Getting Donald Trump’s signature on U.S. legislation that created a regulatory framework for stablecoins helped launch the cryptocurrency into the mainstream.Annabelle Gordon/Reuters
Canada’s banks are exploring new ways to stamp out compliance and financial-crime concerns in sectors that the country’s largest lenders have traditionally deemed too risky for their loan books – a development bolstered by recent regulatory changes.
The U.S. trade war has upended supply chains and American financial-regulation overhaul is accelerating technology advancements in the banking sector. This has increased pressure on Canadian banks to crack down on financial crime while looking at investing in growing industries.
For example, some in the U.S. are “promoting banking certain industries that were perceived before as high-risk,” Guillermo Horta, Toronto-Dominion Bank global head of financial crime risk management, said at a conference held by the Association of Certified Anti-Money Laundering Specialists (ACAMS) in Toronto.
“So, then you start thinking, should I jump or should I stay?”
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When assessing client applications, banks typically reject customers that do not meet their standards for risk and compliance. In some cases, the lenders remove the customers that engage in activity that could pose risks to the financial system – a process known as debanking.
While Canadian regulations have restricted banks from doing business with crypto companies, these rules are changing.
On Wednesday, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), announced revised guidance and capital requirements that allow banks to increase their exposure to crypto. The regulator said this was based on industry feedback and “developments in the crypto markets.”
In July, the U.S. House of Representatives passed a bill to create a regulatory framework for stablecoins, a type of cryptocurrency token. Stablecoins are pegged to a fiat currency and are considered less volatile than other cryptocurrency.
Stablecoins are also used to transfer money across borders and send payments more quickly and with fewer fees. But the digital tokens have also sparked concerns over risks to the stability of the financial system.
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“Cyber, crypto, payments, the geopolitical base – how does all of that influence our risk appetite within the bank in terms of products, customers, and geographies that we want to operate in? We have a lot of discussions around that,” said Michael Donovan, Canadian Imperial Bank of Commerce chief anti-money-laundering officer (CAMLO).
“The impact of not getting it right is going up. That’s more than just fines. That is reputational risk to your institution.”
Ottawa has been making regulatory changes to allow banks to share information on suspected financial-crime activity.
In February, Canada’s banks joined a new partnership with Canada’s fentanyl czar and law enforcement to co-ordinate efforts to mitigate money laundering linked to drug trafficking.
“When we work in these multiprivate partnerships, we have identified the ability to share information faster, make decisions quickly, freeze funds, identify rings and networks of you know human trafficking and related things,” Mr. Horta said.
The federal government launched the Integrated Money Laundering Intelligence Partnership (IMLIP) to increase co-ordination between law-enforcement agencies and financial institutions to respond to organized crime and money-laundering schemes.
Bank of Montreal CAMLO Adam Schabes said that he has already noticed benefits from the new partnership.
Law enforcement provided the banks with feedback on the length of time it takes to act on production orders, which compel financial institutions to provide data and information relevant to a financial-crime investigation. But a bank could also run the risk of divulging too much customer information and breaching Canada’s privacy laws.
After making adjustments to the process, the group found that production orders could be turned around in less than seven days – which Mr. Schabes described as a significant achievement in a short amount of time.
“Criminals are smart. They’re not putting all this stuff in one place,” Mr. Schabes said. “They’re spreading it out in a lot of different areas, and the best way to catch some of that is to be able to share information around what we’re seeing, or to ask questions on certain transactions.”