and Ethics Division Discussion of asset freeze as compliance measure. 2. Training suggestions and comments ° ° ° Duty of loyalty vs. political neutrality; Department of Justice offers course that has a component about dealing with Minister's offices. If any relevance, the member will share with the Network; Mandatory sessions specific to Branches. Paving the Way for employees and managers was highlighted (offered by Canada School of Public Service online free of charge); Presentations to individual Branches - V&E reminded all members that training and presentations to Branches are always encouraged. Presentations will be tailored to each Branch needs; Email and post articles relating to values and ethics on InfoSite. Short email to employees encouraging them to visit website for articles on V&E; Will add roundtable to every agenda to give members opportunity to bring up values and ethics issues, topics and scenarios specific to their Branch for open discussion. 000001Gauthier, Gregory 3 décembre 2013 08:09 Leduc-Siemens, Milaine FW: Deck on Bitcoin Note security classification-not to be shared beyond v and e ~i.e. you and | Greg W. Gauthier Director, Values & Ethics | Directeur, Valeurs & Ethique Law Branch | Direction juridique Department of Finance Canada | Ministre des Finances Canada Ottawa, Canada K1A 0G5 Gregory. Gauthier @fin.gc.ca Telephone | Télephone 613-995-1362 / Government of Canada | Gouvernement du Canada ’Brien, Erin Sent: December 2, 2013 4:51 PM To: Gauthier, Gregory Subject: Deck on Bitcoin HiGreg, Sorry for the delay, but | had to track down an electronic version of the deck. Virtual currency deck for Jean. E Erin O'Brien Chief | Chef Financial Sector Division | Division du secteur financier Financial Sector Policy Branch | Direction de la politique du secteur financier Department of Finance Canada | Ministére des Finances Canada Ottawa, Canada K1A 0G5 Erin. Obrien@fin.cc.ca Telephone | Téléphone 613-992-6785 / Facsimile | Télécopieur 613-943-8436 / Teletypewriter | ‘Teléimprimeur 613-995-1455 Government of Canada | Gouvernement du Canada WOR Bresette pare ore inane Canada 1 00002From: OBrien, Erin Sent: Monday, December 02, 2013 4:51 PM. To: Gauthier, Gregory Subject: Deck on Bitcoin HiGreg, Sorry for the delay, but | had to track down an electronic version of the deck. ®) Virtual currency deck for Jean. E Erin O'Brien Chief | Chef Financial Sector Division | Division du secteur financier Financial Sector Policy Branch | Direction de la politique du secteur financier Department of Finance Canada | Ministére des Finances Canada Ottawa, Canada K1A 0G5 rin, Obrien@fin.ac.ca Telephone | Téléphone 613-992-6785 / Facsimile | Télécopieur 613-943-8436 / Teletypewriter | Téléimprimeur 613-995- 1455 Government of Canada | Gouvernement du Canada BR Bresarrentorrinance pinisuye oes Finances Canada 000003Pages 4to/a9 are duplicates sont des duplicatasPage 10 is withheld pursuant to section est retenue en vertu de article 19(1) of the Access to Information Act de la Loi sur ’accés a l’informationPage 11 is withheld pursuant to section est retenue en vertu de article 19(1) of the Access to Information Act de la Loi sur ’accés a l’informationPage 12 is withheld pursuant to section est retenue en vertu de article 19(1) of the Access to Information Act de la Loi sur ’accés a l’informationPage 13 is withheld pursuant to section est retenue en vertu de article 19(1) of the Access to Information Act de la Loi sur ’accés a l’informationPages 14 to/a25 are withheld pursuant to sections sont retenues en vertu des articles 69(1)(e), 69(1)(g) re: (c), 69(1)(g) re: (d), 69(1)(g) re: (f) of the Access to Information Act de la Loi sur ’accés a l’informationPages 26 to/a63 are withheld pursuant to section sont retenues en vertu de l'article 69(1)(f) of the Access to Information Act de la Loi sur ’accés a l’informationMin ‘ommittee (PPSA\ Department of Finance, Boardroom 22A, Ottawa May 30, 2013, 1 to 5 p.m. Attendees: Public Sector Private Sector -Canada Border Services Agency (CBSA) -Canada Revenue Agency (CRA) — Charities -Canada Revenue Agency (CRA) — Criminal Investigations -Canadian Security Intelligence Service (CSIS) -Department of Finance -Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) -Department of Justice—Criminal Law Policy Section -Department of Justice—International Assistance Grouy Office of the Superintendent of Financial Institutions (OSFD) -Public Safety Canada ice (RCMP) Private Sector ‘Agenda items: 1) Introductions/Weleome © The Department of Finance opened the meeting and welcomed attendees. New attendees were introduced, © The Department of Finance provided a brief overview of the committee and the importance of private sector feedback to Canada’s Anti-Money Laundering/Anti-Terrorist Financing (AML/ATF) Regime. 8.21(1)(b) ‘0000642) Update on Previous Issues Raised a) Progress on user-friendly, sector specific FINTRAC guidance * Atthe last meeting, FINTRAC provided a short presentation on suspicious transaction reports (STRs) with respect to the homebuilding sector. It was noted that it would be useful if FINTRAC could provide similar presentations to other sectors, specifically dealers in precious metals and stones (DPMS). © FINTRAC noted that since the beginning of the calendar year, it has made presentations at different fora. + As of summer 2013, FINTRAC will have a major reports team to better manage FINTRAC’s relationship with the largest of the reporting entities in the financial sector. Given the volume of transactions undertaken by these institutions on a daily basis, they have a critical role in detecting and deterring money laundering and terrorist activity financing. Through tailored engagement and regular supervision, FINTRAC will enhance efforts to improve compliance and facilitate improved reporting. FINTRAC also engaged with major reporters to determine how to align data validation processes. ‘+ In addition, FINTRAC has been working with credit union centrals to better address their challenges and is looking at processes to provide better DPMS guidance. Finally, FINTRAC recently launched a redesigned MSB information web page that simplifies the way information is provided to that sector.A pamphlet on what to expect when FINTRAC conducts a compliance examination was also released. b) Coverage of deposit brokers under the PCMLTFA, * At the last meeting, it was asked whether the government is giving consideration to making deposit brokers a reporting entity. + Finance reported that deposit brokers are expected to meet PCMLTFA obligations when they act as an agent for financial institutions (Fis). If deposit brokers were added as reporting entities, they would have their own obligations, which would duplicate those of the FI that is accepting a deposit. FINTRAC issued a recent interpretation that recognizes circumstances where a reporting entity can rely on previous customer due diligence performed by a deposit broker, which was well received by the Registered Deposit Brokers Association and will reduce the duplication of efforts. ©) Private-sector input into Canada’s national risk assessment «Finance is undertaking work to develop a national risk assessment, which will be used as a tool to guide policy development and priority setting. The national risk assessment will also be useful for the private sector. Finance reached out to members of the committee to provide their expertise. 000654) Discussion of reporting entities? application of the risk-based approach © At the last meeting, there was a request to discuss methodologies for applying a risk-based approach. FINTRAC and OSFI have been asked to do a joint presentation on this topic at the next meeting in November 2013. ©) Progress on sanctions listing issues © Finance circulated a draft plan to address the issues private sector members identified. Committee members are asked for their feedback on the plan. ‘© The plan seeks to address the following five issues: 1, a comprehensive, downloadable, consolidated list of persons or entities subject to targeted financial sanctions in Canada is not available; 2. concerns over the OSFI lists; 3. communications about new sanctioned persons and entities, as well as updates to all current lists, are not always systematic and timely; 4. there are numerous and various reporting requirements of frozen assets for different sanctions regulations; and 5. minimal (if any) compliance guidance is provided to the private sector. f) Effect of the Foreign Account Tax Compliance Act (FATCA) on the Regime: ‘© Atthe last meeting, questions were raised as to what effect the U.S.’s FATCA would have on Canadian reporting entities’ AML/ATF regimes. + FATCA places obligations on Canadian Fs to enter into Internal Revenue Service (IRS) agreements or face a 30% withholding tax on U.S. source payments. The Government of Canada is currently negotiating an agreement with the U.S. that will govern FATCA’s implementation in Canada. This agreement will clarify legal conflicts between FATCA and local laws, and will help reduce compliance burden on reporting entities. Finance does not think FATCA will have any impact on AML rules in Canada. Canada’s position is that it should be implemented consistent with existing AML obligations. However, the scope of FATCA does not align with the scope of the PCMLTFA. For example, casinos are reporting entities, but are not captured under FATCA. Some small Fis may be able to take advantage of exemptions under the intergovernmental agreement, but won’t be exempt from Canada’s AML/ATF Regime. 3) Tour de Table ‘Comments from the Private Sector DPMS 000066Docur Loi sur Fa FINTRAC has undertaken some examinations in the last six months. In general, the examinations have been very onerous on small businesses. There is concern about apparent inconsistencies in examinations across Canada, which makes it difficult to assist members. FINTRAC was thanked for its July 19 meeting/focus group, which will hopefully address some of the concerns identified and help FINTRAC with its compliance activities. © Note: FINTRAC later explained, during its Exam Strategy presentation, that the scope of its examinations are tailored based on the profile of the reporting entity. As such, the ‘scope of an examination within the same sector will reflect this tailored approach. 4 $.20(1)(6) 8.24(1)(b) ‘000067ive asked whether FINTRAC’s securities sector typology report was published. © FINTRAC has published the report. It is available at www.fintrac- canafe.ge.ca/publications/typologies/2013-04-eng pdf. © FINTRAC said itis finalizing proposed guidelines. Draft guidelines are planned to be circulated over the summer, with final guidelines in the fall. FINTRAC would like to provide at least six months between the release of the final guidelines and implementation. seeing FINTRAC’s and OSF1's guidance soon. . with interest the remarks of FINTRAC’s Director to the Association of Certified ‘Anti-Money Laundering Specialists, where he talked about need for improved results and ‘communications. 5 8.20(1)(b) 8.21(1)(b) ‘000068Docur Loi sur Fa © FINTRAC noted that it has met with! several occasions in the last few years on various topics and did provide some feedback in the sector's compliance results. More meetings are already scheduled and this topic will be on the agenda. (© OSFI said the issue may be analogous to shared post office and convenience store arrangements, where there are two different income streams. One could look at whether there is a systemic issue with the business model. '8.20(1)(b) s.21(1(b) ‘000069Comments from the Public Sector CRA - Criminal Investigations * At the last meeting, it was asked whether CRA shares information with civil forfeiture authorities. Information would be shared if all other options were exhausted, but this is limited under the Income Tax Act to information in the public domain. There have been situations where CRA would collect unpaid taxes from certain assets, and civil forfeiture authorities would collect from others. ‘* The most recent Budget contained a measure whereby CRA will gain access to electronic funds transfer reports in 2015. .20(1(b) s.21(1(b) CRA - Charities + CRA - Charities provided an overview of a forthcoming report on Canada’s Counter Terrorism Capacity Building program, which looked at vulnerabilities of the non-profit sector to terrorist financing. Governments, the non-profit sector, and the financial sector have different understandings of the terrorist financing risk. CRA ~ Charities offered to provide an overview of the report at the next PPSAC meeting, CRA would also be interested to get the committee’s feedback on riskiness of non-profit organizations as clients. OSFI ‘* Last year, the Basel Committee on Banking Supervision began work on updating its customer due diligence guidance. It is expected that the committee will release new guidance in June 2013, with a three month consultation period to follow. OSFI participated extensively in drafting the document. * OSFlis interested in the risk that Bitcoin poses to banks, and is working with FINTRAC on the issue. Public Safety Canada ‘© Since the last meeting, there has been troubling terrorist activity around world, which serves as a reminder that international events have a nexus to domestic activities. Canada’s ATF regime figures prominently in conversations about the coordination of actions, activities, response and prevention. 000070+ The government recently completed its required two-year review of Criminal Code listings. ‘One entity came off the list. Since the last committee meeting, there have been some high- profile additions, including the Islamic Revolutionary Guard Corps’ Qods Force, Haqqani ‘Network, and the Taliban, + Recently, Public Safety was asked by the UN Counter-Terrorism Committee to assist southern African countries. Outreach to countries that don’t have measures to counter terrorist financing is regarded as helpful. RCMP * The RCMP's Federal Policing Program has undergone significant restructuring. The RCMP will be able to offer better service as a result. .20(1(b) 8.21(1)(b) FINTRAC * FINTRAC completed its first concurrent examination of a federally-regulated financial institution with OSFI. © At the last meeting, a question was asked about a potential disconnect between the number of reports FINTRAC receives and the number of disclosures it makes. FINTRAC met with one financial institution to show the relationship between the reports they send and how they are used, FINTRAC will continue to do this given that it now has the capacity to look at each institution and inform how reports were used, but there are privacy limitations on the level of detail that can be provided. ‘© When discussing better communication and results, itis important to understand that there is ML and TF taking place in Canada. FINTRAC is looking at compliance for intelligence purposes. In the long run, FINTRAC wants to be much more refined in its understanding and analysis of each sector. For example, what is the risk in the insurance sector? What products are risky? ‘000071* There were a couple questions about lessons learned from audits. FINTRAC analyzes whether there are systemic issues across a sector or all sectors, and in the not too distant. future will provide feedback. + FINTRAC is looking at Bitcoins and online casinos. Dealing in Bitcoins is not an MSB activity on its own, as Bitcoin exchanging is not considered currency exchange. However, such an entity could be conducting other activities that would qualify them as an MSB. If Bitcoin was being used as a platform in order to transfer funds, that would be considered an MSB activity, but FINTRAC has not seen any Bitcoin related activities to date that would meet the definition of an MSB. * FINTRAC’s MSB project was an effort to communicate better with small and medium MSBs. FINTRAC distributed a brochure last year explaining MSB obligations, and published a revised MSB website in March. The third component of the project will be coming soon and will allow for easier MSB registration. 4) Presentation: Accu-Rate Marc Auger, Compliance and Privacy Officer Accu-Rate provided a presentation on a small MSB’s perspective of FINTRAC’s examination process. Follow-up comments and issues ‘* _It.was asked whether Accu-Rate was the first entity to get a full review of the transactions for which FINTRAC found deficient reporting. © Accu-Rate was the first; FINTRAC produced a report showing what transactions were not reported, such that Accu-Rate was able to demonstrate that a misunderstanding had occurred. = Note: FINTRAC later explained, as part of its presentation on Exam Strategy, that all findings letters for compliance examinations conducted on or after April 29, 2013 include “transaction summary reports” listing the reference numbers for all deficient reports/records. © Itwas asked whether FINTRAC’s audit of Accu-Rate’s DPMS business was complete, and whether it was different than FINTRAC’s MSB audit. © The DPMS audit is complete. It was a telephone interview, whereas the MSB audit was, an on-site visit, but the DPMS audit otherwise had a similar approach. 8.20(1)(b) 5) Presentations from Private Sector on Risk Assessments s.24(1)) 000072to Docur Loi sur} Follow-up Comments and Issues «FINTRAC noted that it is difficult to assess the amount of money laundering that is disrupted, and that it is important to understand the context in which transactions occur. '* OSFI said they notice financial institutions having similar difficulties to those outlined in the accounting representative's presentation. OSFI often sees that the risk assessment isn’t applied properly (i.e, high risk clients aren’t treated differently), and that training is not consistent with OSFT's or FINTRAC’s guidance. 6) FINTRAC Presentation: FINTRAC’s Compliance Examination Strategy ee $.20(1)(b) 8.24(1)(b) 000073* FINTRAC presented its examination strategy, explaning how it has evolved over the years from a“one-size-fits-all” approach, where all sectors were considered equal, to a risk-based approach, where activities are selected commensurate with risk. «FINTRAC has refined its business processes and modernized key aspects of its examination program, including the development of new selection strategies and the leveraging of information produced by its Compliance Research Lab to make evidence-based decisions. FINTRAC will continue to build on these with the aim of supporting its core vision of delivering an enforcement focused, risk-based compliance program, 7) Concluding Remarks * Finance thanked members for participating. Follow-up items * The following items will be addressed at the next meeting: ° e000 ° Reporting entities’ application of the risk-based approach MLITF risk posed by virtual currencies (e.g. Bitcoin) Clarifying the treatment of online casinos Progress on sanctions listing issue Experiences of private-sector PPSAC members of having non-profit organizations as clients Request for feedback on what realtors are doing well and what they are doing poorly with respect to their PCMLTFA obligations Inconsistency in the definition of MSBs between PCMLTFA and banks Bank account closures * Communication of bank account closures to law enforcement and FINTRAC * Reconciling banks’ need to close accounts of suspicious clients with law enforcement’s need to keep accounts open of people under investigation ‘Measuring civil forfeitures The next PPSAC meeting is scheduled for November 13, 2013. wn 000074rel rét consultatif public-privé (CCPP) Ministére des Finances, salle de réunion 22A, Ottawa ‘Le 30 mai 2013, de 13hA17b Présents : Secteur public Secteur privé ~ Agence des services frontaliers du Canada (ASFC) - Agence du revenu du Canada (ARC) — Enquétes criminelles ~ ARC - Organismes de bienfaisance - Bureau du surintendant des institutions financiéres (BSIF) ~ Centre d'analyse des opérations et déclarations financiéres du Canada (CANAFE) - Gendarmerie royale du Canada (GRC) - Ministre de la Justice - Section de la politique en matire de droit pénal ~ Ministre de la Justice ~ Service d'entraide internationale - Ministére des Finances ~ Service canadien du renseignement de sécurité (SCRS) - Sécurité publique Canada Absents : Secteur public Secteur privé Points a ordre du jour : 1) Présentations et mot de bienvenue ‘© Leministére des Finances ouvre la réunion et souhaite la bienvenue aux participants. On procéde & la présentation des nouveaux participants. 8.21(1(b) (000075Le ministére des Finances présente un bref apercu du comité et du role important que joue la rétroaction du secteur privé & !’égard du régime canadien de lutte contre le recyclage des produits de la criminalité et le financement des activités terroristes (LRPC/FAT). 2) Le point sur les questions soulevées antérieurement. a) Progrés réalisés par le CANAFE relativement a la préparation de matériel d'orientation convivial et adapté & chaque secteur Lors de la derniére réunion, le CANAFE a donné une bréve présentation sur les déclarations d’opérations douteuses (DOD) dans le secteur de la construction d’habitations. On mentionne quill serait utile que le CANAFE puisse donner des présentations semblables dans d’ autres secteurs, notamment auprés des négociants en métaux précieux et en pierres précieuses (NMPPP). Le CANAFE souligne que depuis le début de I’année civile, il a fait des présentations lors de différents forums. A compter de 'été 2013, le CANAFE disposera d'une équipe principale chargée des rapports, afin de mieux gérer ses relations avec les plus importantes entités déclarantes du secteur financier. Etant donné le volume d'opérations qu'effectuent ces institutions tous les jours, celles-ci jouent un r6le essentie! dans le repérage et 'élimination du blanchiment d'argent et du financement d’ activités terroristes. Grice & une mobilisation personnalisée et une surveillance régulitre, le CANAFE pourra mieux cibler les efforts visant & rehausser la conformité et & favoriser une production améliorée de rapports. Le CANAFE s'est aussi engagé auprés des entités déclarantes majeures & trouver une maniére d’harmoniser les processus de validation des données. En outre, le CANAFE a travaillé avec les centrales de caisses de crédit pour les aider & résoudre les difficultés auxquelles elles font face, et il cherche des moyens de mieux les guider & l’égard des NMPPP. Enfin, le CANAFE a récemment lancé une version remaniée de la page Web contenant de information destinée aux ESM, qui permet de véhiculer plus facilement linformation & ce secteur. Une brochure indiquant ce a quoi il faut s‘attendre lorsque le CANAFE procéde & un examen de la conformité a aussi été publiée. b) Couverture des courtiers en dépéts en vertu de LRPCFAT Lors de la derniére réunion, on a demande si le gouvernement envisageait de considérer les courtiers en dépéts comme étant des entités déclarantes. Le ministére des Finances indique que les courtiers en dépots agissant & titre d’agent d’une institution financiére (IF) sont tenus de se conformer aux exigences de la LRPCFAT. Le fait d’ajouter les courtiers en dépéts & la liste des entités déclarantes aurait pour effet de créer des dédoublements, car ceux-ci devraient se conformer & deux séries d’exigences, soit les leurs et celles de IF recevant le dépét. Le CANAFE a récemment émis un avis d’interprétation dans 2 000076lequel il reconnait que, selon les circonstances, une entité déclarante peut s’en remettre & la diligence raisonnable dont a fait preuve le courtier de dépéts & I’égard des clients précédents. Cet avis d’interprétation a été bien accueilli par la Registered Deposit Brokers Association et permettra de réduire le dédoublement des efforts. c) Observations du secteur privé relativement a I’ aluation nationale des risques * Le ministére des Finances est en train de mettre au point une évaluation nationale des risques, qui sera utilisée comme outil pour orienter I’élaboration des politiques et I’établissement des priorités. Cette évaluation aura également son utilité pour le secteur privé. Le ministre demande aux membres du comité de mettre & profit leur expertise. 4) Discussion sur application par les entités déclarantes dune approche axée sur le risque ‘© Lors de la demidre réunion, certaines personnes ont indiqué qu’elles aimeraient discuter des méthodologies relatives & I’application d’une approche axée sur le risque. On a demandé au CANAFE et au BSIF de faire une présentation conjointe sur le sujet lors de la prochaine réunion en novembre prochain. ©) Progrés dans le dossier des listes de sanctions © Le ministre des Finances a fait circuler un plan provisoire visant & résoudre les problémes soulevés par les membres du secteur privé. On demande aux membres du comité de soumettre leurs observations sur le plan, © Leplan porte sur les cing questions suivantes : 1, une liste exhaustive, téléchargeable et consolidée des personnes et des entités faisant objet de sanctions financiéres ciblées au Canada; 2. les préoccupations concemant les listes du BSIF; 3. la divulgation du nom des personnes ou des entités faisant I’objet de sanctions et la mise a jour des listes existantes ne se font pas systématiquement et en temps opportun; 4, les exigences de rapports sur les avoirs bloqués sont nombreuses et varient selon les différents rglements propres aux sanctions; 5. le secteur privé ne regoit que peu (ou pas) d’orientations en matitre de conformité. f) Incidence de la Foreign Account Tax Compliance Act (FATCA) sur le régime ‘© Lors de la demiére réunion, des questions ont été soulevées relativement & incidence qu’aura la FATCA (E.-U.) sur les régimes canadiens de LRPCFAT des entités déclarantes, + En vertu de la FATCA, les IF canadiennes doivent conclure une entente I'Internal Revenue Service (IRS), & défaut de quoi une retenue dimpét de 30 % sera appliquée sur les paiements provenant de sources américaines. Le gouvernement fédéral est en train de négocier une entente avec les £.-U. visant a régir la mise en ceuvre de la FATCA au Canada. Cette entente 3 000077viendra éclaircir les conflits légaux qui existent entre la FATCA et les lois locales, et permettra d’atténuer le fardeau de la conformité des entités déclarantes. Le ministére des Finances ne pense pas que la FATCA aura une incidence sur les régles de lutte contre le blanchiment d'argent au Canada, Le Canada est d’avis devrait étre mise en oeuvre conformément aux obligations existantes en matiére de lutte contre le blanchiment d’argent. Toutefois, la portée de la FATCA ne concorde pas avec celle de la LRPCFAT. Par exemple, Jes casinos sont considérés comme des entités déclarantes, mais ne sont pas assujettis a la FATCA. Certaines petites IF pourront se prévaloir des exemptions prévues en vertu de Ventente intergouvernementale, mais ne pourront se soustraire au régime canadien de LRPC/FAT. 3) Tour de table Remarques du secteur privé NMPPP ‘Le CANAFE a entrepris un certain nombre d’examens au cours des six derniers mois. En général, ces examens ont engendré des cotts trés élevés pour les petites entreprises. On se préoccupe du fait qu’il y a des incohérences apparentes au niveau des examens & I’échelle nationale, ce qui fait en sorte qu’il est difficile d’offrir du soutien aux membres. Le CANAFE tiendra une séance de consultation de groupe le 19 juillet. On espére que cette séance permettra de répondre & certaines des préoccupations soulevées et aidera le CANAFE dans le cadre de ses activités d’ observation de la conformité. © Remarque : Le CANAFE explique ultérieurement, durant la présentation de sa stratégie d'examen, que la portée des examens est adaptée au profil de Uentité déclarante. Par conséquent, la portée d'un examen dans un secteur donné tiendra compte de cette approche personnalisée. 8.20(1(b) s.21(1(b) ‘000078© Lereprésentant ‘veut savoir si le rapport sur la typologie du secteur des valeurs mobiliéres du CANAFE a été publié. © Le rapport a été publié et est disponible & I’adresse suivante : www.fintrac- ccanafe. gc.ca/publications/typologies/2013-04-fra.pdf. '8.20(1)(b) 8.24(1)(b) ‘000079‘© LeCANAFE indique qu’il est en train de mettre la dernitre main aux lignes directrices proposées. Une version provisoire de ces lignes directrices devrait étre envoyée au cours de 1’6t6 et la version définitive sera préte & l’automne, Le CANAFE prévoit qu’un délai 4’au moins six mois s’écoulera entre la publication des lignes directrices définitives et, leur mise en ceuvre. attend avec impatience que le CANAFE et le BSIF émettent leurs directives. pris connaissance avec intérét des propos du directeur de I'Association des spécialistes accrédités de la lutte contre le blanchiment argent du CANAFE, concernant la nécessité d’ apporter des améliorations sur le plan des résultats et des communications. ‘© Le CANAFE mentionne quil a renco plusieurs reprises ces demnigres années. our discuter de divers sujets et qu'il a fourni une certaine rétroaction concernant les résultats du secteur en matiére de conformité. D’autres réunions sont prévues, au cours desquelles ce sujet sera abordé. ee '8.20(1)(b) 8.21(1)(b) ‘000080‘© Le BSIF mentionne que le probléme est analogue a la situation des ententes de partage entre les bureaux de poste et les dépanneurs, qui générent deux différentes sources de revemus. On pourrait désigner une personne pour examiner le dossier, afin de voir si le modele opérationnel présente un probleme systémique. '8.20(1)(b) 8.21(1)(b) ‘000081Remarques du secteur public ARC - Enquétes criminelles * Lors de la demiére réunion, des participants ont demandé si l' ARC partageait de information avec les autorités d’application civiles. Le partage d'information serait envisage si toutes les autres options étaient épuisées, mais cela se limiterait, conformément & Ja Loi de l'impot sur le revenu, & Vinformation relevant du domaine public. Parfois, 'ARC pergoit des impéts non payés sur certains actifs et les autorités d’application civiles perpoivent des montants sur d’autres actifs. ‘+ Ledemier budget comprend une mesure qui permettra & I’ ARC d’avoir accés aux déclarations de télévirements, et ce, dés 2015. ARC - Organismes de bienfaisance * LaDirection des organismes de bienfaisance de I’ ARC présente un apergu du rapport & araitre sur le programme canadien de renforcement des capacités antiterroristes, qui abordera la vulnérabilité du secteur des organismes sans but lucratif a I’égard du financement d activités terroristes. Les gouvernement, le secteur des organismes sans but Iucratif et le secteur financier ont des perceptions différentes du risque de financement d'activités terroristes. La Direction des organismes de bienfaisance de I’ ARC propose de donner un apergu du rapport lors de la prochaine réunion du CCPP. L’ ARC serait également intéressée a obtenir les commentaires des membres du comité au sujet du degré de risque que représentent les organismes sans but lucratif en tant que clients. BSIF ‘+ L’an demier, le Comité de Bale sur le contréle bancaire a entamé les travaux en vue de mettre & jour ses lignes directrices sur le devoir de vigilance relatif & la clientéle. On s'attend ce que le Comité publie ses nouvelles lignes directrices en juin 2013 et que la publication soit suivie d'une période de consultation de trois mois. Le BSIF a participé de prés & la préparation du document. .20(1\(b) 8.21(1)(b) ‘000082‘+ Le BSIF s"intéresse au risque que pose le Bitcoin pour les banques et planche sur le dossier avec le CANAFE. Sécurité publique Canada ‘+ Depuis la demiére réunion, des activités terroristes inquiétantes ont eu lieu & travers le monde. Cela nous rappelle que les événements d’envergure internationale ont des répercussions sur les activités nationales. Le régime canadien de lutte contre le financement des activités terroristes est au coeur des conversations sur la coordination des mesures et des activités de riposte et de prévention. ‘+ Le gouvernement a récemment complété son examen obligatoire de deux ans sur Ia liste des emtités et particuliers liés & des activités terroristes. Le nom d’une entité a été retiré de la liste. Depuis la demiére réunion du comité, des ajouts importants ont été apportés a la liste, dont la Brigade al-Qods des Gardiens de la révolution islamique, le réseau Haqqani et les Talibans. © Récemment, le Comité des Nations Unies contre le terrorisme (CCT) a demandé & Sécurité publique Canada de venir en aide aux pays du sud de I’Afrique. La sensibilisation des pays ‘qui n’ont pas de mesures de lutte au terrorisme est considérée comme GRC '* Les services de police fédérale de la GRC ont subi une importante restructuration. Cela permettra ala GRC d’offrir de meilleurs services. s.20(1\(b) s.21(1)(b) ‘000083CANAFE, * Le CANAFE vient de terminer son premier examen simultané des institutions financiéres sous réglementation fédérale avec le BSIF. © Lors de la demniére réunion, une question a été posée sur I’écart potentiel entre le nombre de rapports regus par le CANAFE et le nombre de divulgations qui sont faites. Le CANAFE a rencontré le représentant dune institution financiére pour lui montrer le lien qui existe entre Jes rapports qui sont envoyés et la fagon dont ils sont utilisés. Les efforts se poursuivront dans cette voie, étant donné que le CANAFE a maintenant la capacité nécessaire pour discuter avec chaque institution et les éclairer sur la fagon dont les rapports sont utilisés, mais, doit tout de méme respecter les limites qu’impose le respect de la vie privée en ce qui a trait au niveau de détail des renseignements qui sont dévoilés + Lorsqu’on discute de I’ amélioration des communications et des résultats, il est important de comprendre qu’il y a bel et bien des cas de blanchiment d'argent et de financement activités terroristes au Canada, Le CANAFE vérifie la conformité & des fins de renseignements. A long terme, le CANAFE a pour objectif de se perfectionner afin de mieux comprendre et de mieux analyser chaque secteur. Par exemple, quels sont les risques propres au secteur de I’assurance? Quels sont les produits qui présentent un risque? ‘+ Des questions ont été posées au sujet des legons tirées des vérifications. Le CANAFE effectue une analyse pour déterminer s’il existe des enjeux systémiques propres & un secteur en particulier ou & tous les secteurs et, dans un avenir assez rapproché, il fera le point sur le dossier. ‘+ Le CANAFE se penche sur la question des Bitcoins et des casinos en ligne. Les opérations en coins ne relevent pas uniquement des ESM, puisque ce ne sont pas réellement des opérations de change. Toutefois, les entités visées peuvent mener d’autres activités contribuant & faire d’elles des ESM. Si le Bitcoin est utilisé comme une plateforme pour transférer des fonds, cela est considéré comme une opération d’ESM. A ce jour, le CANAFE na relevé aucune opération de Bitcoin répondant a la définition d’ une ESM. © Le projet sur les ESM du CANAFE a été lancé en vue d’améliorer la communication avec les petites et les grandes ESM. L’an dernier, le CANAFE a distribué une brochure aux ESM leur expliquant quelles sont leurs obligations et a mis en ligne une version remaniée de son site Web consacré aux ESM en mars. La troisiéme composante du projet sera dévoilée sous peu et viendra simplifier le processus d'enregistrement des ESM. 4) Présentation : Accu-Rate Marc Auger, agent de conformité et de protection de la vie privée Accu-Rate présente un exposé sur le processus d’examen du CANAFE, du point de vue d’une petite ESM. 10 00084Remarques de suivi et enjewx © Ondemande si Accu-Rate a été la premiére entité a faire objet d’un examen complet des transactions non déclarées relevées par le CANAFE. © Accu-Rate a en effet été la premiére; le CANAFE a publié un rapport montrant que certaines transactions n’avaient pas été déclarées, mais Accu-Rate a été en mesure de ds teayon } ahh boa ctl Hate doust kt gyse, ~besed commer Uf -e | 8.21(1)(b) 00001Tee eka a dL al yaa slo rnp Ty 7 Py s +] Brin mad lato cheno dh de, 5.21(1)(a)_ meee erhrlhmrlhmULUccCLUL 00082Not Relevant - Out of Scope 8.21(1)(b) 00003-) 4 ether on Mom — GrshpArnre/ ine 7 Lan ory Myo ga Crd - } Ae © arty a pedpihl") don jasod fe ebb Par VniaNy Pow t7 nae = tony, fil — pr. lant arid puis | Iidy anded by wnbord Yohnkn Der a - Ue . | ke So AG ae wt | 3 denaind ae wvtaStind ture 1) leary rewnaya/ = 8.21(1b) 00004epee Aas, eee Pte sy luettatady florea ete int a uclady 3 ta 8.21(1)(b) 0008sDigital Currency dealers grapple with big banks z and murky financial rules ISSUE * On April 28", Canadian Press Newswire published a story noting that virtual currencies such as Bitcoin are unregulated in Canada. It contrasts Canada with the U.S., indicating that the U.S. Treasury's Financial Crimes Enforcement Network recently issued guidance clarifying that dealers of virtual currencies, including Bitcoin, are subject to rules that govern financial transactions. KEY POINTS © Bitcoin exchanges are not currently subject to Canada’s anti-money laundering legislation. * The Government of Canada is committed to a strong and effective anti-money laundering and anti-terrorist financing regime. We regularly review our anti-money laundering laws and make changes as appropriate. BACKGROUND «The virtual currency Bitcoin is based on a decentralized, anonymous, peer-to-peer network. Unlike traditional currencies, there is no central authority issuing or backing Bitcoins. Currently, there are approximately 11 million Bitcoins in circulation with a value of between $1 and $2 billion. Users buy and sell Bitcoins through exchanges or locally from other users. © Bitcoins can be used as a currency for both virtual and real goods and services. Use of Bitcoins for real goods and services appears to be mainly confined to niche markets, and there are still very few non-web businesses that accept Bitcoins as a payment method. «Currency in Canada is governed by the Currency Act. Bank notes produced by the Bank of Canada and coins produced by the Royal Canadian Mint ~ denominated in Canadian dollars ~ are recognized as legal tender in Canada. However, the Currency Act does not prevent Canadians from using other currencies and payment methods denominated in foreign currencies as a means of transacting business. «Given the legal uncertainty and anonymity of Bitcoin, there is a concem that this type of virtual currency can be used by criminals and money launderers. «The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) provides the legislative basis for Canada’s anti-money laundering and anti-terrorist financing regime. The PCMLTFA regulates a range of entities, including money services businesses (MSBs), which are required to identify their clients, keep records, have internal compliance procedures in place, and report suspicious and certain prescribed transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). «FINTRAC has informed Finance officials that they do not consider businesses providing Bitcoin-related financial services to be covered as money services businesses under the PCMLTFA. While the Act applies to businesses engaged in foreign exchange dealing,” this does not apply to Bitcoin, as it is not a national currency of any country. While the PCMLTFA also covers businesses engaged in “remitting funds or transmitting funds by any means,” this also does not apply to Bitcoin because it is not encompassed within the definition of “funds” under the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations. PREPARED BY APPROVED BY DATE Leah Anderson (892-6516) Jeremy Rudin (992-4679) 2013-04-29 00006Page 97 is withheld pursuant to section est retenue en vertu de article 21(1)(a) of the Access to Information Act de la Loi sur ’accés a l’informationBitcoin kiosks coming to Canada ISSUE * On September 9, 2013, Canadian Press published a story noting that Bitcoin kiosks, ATM-like machines that allow individuals to exchange Canadian cash for Bitcoin or vice versa, will be rolled out in Canada starting this fall. The article contrasts Canada with the U.S., indicating that Bitcoin startups are gravitating to Canada because the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is not as strict as U.S. regulators with respect to virtual currency. KEY POINTS * Bitcoin exchanges, including kiosks that provide exchange services, are not currently subject to Canada’s anti-money laundering legislation. * The Government of Canada is committed to a strong and effective anti-money laundering and anti-terrorist financing regime. We regularly review our anti-money laundering laws and make changes as appropriate. BACKGROUND ‘© The virtual currency Bitcoin is based on a decentralized, anonymous, peer-to-peer network. Unlike traditional currencies, there is no central authority issuing or backing Bitcoins. Currently, there are approximately 12 million Bitcoins in circulation with a value of between $1 and $2 billion. Users buy and sell Bitcoins through exchanges or locally from other users. * Bitcoins can be used as a currency for both virtual and real goods and services. Use of Bitcoins for real goods and services appears to be mainly confined to niche markets, and there are still very few non-web businesses that accept Bitcoins as a payment method. * Currency in Canada is governed by the Currency Act. Bank notes produced by the Bank of Canada and coins produced by the Royal Canadian Mint - denominated in Canadian dollars — are recognized as legal tender in Canada. However, the Currency Act does not prevent Canadians from using other currencies and payment methods denominated in foreign currencies as a means of transacting business. + Given the legal uncertainty and pseudo-anonymity of Bitcoin, there is a concern that this type of virtual currency can be used by criminals and money launderers. «The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) provides the legislative basis for Canada’s anti-money laundering and anti-terrorist financing regime. The PCMLTFA regulates a range of entities, including money services businesses (MSBs), which are required to identify their clients, keep records, have internal compliance procedures in place, and report suspicious and certain prescribed transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). * FINTRAC has informed Finance officials that they do not consider businesses providing Bitcoin-related financial services to be covered as money services businesses under the PCMLTFA. While the Act applies to businesses engaged in “foreign exchange dealing,” this does not apply to Bitcoin, as it is not a national currency of any country. While the PCMLTFA also covers businesses engaged in “remitting funds or transmitting funds by any means,” this also does not apply to Bitcoin because it is not encompassed within the definition of “funds” under the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations. PREPARED BY APPROVED BY DATE Leah Anderson (992-6516) Jeremy Rudin (992-4679) 2013-09-08 aPage 99 is withheld pursuant to section est retenue en vertu de article 21(1)(a) of the Access to Information Act de la Loi sur ’accés a l’information~ ae sng Yo do Et 7 Nex vate Apal yt Lie IL AeA > : 2 EUSTON 1s. cengldeding ny. at €on_2- ay ba a5. al # lows, ih SiL_concesnedt abort” nezel fo doletmine coneghivate fronetoy jackal, cuuceite/ en Bitoias (ilnes) oa fd US H ~ busine ox sell lig Bitrotn is cok g, Mob “Paying se xbuts ay Birsins Gs. Bay] x a MB s.21(1Ma) 000100Date! sBian\c oot acaba (ace = anes Riktoin asa seaurit . Pecpke tho ‘tren on Bits on tings sph losllare 00101Fnkae mh = of hit coins = prope clea burke, LM, hag, ‘ Cost treet The Stree « = See WO take Bib oi — lh da “uinus "fx Bela - Eg rays tnd sdvs.4_ bk akg =n Um = Vonya wll. to wr Crantndy..saeh orp | = Bik fy = far oto boil, 1s} fread Or pane mcchet PO A g Now doranpns— ht treigard a ——— natn ~ 00102Minutes of the Public/Private Sector Advisory Committee (PPSAC) Department of Finance, Boardroom 22A, Ottawa November 13, 2013, 1 to 5 p.m. Attendees: Public Sector - Canada Revenue Agency (CRA) - Charities - Canadian Security Intelligence Service (sis) ~ Department of Finance - Financial Transactions and Reports Analysis. ‘Centre of Canada (FINTRAC) - Department of Justice—Criminal Law Policy - Department of Justice—International Assistance Group Institutions (OSFI) ~ Public Safety Canada - Royal Canadian Mounted Police (RCMP) ‘Absent: Public Sector Private Sector - Canada Border Services Agency (CBSA) - Canada Revenue Agency (CRA) ~ Criminal Investigati Agenda items: 1) Introduetions/Welcome 2) Update on Previous Issues Raised a) Reporting entities’ application of the risk-based approach ‘+ Atthe November 2012 meeting, members requested feedback on how reporting entities, should implement a risk-based approach. FINTRAC and OSFI presented on this later in the meeting. b) ML/TF risk posed by virtual currencies (e.g. Bitcoin) 8.21(1(b) 000103* It was acknowledged that virtual currencies pose an AML/ATF concern and that work is being done to address this. ©) Clarifying the treatment of online casinos * Atthe last meeting, it was asked whether online casinos are currently subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). ‘* Consultations were conducted on this subject, but non-face-to-face requirements are being examined before action is taken. It was acknowledged that there is a lack of clarity as to how online casinos are currently treated under the PCMTLFA, but online casinos are encouraged to implement AML/ATF policies as a best practice while work occurs to address this issue. 4) Progress on sanctions listing issues + Problems related to sanctions listings were identified several meetings ago. Progress is being made on developing a single website with all relevant sanctions information. The United Nations (UN) is also working to improve how they produce and disseminate sanctions lists. ‘© This item will remain on PPSAC’s follow-up list until the problem is resolved. €) Experiences of private-sector PPSAC members of having non-profit organizations (NPOs) as clients * At the last meeting, CRA-Charities asked for feedback from committee members about the risks posed by NPOs. CRA-Charities provided a presentation on this later in the meeting, £) Request for feedback on what realtors are doing well and what they are doing poorly with respect to their PCMLTFA obligations 8) Inconsistency in the definition of money services businesses (MSBs) between PCMLTFA and banks * Atthe last meeting, it was asked whether the government can have financial institutions use the definition of MSB under the PCMLTFA rather than their own definition. ‘+ It would be desirable for reporting entities to take a risk-based approach, which suggests that institutions should be free to close the accounts of clients that they view as risky. At the same time, MSBs or their agents should not be put out of business. The government cannot intervene in specific business decisions, but may need to intervene if AML/ATF obligations are inadvertently sending a message that all MSBs are too risky for financial institutions to do business with, 8.20(1)(b) 8.21(1)(b) 00104More )les of this issue were re ted, h) Bank account closures . financial institutions sometimes close an account because of AML/ATF or criminality concems, without communicating this to law enforcement. Two issues stem from this. First, should financial institutions report to FINTRAC when they close an account? Second, is closing an account a practice that might interfere with law enforcement investigations, and is there a way of fixing this? ‘* Financial institutions are not required to report account closures to FINTRAC under the PCMLTFA, but are encouraged to do so when filing a suspicious transaction report in relation to the account, ‘* There may be privacy concems related to informing law enforcement. However, it would be frustrating for law enforcement if an account closure led to a dead end in an investigation. h) Measuring civil forfeitures ‘* Data is not tracked at the federal level, although some provinces make their data public. 3) Tour de Table Comments from the Private Sector 8.20(1)b) s.24(1\(b) 000105Page 106 is withheld pursuant to sections est retenue en vertu des articles 20(1)(b), 24(1)(b) of the Access to Information Act de la Loi sur ’accés a l’informationent relea 2 Inform. Comments from the Public Sector OSFI ‘© The Basel AMLICFT Expert Group met in October. The group will likely issue guidance for banks and banking supervisors early in 2014. RCMP ‘© With respect to the follow-up item on bank account closures, law enforcement generally has a positive relationship with financial institutions and there is value to keeping accounts open. for investigative purposes, particularly for national security threats. 5 .20(1)(b) s.24(1)(0) 000107FINTRAC FINTRAC is working to finalize guidance on the regulatory measures coming into force on February 1, 2014, FINTRAC will adjust its expectations for when reporting entities will be expected to come into compliance depending on when guidance can be shared. FINTRAC has modified its criteria for publicly naming reporting entities that have been issued administrative monetary penalties; it will only name entities in the most serious cases. FINTRAC is working on a typologies report about cash transactions. With respect to concems raised about Visa Original Credit Transactions, armoured cars and virtual currency, it was agreed these issues should be examined. It is important to consider the level of risk, not simply whether or not a service can or can’t be used for money laundering. FINTRAC must make choices about how to allocate compliance resources. FINTRAC will work with casinos on a one-on-one basis regarding who is a reporting entity so that everyone understands their obligations. ‘With respect to the concer raised about customer identification in the loan and mortgage ‘market, FINTRAC confirmed that financial institutions must re-identify clients when purchasing mortgages or loans from an unregulated entity, With respect to bank account closures, financial institutions may note in suspicious transaction reports that they have closed an account, but it is not required. 4) Presentations: FINTRAC and OSFI Frank Lofranco, Deputy Chief Compliance Officer (FINTRAC) Christine Ring, Director, Anti-Money Laundering and Compliance Division (OSFI) FINTRAC and OSFI provided presentations on the risk-based approach, how it can be implemented, common issues reporting entities face in implementing the risk-based approach in practice, and plans for updated guidance in this area. Follow-up comments and questions What outcomes will FINTRAC look for when it focuses on the effectiveness of reporting entities’ implementation of a risk-based approach? © FINTRAC is working to determine specific outcomes that will be set out in guidance. 8.20(1)(b) 8.24(1)(b) 00108‘© What are the timelines for developing the guidance, and will FINTRAC consult on it? © Work on the guidance was paused to ensure consistency with the regulations coming into force on February 1, 2014. Its release is expected in the spring. ‘© OSFI said the regulations coming into force on February 1, 2014 don’t impose any significant added burden on reporting entities. Does FINTRAC share this opinion? co FINTRAC generally agrees with OSFI, but there is some difference in the burden between different sectors, particularly between account- and non-account-based sectors. © What does FINTRAC think will be the impact of its forthcoming guidance on the ability of reporting entities to implement a risk-based approach? ‘0 FINTRAC’s hope is that reporting entities should be able to use the guidance to implement business processes that FINTRAC views as acceptable. The goal is to get, reporting entities to make decisions based on assessed risk. ‘© Will the guidance allow reporting entities to undertake a self-assessment of how effective their implementation of the risk-based approach is? © FINTRAC said it would. FINTRAC has one-on-one conversations with reporting entities about specific deficiencies, whereas the goal of the guidance is to help all reporting entities with the most fundamental issues. © OSFi noted that remedying non-compliance is an iterative process. OSFI has conversations with reporting entities individually about deficiencies and seeks feedback to understand financial institutions’ viewpoints and determine why deficiencies exist. ‘The two presentations will be made available to committee members on the PPSAC website. 5) Presentation: CRA - Charities Alastair Bland, Director, Review and Analysis Division CRA-Charities provided an overview of the Financial Action Task Force’s (FATF’s) typologies work on NPOs, noting the need to better understand NPO risks and gather case studies. Like ‘MSBs, NPOs often have their bank accounts closed, and CRA-Charities would appreciate feedback from financial institutions as to how they view and address the risks posed by NPOs. Follow-up comments and questions ‘© What does CRA — Charities view as the risks associated with opening accounts for NPOs? © CRA ~Charities doesn’t have an answer yet. Risks are less related to the types of financial transactions taking place than they are to the objectives and activities of the particular NPO. It is also important to differentiate between charitable NPOs, such as relief organizations, which are usually cash intensive and other types of NPOs such as political parties, which are outside the scope of the FATF’s project. ‘© What kind of due diligence does CRA conduct before registering a charity, and can a charity's registration be viewed by reporting entities as mitigating its risk? 00109© Registration does not necessarily mean a charity is problem-free. However, losing charitable status has implications for a charity's reputation. CRA ensures entities meet, the definition of a charity under the Income Tax Act before approving their registration; the list of registered charities and their financial reports are available on CRA’s website. ‘* Has consideration been given to cross-referencing instances of charities’ abuse with the listing regime, and whether abuse tends to occur in developing countries? © That level of analysis may not be possible, However, exploitation of charities is often ‘identified through the use of a list. Lists are a big concem to the sector. * AnFATF report, International Best Practices: Combating the Abuse of Non-Profit Organisations, was published in June and a Canadian version might be produced. Will any other countries or sectors potentially produce their own version? © CRA-Charities does not expect other countries to adapt a country-specific version, although the U.K. may have some interest. With respect to analyzing other sectors, the ‘mandate from the FATF for the work on NPOs is specific to the project. ‘* How does the FATF conduct mutual evaluations for Recommendation 8? © The FATF has a standard and a five-page interpretive note, The recommendation sets out four pillars of a good program. The 4th round of evaluations has infused the concept of effectiveness, which involves getting the balance right between clamping down on NPO abuse, while still encouraging charitable activities. © International Issues Josée Nadeau, Department of Finance * The FATF continues to update its lists of high-risk jurisdictions and is reviewing its high-risk process for the new round of mutual evaluations. Finance would appreciate PPSAC members’ views on any issues, including the current four-month cycle, and whether a one- year cycle would be sufficient. * Asnoted previously, the FATF is developing sector-specific risk-based guidance. Current work is on deposit-taking institutions, with MSBs to follow. Finance will provide the FATF with the names of PPSAC members from these sectors to facilitate consultation. ‘© Budget 2013 contained a commitment to examine corporate transparency, which is being led by Industry Canada, PPSAC members may be interested in the potential implications on PCMLTFA obligations to identify beneficial owners. Finance can forward Industry Canada’s forthcoming consultation paper to committee members. * The FATF’s policy development committee is examining effective supervision and enforcement, which may result in guidance. The FATF is also developing guidance on : 8.21(1)b) 000110beneficial ownership information standards which will be helpful to reporting entities and governments, and will inform policy work in Canada. © The FATF is soon starting its 4th round of mutual evaluations and plans to send a team to Canada in September 2015. The assessment will focus on effectiveness and the FATF team. will want to talk to the private sector. Finance is willing to organize training for PPSAC members on the FATF standards and assessment methodology. + All Assistant Deputy Ministers involved in Canada’s AML/ATF Regime have endorsed the ‘work of the domestic risk assessment. The risk assessment will inform government policy and operations, and a sanitized version will be shared with reporting entities. Finance is, willing to conduct a conference call with PPSAC members who are interested to lea more and share views, and will provide an update on this project at the next PPSAC meeting. The risk assessment will also examine NPOs. 7) Domestic Issues David Karp, Department of Finance ‘© Finance is continuing its review of the PCMLTFA, including consultation responses from the private sector, and the March 2013 Report of the Standing Senate Committee on Banking, Trade and Commerce. * On October 10, the Supreme Court of Canada granted leave for the Government to appeal the B.C Court of Appeal's decision on the coverage of the legal profession under the PCMLTFA. 8) Concluding Remarks Follow-up items ‘© The following items will be addressed at the next meetin; ° ° ° ° Progress on sanctions listing issue Visa Original Credit Transactions Reliance on client identification conducted by unregulated mortgage and loan ‘companies Clarifying the reporting entity in the casino sector Risks of armoured car service providers Implications of the Agreement on the Sharing of Forfeited Assets and the Return of Property Coordinating the coming-into-force dates of amendments Communication of bank account closures to law enforcement and FINTRAC ‘The next PPSAC meeting is scheduled for May 8, 2014. 000111Karp, David : From: Karp, David Sent: ‘Wednesday, October 09, 2013 3:17 PM To: Scott, Rodger Subject: Mongolia debrief Hi Rodger, Here is a summary of the meetings in Mongolia. Let me know if it’s what you were expecting in terms of format, detail, etc. — 1 can make changes if you want. Cheers, David. | attended the joint APG/EAG Joint Typologies and Capacity Building Workshop in Ulaanbaatar, Mongolia, from Sept. 23- 27, where | headed the Canadian delegation and presented in the capacity building workshop on the topic of virtual ‘currencies. Todd Pentland from the CRA Charities Directorate was the only other member of the Canadian government to attend; he co-chaired the typologies workshop on non-profit organizations. The capacity building workshop was attended by members of the private sector (in addition to APG and EAG delegates). Opening remarks and presentations meeting in Decemeber. Typologies workshops ~ Gold | attended the typologies workshop on gold. Gold will be the APG's main typologies project over the next two years. The project is being co-led by Australia and India, The project is of particular interest to the APG region, given that India and China account for approximately half of the world’s gold consumption. s.13(1Ma) 000112‘The project will consist of two parts. The first part, scheduled from June 2013 ~ Oct. 2014, will provide an overview of. the gold market, look at illegal versus illegal gold, identify predicate offences, red flags for suspicious transactions, and ML/TF case studies. The second part, scheduled from June 2014 to sometime in 2015, will identify best practices for policies and investigations, and identify potential mechanisms for international cooperation. The project may be discussed at the FATF typologies workshop in December, and draft findings will be released in mid-January 2014. The EAG plans to officially join the project team in Novernber at its plenary meeting. The APG is also considering involving the private sector in the project. ‘The group agreed that a gold typologies report is important, and that a questionnaire is needed. Typologies workshops - NPOs 1 did not attend the typologies workshop on NPOs, which was co-chaired by Todd Pentland from the CRA Charities Directorate. The following summary is based on a debrief that Mr. Pentland and his co-chair provided at the closing plenary. ‘The workshop discussed the importance of FATF Recommendation 8. ‘The APG has sent out a bulletin requesting that countries provide case studies for this project. The outline for the paper that will be produced on this topic is not finalized. It is possible that the paper will contain policy recommendations. Typologies workshops — ilcit financial flows/corruption No one from Canada attended the typologies workshop on illicit financial flows. The following summary is a debrief that the workshop co-chairs provided at the closing plenary. ‘The goal of the workshop was to share experiences, how AML/CFT tools can be applied to the problem of illicit financial flows and corruption, and to discuss the possibility of an ilict financial flows project, potentially with the FATF. 8.13(1)1a) s.24(1\a) 000113Implementation issues working group ‘At the closing plenary, an update was provided on the Implementation issues Working Group. Drug-related financial flows Legal professionals ‘At the closing plenary, it was noted that the FATF typologies report on legal professionals was published in June. A brief summary of the report was discussed. Capacity building workshop - Opening remarks Both the APG and EAG noted the importance of working with the private sector. ‘An overview of the revised FATF standards was provided by the IMF. There was a focus on Recommendation 1. It was noted that the national risk assessment is complex and can’t simply be contracted out to consultants. The IMF noted that developing a national risk assessment is a 1-2 year project. FATF discussed the role of strategic analysis in risk assessments. Capacity building workshop ~ Virtual currencies Iwas a presenter at the capacity building workshop on virtual currencies. 3 8.13(1)(a) 8.24(1)(b) 000114\ id on the definition of virtual currency, It was clear from our pr ns terminology, and that establishing a common lexicon would help discussions going forward, | presented on Canada’s experience with virtual currencies, as well as considerations for countries considering regulating virtual currencies for AML purposes. Some questions and comments were interesting. Capacity building workshop ~ Financial inclusion No one from Canada attended the financial inclusion workshop. The following summary is a debrief that co-chairs provided at the closing plenary. ‘Closing remarks twas noted that the next APG typologies workshop will be held in Bangkok, Thailand from Nov. 24-28, 2014. David Karp, Analyst/Economist | Analyste/Economiste s.13(1Ma) 000115Finncial Crimes - Domestic | Crimes financiers - Domestique nance Canada | Finances Canada 613-943-9402 | david.karp@fin.gc.ca 000116Protected A RR ue ec’ Federal Policing Criminal Operations Gc cuelcucd DPA Uk) Canadit 000117Criminal Intelligence Brief - Bitcoin virtual currency Protected A What is Bitcoin? Bitcoin (BTC) is a form of digital currency exchanged through anonymous peer to peer ‘computer transactions. Bitcoins can be transferred internationally through personal computers without the need for any intermediate financial institution or the need to exchange funds into another country's currency.’ Bitcoin differs from world currencies as it does not have a central bank (i.e.Bank of Canada) to manage and control it. Since its value cannot be affected by any nation’s monetary policy, Bitcoin is considered by many asa global currency. (U) Bitcoin is one of the first implementations of a concept called crypto-currency (a type of digital currency that uses cryptography for security).? Since 2010, the Bitcoin community has grown many developers working on the project. However it has only been over the past few months that the popularity and value of Bitcoin has exploded. As an example, last month’s high was $48 USD whereas on March 25, 2013 the weighted price of 1 BTC was $71.59 USD.’ Since its inception, Bitcoin has been viewed as a volatile currency but the increase in daily trade volumes and the number of Bitcoins generated has led to its ever increasing value. The acceptance of Bitcoin as method of payment by several large online companies including Reddit, Wordpress and Fulfillment-by-Amazon have further legitimized this form of currency. (u) ‘Mt Gox (USD\cwoll’SEPA) oi say 2B 29-Dy We -tstontatiam 5 OHNE HR WTN,CT awisaIK aK Bitcoin trade price and volume April 2012- March 2013 a aK ax 100K 2 http://Bitcoin.org/en/ 2 http://www techopedia.com/defintion/27531/cryptocurrency * hetp://eitcoinwatch.com/ imina inettoence 2010-7 |2 {i srametspepyfma RO. ae i rr eke a eet a prenson ehe Racer eianpdnsina eso macy nC 000118Criminal intelligence Brief ~ Bit Protected A How it works The process of sending or receiving a payment is relatively straightforward. The first step is to install a wallet (software) on a personal computer or mobile phone. A user then generates a Bitcoin address to disclose to other users to receive payments. To send a payment, users obtain the recipient's wallet address and simply send their payment to that address.* (U) Converting local currency to Bitcoin currency (or vice versa) can be done through various online Bitcoin exchange services such as MT.GOX (the world’s largest Bitcoin exchange service)® or the largest Canadian based virtual exchange VirtEx.® These virtual exchanges work similarly to foreign exchange markets (forex), where Bitcoins are traded against international currencies on ‘a bid and ask price.’ (U) How are Bitcoins generated? Unlike centralized currencies that can be issued and controlled by a central bank, Bitcoin uses a predefined algorithm that determines the rate at which the currency will be created. The algorithm was created so a generated each time a user discovers a new block.® The difficulty level to mine new coins changes depending on the number of people who attempt to mine them, ensuring that the number of blocks generated remains constant based on the algorithm.? Users who use their computers to perform calculations to try and discover a block are called miners. Miners are paid in Bitcoin for solving a block (mining Bitcoins or verifying Bitcoin transactions) and the remuneration is dependent on the block being solved."° As mining a block became more and more difficult, individuals began organizing themselves into pools to increase their processing power and share the rewards evenly amongst the members of the pool." An industry of Bit miners has surfaced as this currency has gained momentum and legitimacy. New supercomputers, referred to as mining rigs, that can be purchased for approximately $1,500 USD are in such high demand and short supply that a recent Bitcoin miner paid $20,600 USD for one on an online market.’ (U) The number of Bitcoins generated per block is set to decrease by 50% every 4 years. The result is that the number of Bitcoins in existence will never exceed 21 million (in the year 2140).™* Given its predefined and limited supply, the value of Bitcoins may theoretically increase infinitely (ie, 1 BTC = $1,000,000 USD). As such, Bitcoins can be divided down to 8 decimals (i.e. shapdfatcon areata mtgox.com/ s/ www.cavirtex.corn/why_virtex 7 htp://www forextioor.com/bid-ask-prices html * nttps://en.8itcoinit/wiki/Block 2 tp:/Bitcoinfaa.com/ http//Bitcoinfaq.com/ * hetps//en.itcoin.it/wik/ Mining * hetp/ motherboard vice.com/blog/a-guide-o-Bitoin-mining-why-someone-bought-a-1500-Sitcoin-miner-on- ¢bay-for-20600 2 hetpi www. ebay conyitm/181105056845 * hetps//en.Btcoinit/wik/Controlled_supplicite_note-0 2013-08-27 |3 int atignce Sie Snr ne eet of te ROMP. ane yo agent cor a ia ot dae cp, ead ued oa Serra ne he rr te iar adn Sarno Wt oo hcl pons 00119Criminal Intelligence Brief - Bitcoin virtual currency Protected A using the same example of 1 BTC being worth $1 million, 0.00000001 BTC would be worth $0.01 USD). Discussions about ways to provide for even smaller quantities of Bitcoins may be created in the future if the need arises.'® (U) Bitcoin mining and confirming a Bitcoin transaction is rather technical to explain but it entails a transaction log that is updated every 10 minutes and authenticated by ECDSA digital signature and verified by SHA-256 cryptographic hash functions.”° The mining process or proof-of-work process involves scanning for a value that when hashed begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash."” (U) Advantages and drawbacks ‘The Bitcoin Foundation recognizes that Bitcoin is an experimental new currency that is in active development. As such, is warns users that although it becomes less experimental as usage grows, it remains a new invention that is exploring ideas that have never been attempted before. The Foundation also cautions users that the price of a Bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Consequently, they recommend against keeping your savings in Bitcoin as it is considered a high risk asset."* (U) One of the drawbacks of Bitcoins, which is also seen as a security feature, is the transaction issued with Bitcoin has no bi chargeback mechanism. Once payment is sent, only the person receiving the funds is able to resend those funds." Those who see this as an advantage argue that it protects merchants against credit card and chargeback scams.”° (U) The majority of Bitcoin exchanges also have daily and monthly withdrawal limits. As an example, the world’s largest Bitcoin exchange, Mt.Gox, has a daily limit of $1,000 USD per 24 hour period and a Bitcoin daily limit withdrawal of 100 BTC. For verified status (level 1) clients withdrawals are capped at $50,000 USD monthly or $10,000 USD per 24 hour period and trusted status (level 2) clients are entitled to withdraw $500,000 USD per month or $100,000 USD per 24 hour period,”* In order to become a verified client, a valid copy of a government issued photo ID and proof of residence must be provided to Mt.Gox. To become a trusted clients, those same documents must be notarized and apostilled.”” (U) There is much debate surrounding the anonymity level of Bitcoin. Since all Bitcoin transactions are stored publicly and permanently on the network, anybody can see the balance and the * hetp://eitcoinfag.com/ * netps://en.bitcoin.t/w/index.php?titlesHashBoldid=35160 Y nttp://en.wikipedia.org/wiki/Bitcoin * hutp://Bitcoin.org/en/you-need-to-know ® nttp://8itcoin.org/en/yourneed-to-know © hetps://en.Bitcoin it/wiki/Myths. ® nttps://mtgox.com/press_release_20130313.html * hetps://support.mtgox.com/entries/20919111-AML-Account Statuses oreo ee ees Seca ee 000120Criminal intelligence Brief - Bitcoin virtual currency ‘Protected A transactions of any Bitcoin address. However, it is not possible to associate a Bitcoin address with its physical owner unless the owner demonstrates ownership of it. However, if any of the addresses in a transaction's past or future can be tied to an actual identity, it might be possible ‘to work from that point and figure out who owns the other addresses. To make it more difficult to track true ownership, the officially encouraged practice is to use a new address for every transaction and to use a tool like Tor to mask your computer's IP address.” (U) Trending The ever increasing popularity of Bitcoins as an alternative to domestic currency has propelled its value immensely. This surge in popularity has further served to legitimize its usage and has been the focus of financial institutions, government, innovators and the general media. (U) Market strategists are attributing the significant boost in the value of Bitcoin to the ongoing European crisis, where Euro and Russian ruble holders who are terrified by the situation in Cyprus are looking at Bitcoin as an alternative currency to safeguard their holdings." Equally, an analysis of Bitcoin google searches and Apple application (“app”) downloads by Spaniards {also in a difficult economic situation) show a significant upward trend.”* Financial strategists have also started to discuss the role of Bitcoin as a currency hedging strategy.” (U) The use of Bitcoins has been slowly spilling from online to the physical world, with a Pizza for Coins service that converts Bitcoins to US funds for food’” and more recently a Canadian entrepreneur listing his two-bedroom bungalow for $405,000 CDN, or the equivalent in Bitcoins.”* (U) Another example is in the creation of a dollar-converting anonymous Bitcoin ATM machine by two New Hampshire entrepreneurs. Unlike ATM machines that dispense money, these Bitcoin ATM’s will accept dollar bills and use the same validation mechanism as vending machines use to instantly convert the amount deposited into Bitcoins and deposited in your Bitcoin wallet account). The entrepreneurs hope to sell these ATM's to grocery stores, bars and restaurants who would earn a commission based on the monies deposited.”* (U) In December 2012, the company running Bitcoin-Central, Paymium, entered into a partnership with payment processor Agoba and French bank Credit Mutuel Arkéa, that enables them to create accounts that hold Bitcoin currency. This made Bitcoin-Central the first Bitcoin exchange operating within European regulations and subject to the same protections as Euros held at the Credit Mutuel Arkéa bank, In the coming months, Paymium expects that account holders will be ® hetps:/fen.Bitcoin.it/wiki/Anonymity > http abonews.go.com/Business/cyprus-risis-boosting-unique-currency-Bitcoin/story?id=18792763 25 hetp:/ Avww.wired.co.uk/news/archive/2013-03/20/8itcoin-spain-currency-run 2 hetp://seekingalpha.com/articie/1256441-bitpay-integrates-Bitcoln-payment-with-amazon-com ® http://pizzatorcoins.com/ 2 http://www. bbe.co.uk/news/technology-21863593 ® netp://news.cnet.com/8301-13578_3-57570925-38/need-Bitcoins-this-atm-takes-dollars-and-funds-your- account/ 2013-09-27 | 5 Cin tines SAEs he scaty of a ROMP. aa er agement be reac, cn, rans wd of at ‘Bona ne bat net cant te sag tints uatn tance pcveys ona erg aa pum. ‘neat snags fan dts eam ané mas scorer ny moan eee a 000121Criminal intelligence Brief - Bitcoin virtual currency Protected A able to order debit cards that will allow them to use their Bitcoin accounts to make cash withdrawals and purchases. The accounts can be used just like any other payment account, having its own international bank account number, and users will have the option of converting any deposited funds directly into the Bitcoin currency. °° (U) Prompted by juiries from other regulators and law enforcement agencies, in March 2013, the Financial Crimes Enforcement Network (FinCEN), the U.S. Financial Intelligence Unit (FINTRAC equivalent), published guidelines for how virtual currencies like Bitcoin should be regulated. In its guidance, FinCEN clarifies which virtual currency users must register as money service business (MSB), under the anti-money laundering rules of the Bank Secrecy Act. Any user or business that exchanges Bitcoins for another currency qualifies as a "money transmitter," a type of MSB, and must register with FinCEN. This includes many players that are essential to the Bitcoin economy such as exchanges where Bitcoin is bought and sold, services such as BitInstant that facilitate trading of Bitcoin, and "miners" who generate new Bitcoins in exchange for cash.”* (U) ‘Strategic Considerations Despite its recent flurry of activity, the Bitcoin market capitalization of $830.3 million USD (as of 2013-03-26)”, and daily trade volume of $6.39 million USD (as of 2013-03-26)" represents a minute percentage of the global market capitalization (approximately $49.735 trillion USD™4) or the foreign exchange markets $3.98 trillion in daily transactions.”* As such, Bitcoin does not appear to pose an imminent threat to the integrity of either capital or forex markets. However, its recent rise in popularity and the fact that there are less than 15% of all Bitcoins to be generated (3 million out of a possible 21 million) in circulation is concerning, As expected central banks and government regulators will continue to keep a close eye on the rise of this, virtual currency and surely act accordingly to preserve the integrity of the traditional foreign ‘exchange markets. (U) From a law enforcement perspective, it is evident that Bitcoin represents a method to obtain payments for illicit goods and/or launder proceeds under a new cloak of anonymity. Its virtual usage and added layer of anonymity represent new barriers for law enforcement investigators. (u) ® http://www adnet.com/Bitcoin-exchange-gains-bac * netpi//www.theverge.com/2013/3/20/4127506/8i ae ® hrtp://blockchaininfo/eharts/market-cap * http blockchain info/stats * http//mww.world- exchanges org/iles/statistics/pdf/1st%620ha%20%202012%20WFEX20marketX2Ohighlights%20with20commen t5.0.pdF *http://en.wikipedia.org/wiki/Forex ‘rom-french-bank-7000008533/ foundation-new-us-rulestargeting-vitual-currencies- rota osce 2013-03-27 |6 ‘Ti erry pay of he ROMP. aed 1 our aetna ncn dot esd, ei eben, ed ter SEES Eee crete aoe tases ana we pane 000122Page 123 is a duplicate est un duplicataPages 124 to/a127 are withheld pursuant to sections sont retenues en vertu des articles 20(1)(b), 24(1)(b) of the Access to Information Act de la Loi sur ’accés a l’informationPage 128 is withheld pursuant to sections est retenue en vertu des articles 20(1)(b), 24(1)(b) of the Access to Information Act de la Loi sur ’accés a l’information- Colilted CaS Find = Lift Pity nts Date . Creme Archon at” _ as Aye Manes « = : REC = b= pur Vefys Cn bal ofg. EU _e- Maney sites tie =~ appl four, Spwl] Ws. My 3 ACE thos mie “We ek. ; 7 Lily try Fate i Lavconse ul ag Sy ATA LJ EAD Yon” S60 Villian Sle Finds 2 aeaen _4_loql Mores i .20(1\b) 8.24(1\b) 000129Canada’s virtual currency landscape 000130Overview of presentation = What is virtual currency? = What are the pros and cons of virtual currency? = What virtual currency activity exists in Canada? = How are virtual currencies treated under Canadian legislation? * What is Finance doing about virtual currencies? = What are other countries doing about virtual currencies? 000131What is virtual currency? « A “virtual currency” (or cryptocurrency, digital currency or electronic currency) is a medium of exchange that: 4. Allows for value to be held and exchanged in an electronic, non-physical manner 2. Is nota fiat currency 3. Has the intended purpose of being exchanged for real and/or virtual goods and services 4. Allows for its units to be transferred between individuals 000132Open-flow virtual currencies = Can be directly purchased with, or sold for, real currency = Can be used to buy or sell real and/or virtual goods and services OPEN-FLOW VIRTUAL CURRENCIES Virtual currency Real currency Real goods _Virtual goods andservices. and services 000133Open-flow virtual currencies = Most common and versatile type of virtual currency = Most at risk for money laundering and terrorist financing because they can be bought and sold for real currency = Examples: Bitcoin, Liberty Reserve, e-gold Bitcoin is the most prominent example of an oper-fow virtual currency. Open-flow virtual currencies can be bought oF sold for real currency, and can be exchanged for real ‘and/or vitual goods and services. 000134Centralized virtual currencies = A single authority is responsible ing transactions, determining the money supply, creating rules about who can exchange or use the currency W Liee = Real currencies, as well as most Sk LINDEN DOLLAR traditional online payments (e.g., PayPal, credit card payments) are centralized VAR 7 Ses ARRAY = Examples: Liberty Reserve, Linden Dolars are a vitual currency in an ontine game 7 Called “Second Life" Lindon Dollars are a centralized Pecunix, Linden Dollars, World titel carerey becuse the gare’ evetope Linden abs, controls the money supply and makes rules about of Warcraft gold ren be ‘who can buy and sel the currency. 000135,Decentralized virtual currencies = Does not have a central authority with responsibility = New units are typically created through “mi process used to verify transactions) = Money supply is pre- determined by an algorithm Bitcoin and Litecoin are decentralized virtual currencies. No singlo authority controls the currency. Ther money supplies 7 . i a are determined by an algorithm and users collectively verify = Examples: Bitcoin, Litecoin that transactions are legitimate. ig” (a 000136Advantages of virtual currency = Virtual currencies have a number of positive characteristics = Low transaction fees = Cost-effective remittances = Greater payment choice/competition = Predictable money supply = Irreversible payments « Ability to track payments le for innovation 000137SECRET Downsides of virtual currency = Virtual currencies also have some potential downsides = Money laundering and terrorist financing risks « Use in illicit transactions = Volatility * Difficult for consumers to understand » Lack of consumer protection + Vulnerable to cyber theft + No deposit insurance + Irreversible payments = Can encourage hoarding rather than spending = Could theoretically undermine fiat currencies 000138SECRET Money laundering and terrorist financing vulnerabilities = Pseudo-anonymity = Can be purchased with cash = Ease of moving funds across borders = Regulatory arbitrage + Between countries + With other similar regulated activites (e.g. foreign currency exchage) «= Lack of restrictions on deposits/withdrawals = Low cost of services ne aero cca 000139Virtual currency activity in Canada = The U.S. dollar is by far the most frequently exchanged currency with Bitcoin = The growth of the Chinese renminbi in the Bitcoin market is very recent * The Canadian dollar is the fifth most commonly exchanged currency with Bitcoin 1% Bitcoin exchange volume by currency, from y.biteoincharts.com (as of Nov. 21, 2013) 000140Bitcoin exchanges = Canada has several Bitcoin exchanges = 1616 Exchange Inc. * Bitcoiniacs = Canadian Bitcoins = Canadian Virtual Exchange (a.k.a. Virtex) = FastExchanger = LibertyBit = Nanaimo Gold * QuickBT = Vault of Satoshi = XBtc.ca = Canadian dollars can also be exchanged for Bitcoin (and vice versa) on several international exchanges = Mt. Gox (Japan) = WeExchange (Australia) = BIPS (Denmark, with a Canadian office) 12 00141Bitcoin exchanges = Canadian Virtual Exchange = $34.7 million traded to date = $1.8 million market capitalization largest in Canada = Some exchanges (e.g. Canadian Virtual Exchange) operate like a stock exchange = Buyers and sellers can post bid and ask prices = Exchange keeps a percentage of transaction as its fee * Other exchanges (e.g. Nanaimo Gold) operate like a currency exchange bureau = Exchange keeps a supply of real and virtual currency on hand, and sells at a higher price than it buys at = Canada has both in-person and online exchanges 13 00142Bitcoin exchanges " Bitcoin exchanging can also be done informally » Bitcoin Co-op is an informal group in Vancouver, which includes a directory of seven “trusted individuals” who meet in public places to buy or sell Bitcoins = LocalBitcoins.com is a Finnish website that sellers of Bitcoin worldwide + Approximately 70 Canadian sellers of Bitcoin are listed « A “Satoshi Square” occurred in Toronto on July 29 14 000143Bitcoin merchants = A small number, but diverse range, of individuals and merchants in Canada accept Bitcoin as payment = Coffee shops + Restaurants = Dentists « Lawyers = Real estate agents = Charities = Wineries = Marriage commissioners = Hypnotherapy 15 00144Bitcoin merchants = You can even en buy ice hockey Hockey Underwear Shopping Cart ke a rh underwear ss Meepted Payments using Bitcoin os deme ¢ 000145,Bitcoin financial service providers = Bitcoiniacs exchange has purchased five Bitcoin ATMs from RoboCoin « First ATM is operational in Vancouver BitcoinATM, owned by a Canadian, is developing an ATM to exchange Bitcoin for cash = Canadian Virtual Exchange offers payment processing for merchants * Automatic conversion of Bitcoin sales to Canadian dollars Toronto-based Coinkite is developing a payment system * Bitcoin-denominated debit cards (for consumers) and card readers (for merchants) Bitcoin Ventures Inc. plans to launch CoinTap prepaid card in Q1 2014 + Cards can be purchased at merchants using Canadian dollars; balance can then be exchanged online for Bitcoin Bex, a company in Vancouver, provides services to people who want to start a Bitcoin exchange * Slogan is “We do the tech. You do the rest.” Havelock Investments operates Bitcoin-denominated stock exchange for companies involved in virtual currencies « Was previously Canadian; recently sold to a Panamanian investment fund Montreal-based Bitcoin Embassy is a non-profit orgat and related technologies + Will house Bitcoin store, educational hub and conference space ition that promotes Bitcoin 7 000146Other virtual currencies = Litecoin = Vault of Satoshi exchanges Litecoin = Pecunix (e-gold) = A small number of Canadian exchanges exist, including CentreGold (also in Bi h Virgin Islands), FastExchanger, Nanaimo Gold and xgold.ca « Liberty Reserve = Two Canadian Liberty Reserve exchanges had websites seized by U.S. Department of Justice (Centregold.ca and Getemoney.com) 000147What Canadian legislation says « Proceeds of Crime (Money Laundering) and Terrorist Financing Act = Foreign exchange bureaus are subject to anti-money laundering requirements, but virtual currency exchanges aren’t = Currency Act = Says what can and can’t be done with Canadian dollars; silent on what can and can’t be done with other currencies = Bank Act « Restricts use of “bank” to entities licensed by OSFI + OSFI issued warning notice against “Bank of Satoshi”; exchange changed its name to “Vault of Satoshi = Income Tax Act = Exchange of virtual currency for goods and services is considered barter transaction and is taxable « If virtual currency is bought or sold as a commodity, profits could be taxed for income or capital gains 19 000148Page 149 is withheld pursuant to sections est retenue en vertu des articles 69(1)(g) re: (c), 69(1)(g) re: (f) of the Access to Information Act de la Loi sur ’accés a l’informationWhat other countries are doing = Australia = Anti-Money Peunverad and Counter-Terrorism Financing Act covers transmission of “e-currency” and exchange of e-currency for gaming chips or tokens + “e-currency” only covers virtual currencies that are pegged to precious metals « France & Germany « Bitcoin exchanges have partnered with banks, such that euro- denominated deposits with Bitcoin exchanges are covered by deposit insurance = In Germany, Bitcoin receives same tax treatment as gold. = Sweden = Media reports suggest that companies that buy and sell are required to register with Finansinspektionen (financial sector supervisor) 21 000150What other countries are doing * Thailand = Lack of clarity of legality of Bitcoin exchanges * Currency exchanges and money transmitters must be licensed by Bank of Thailand *ATh itcoin exchange was denied a license because legislation refers to “foreign currency” = UK. » HM Revenue and Customs said in July that Bitcoin exchanges do not need to register, but indicated that this may change shortly #U.S. = Bitcoin exchanges and administrators are money services businesses and regulated by FinCEN for anti-money laundering = Aug. 2013 court decision ruled that investments in Bitcoin are securities and subject to the SEC’s jurisdiction 22 000151Dowels, Department of Finance Ministre des Finances Me chsce Canada MEMORANDUM = NOTE DE SERVICE ary aa CRT PROTECTED B |" rignitarTeephone wea —AaieurNamtro de Gow] Christine Fay 943-1301 0 A » Minister of Finance s.16(2)(€) cae. De BF nie 5) fh eS FROM Michael stom i 2013FIN391173 DE &> (rey MAY 177013 YRECT Regulation of the Digital Currency Bitcoin This note is for information. Issue This note provides an overview of Bitcoin, reviews the risks it poses, and summarizes how it is regulated in some international jurisdictions and Canada. Background Bitcoin is a decentralized digital currency exchanged through semi-anonymous, peer-to-peer computer transactions. No central authority issues bitcoins or tracks transactions. These tasks are managed collectively by a computer server network. Bitcoins can be used to purchase both virtual and real goods and services; although presently its acceptability in the real economy is limited to niche markets. To use Bitcoin, a user downloads a free open-source application which allows the user to create Bitcoin address (similar to an email address) to transfer bitcoins by personal computer or mobile phone. A user stores bitcoins in a digital wallet on a computer. The data is saved locally on the user’s computer, The loss or deletion of the data file would result in the loss of the bitcoins. Alll transactions are sent to a public network for verification within 10-60 minutes. Although both parties’ bitcoin addresses and IP addresses are sent to the public network, no additional information is provided about either party. Converting local currency into biteoins or vice versa is done through exchange platforms. These virtual exchanges work similarly to foreign exchange markets where bitcoins are traded against international currencies using a bid and ask price. ‘The total supply of bitcoins is capped at 21 million, which will be generated by the year 2140. Bitcoins are generated through “mining,” an activity whereby computers solve complex ‘mathematical problems that assist in verifying transactions. There are approximately Canada Leah Anderson (992-6516) ooots2Seo Notes, 11.2 million bitcoins currently in circulation, with a total value of between $1-2 billion. Globally, there are approximately 60,000 bitcoin transactions per day. Bitcoins can be divided and spent in denominations as small as one-one-hundred-millionth of a bitcoin (ie., 000000001 bitcoins). Innovations in new payment instruments using bitcoin are progressing quickly. For example, bitbills are being developed that would act like a prepaid card allowing consumers to store and use bitcoins in a point of sale environment. PayPal has also announced that it is considering including bitcoin as part of its payments platform. 210148) Potential Risks of Virtual Currencies 5.21(H)b) The ECB published a report Virtual Currency Schemes in October 2012 that concludes that, currently, virtual currency schemes do not pose a risk to price stability, provided that money creation continues to stay at a low level. They also do not jeopardise financial stability owing to their limited connection with the real economy, their low volume traded and a lack of wide user acceptance. While virtual currency schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers, they entail risks for users. For example, there have been a number of security incidents in which bitcoin wallets or other infrastructures have been compromised. These incidents have exposed users to either theft of bitcoins or theft of personal information given to bitcoin exchanges. These incidents highlight the security challenge of these products and may affect consumers’ willingness to adopt them. Moreover, the price of a bitcoin can fluctuate widely. For instance, in April the price for a bitcoin fell to $130 from a record high of $260. Presently the value is approximately $112 (May 15, 2013). The bitcoin Foundation’, an association of bitcoin users, dedicated to the standardization and promotion of bitcoin, attributes this to bitcoin’s young economy, novel nature, and sometimes illiquid markets. Virtual currencies such as bitcoin have been criticized for their potential to fund illicit activity, such as money laundering or terrorist financing. bitcoin’s decentralized nature (i.e., peer-to- peer transfer without a financial intermediary), lack of regulation, and high level of anonymity, may make it an attractive payment method for criminals. However, the degree to which itis currently being used for these purposes is unclear. 1 See: www.bitcoinfoundation.org, ooots3The most comprehensive study of Bitcoin’s money laundering risks is an April 2012 intelligence assessment by the U.S. Federal Bureau of Investigation (FBI) titled Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity. The study notes the potential for criminals to exploit bitcoin, should it become more widely accepted. An academic study, published in October 2012 in Information & Communications Technology Law, finds that bitcoin is currently “unsuitable for laundering on a large scale” because such activity would likely be detected due to the limited usage of the currency. Regulation of Bitcoin internationally a2) To the best of our knowledge, the U.S. is the only country that currently applies its anti-money Jaundering/anti-terrorist financing (AML/ATF) legislation to bitcoin. The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury responsible for enforcing AML/ATF regulations under the Bank Secrecy Act, issued guidance in March 2013 on the application of its regulations to persons administering, exchanging or using virtual currencies. According to the guidance, bitcoin exchanges are considered money transmitters (a subset of money services businesses (MSBs)), and are subject to U.S. AML/ATF regulations. Persons ‘who mine bitcoins and exchange them for real currency are considered money transmitters and are also covered, however, miners who spend bitcoins on goods and services are not. The U.S. is also apparently considering regulating bitcoin as a derivative under securities legislation, The European Central Bank noted in a recent report that bitcoin does not fit the EU’s current legislative framework including the Electronic Money Directive, the Payment Services Directive, nor does it fall under Directive 2011/83 on consumer rights. The report notes that a number of European jurisdictions, as well as the European Commission’s Payment Committee, are looking into the legal status of bitcoin. Regulation of Bitcoin in Canada Currency in Canada is governed by the Currency Act. Bank notes produced by the Bank of Canada and coins produced by the Royal Canadian Mint — denominated in Canadian dollars — are recognized as legal tender in Canada. However, the Currency Act does not prevent Canadians from using other currencies and payment methods as a means of transacting business. Bitcoin is not captured by the Currency Act. Bitcoin is also not captured by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), which provides the legislative basis for Canada’s anti-money laundering and anti-terrorist financing regime. Persons and entities subject to the PCMLTFA (called “reporting entities”) are required to identify their clients, keep records, have internal compliance procedures in place and report certain transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). ooots4-4- a Unlike in the U.S., FINTRAC has informed Finance officials that it does not consider entities that provide bitcoin-related financial services as meeting the criteria for MSBs, and thus being subject to the PCMLTFA, because: a) » As part of the review of the governance of the Canadian payments system, Finance is working closely with the Bank of Canada to develop a conceptual oversight framework to address retail ‘payments systems. Part of this work includes assessing the operational and economic risks various retail payments systems pose. In this context, we are reviewing e-money transfer 5240) 0015s,‘http://webcims/FinEn/FolderPrint.asp?var=0.0875296 2013-05-08 ooots6Lavoratore, Sandra Wednesday, May 08, 2013 4:05 PM Levac Baquero, Nicolas, FW: U.S. watchdog eyes regulation for digital currency Bitcoin For action by May 17 in DMO please. ‘Sandra Lavoratore Departmental Secretary | Secrétaire ministerial Deputy Minister's Office | Cabinet du sous-ministre Department of Finance Canada | Ministére des Finances Canada Ottawa, Canada K1A 0G5 Sandra, Lavoratore@fin.ac. Telephone | Téléphone 61: 1455 Government of Canada | Gouvernement du Canada De aaipeteoe oern Canad 192-2702 | Facsimile | Télécopieur 613-992-3789 / Teletypewriter | Téléimprimeur 613-995- From: Mercier, Patrick ‘Sent: Wednesday, May 08, 2013 9:33 AM To: Anderson, Leah; Foster, Wayne Cc: Wright, Kevin; O'Brien, Erin; Lafleur, Diane; Grasham, Rachel; Bordeleau, Annik; Lavoratore, Sandra Subject: Re: U.S. watchdog eyes regulation for digital currency Bitcoin I'm looking for one note that addresses all the issue related to Bitcoin. hitp://business financialpost.com/2013/05/07/u-s-watchdog-eyes-requlation-for-di rrency-bitcoin! U.S. watchdog eyes regulation for digital currency Bitcoin Douwe Miedema, Reuters | 13/05/07 WASHINGTON — The top U.S. derivatives regulator is considering whether the Bitcoin virtual currency should be subject to its rules, a top official at the agency said. Bart Chilton, one of five commissioners at the Commodity Futures Trading Commission, said he had asked staff to explore whether consumers needed more protection from any mishaps with Bitcoin, whose value collapsed last month. “Here's what | know for sure: we could regulate it if we wanted. That is very clear,” Chilton told Reuters in an interview on Monday. The Financial Times was first to report on Chilton’s plans. Bitcoin, a digital currency that can be moved via computer or smartphone without a financial intermediary, has gained in prominence as people start to question the safety of holding their cash in the bank. It shot up in value in March, when investors took fright at the next turn of the eurozone debt crisis. - But the price of one “coin” plunged to $130 from a record high of $260 on April 10. 1 ooots7| The CFTC's remit has been vastly expanded after the 2007-09 financial crisis when it was tasked with writing rules for the $650 trillion swaps market. “There is potentially a federal role here, and we have to make sure that we're on guard that whatever is traded is appropriately regulated,” Chilton said, Chilton is an often outspoken Democrat on the CFTC’s board, and the adoption of any regulation he is pushing for depends on the support ofthe others on the board, as well as what the CFTC’s lawyers and other experts say. ‘A spokesman for the CFTC declined to comment. ‘The absence of physical Bitcoins meant people investing in the currency to speculate on a rise in its value could not be said to participate in cash markets, Chilton said, bringing them within the remit of the CFTC's mandate. “If you're buying Bitcoin and you are hoping that their value increases ... and you could purchase something with them in a day or a week or a month or a year, that is clearly a derivative of the actual Bitcoin,” Chilton said, The U.S. Treasury Department in March said that Bitcoin exchanges would be subject to the same money laundering rules that govern money services business like Westem Union. oootse(FOLD HERE) (PLIER ICI) tof Fir Ministare des Fit Department of Fence Miniter inances or Signature by Taformation oF A sgnerpar/ Pou information de Minister of Finance Prepared by (amenities vson) Prepare par (nmnitles/dvision) Christine Fay Tr snsulaton wih (nmTinialoranch(esVaRvision SD), En consultation ge (onyiaitals/dieeion(sivsion()) Erin O'Bri farBector Division iroved by Approuvd par ier Dieu Leah Anderson& Al Deca gree Diane Lafleur 9 Sicnniee aie Jeremy Rudin — FSP! Asus Depaty Miniter GT : Dept for Cade Jean Boivin Souctinate dt ee a Louise Levonian i Michael Horgan Deputy Miniter tse Oo scene avoir Remarks Remarqes Regulation of the Digital Currency Bitcoin File, No de dossier Date 2013FIN391173 2013-05-17 FINGIOST (ew B25) ooots9