Ask Amber: Does bitcoin investment bring regulatory headaches?

Hey Compliance Nerd!

A friend of mine who wants to make a investment in Bitcoin. However his concern is declaring it to the government, so a couple years down the road if it is a successful investment he isn’t left dealing with AML regulations. Is that something that should be a cause for concern?

A Shy Investor

 

Hey & happy new year Shy!

I understand that concern, and there is a relatively simple test that should clear up most of the apprehension. Is the intent to purchase bitcoin for personal use (for instance in the hope that it rises in value, or to buy goods or services at a discounted rate)? If so, there aren’t anyregulations that I am aware of that would “capture” these uses of bitcoin. Even in the U.S. (which has been much faster than Canada to apply regulation to bitcoin related activities), there are rulings like this one, which provides exemptions for bitcoin miners, and related investments.

If your friend’s intention is to simply buy bitcoin, with the intent to sell it when the price rises, I don’t anticipate regulatory issues for him.

As a compliance nerd, I do have two caveats. The first of these is that while one may consider bitcoin an investment, it is not generally regulated as such. This means that no one will be providing a prospectus or standardized financial risk analysis type of document… and as one can see by looking at price fluctuations over time, there is indeed significant financial risk here. The tax consequences of those fluctuations can also be tricky to figure out (so having an accountant that knows about bitcoin is always a good idea).

The second is that if the intent is to then advertise the sale of bitcoin (at the time that he is ready to cash in) to the public (as opposed to selling through an exchange or other method), there is a possibility of being considered an exchange oneself. There are a few tests for this, which boil down to the determination of whether this is a business or just a person selling something. If the quantities are going to be very large, it’s worth diving into further (the rules will be slightly different based on the jurisdiction).

I hope that helps!

Cheers,
Amber

Amber D. Scott, MBA, CIPP, CBP, CAMS
Founder & Chief AML Ninja, Outlier Solutions Inc.
Amber is a long time, self-described “compliance nerd”. Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].


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Hey Compliance Nerd!
I want to start serving clients in Quebec. I’ve already got a respondent, since I don’t have offices in Quebec…  but my respondent is telling me that it could take as long as six (6) months to get a license under Quebec’s MSB Act?!? What’s up with the time that this takes?  Is there a “grace period” or something that would let me start serving clients ASAP once I’ve submitted the paperwork?
Sleepless in Quebec

Hey Sleepless,
I have good news and bad news. Let’s start with the bad news.
As far as we know, the Authorite des Marches Financiers (AMF) has stated (in this press release for instance) that no grace periods are being offered under Quebec’s MSB Act. In fact, in 2015 the AMF collaborated with additional enforcement agencies, including the Surete du Quebec, to conduct a number of searches related to un licensed MSBs… I interpret this as being a strong signal.
On the bright side, you can serve the remaining 77% of Canada’s population before your AMF licensing has been completed. This is why you see some financial services companies (including banks) that ask for province of residence at the first page. Vive la difference, indeed.
Cheers,
Amber

Amber D. Scott, MBA, CIPP, CBP, CAMS
Founder & Chief AML Ninja, Outlier Solutions Inc.
Amber is a long time, self-described “compliance nerd”. Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].

Hey Compliance Nerd!
I got an email from a customer asking for an “AML Clearance Certificate” from us. The customer’s email said that this was something that their bank had requested, and that once they had it, they would start doing a lot more trading. They even sent us a link to a site that would apparently issue the certificate once background checks were conducted, but something didn’t seem right. I did a quick Google search, and everything that I’ve read seems to indicate that this is a scam. I don’t want to get caught up in a scam, but I’m afraid of losing a customer. What’s the deal with these certificates?
Not Clear(ed)

Hey Not Clear(ed)!
First of all, good instincts!
An “AML Clearance Certificate” is a fictional requirement, although sometimes the scammers will go so far as to set up a website for a fictitious company that issues these “certificates” (this allows them to collect both victims’ banking and credit card information). If anyone is asking you for an “AML Clearance Certificate”, they are participating in a scam.
Do not, under any circumstances, provide such a person with personal, company, or financial details.
The same logic applies if you are asked for an “anti-terrorism certificate” or an “anti-money laundering source of funds certificate”…
This scam has used many names, but the setup is always the same. The scammer will say that they want to send funds but, need a certificate from you first. The dollar value is usually larger than the victims’ normal transactions, and there is a time limit. In the most sickening example that I’ve seen, the scammers targeted charities, posing as people or organizations that wanted to make donations.
As part of the first step, the scammers collect your company and banking information and helpfully suggest a site for a “company” that can help you get your “certificate.” Generally, this site requires a credit card payment (these may range from a few hundred to several thousand dollars). In more sophisticated scams, the site’s fine print states that the certificates are “not authorized by any government or international body” and that there are absolutely no refunds. This means that even if the victim reports the scam to their credit card company, the card company may not be able to issue a refund.
At this stage, the scammers have the victim’s banking and credit card information. They may use this to conduct transactions (like draining the bank account or paying for things with the credit card), or simply sell the information on the dark web to other scammers.
At any point, you can report the scam to the Canadian Anti-Fraud Centre either online or by phone (1-888-495-8501).
If you have already provided some, or all of your financial details, it’s in your best interest to act quickly.   Contact your financial institutions and let them know what’s happened. They will be able to close your existing accounts, issue new accounts and review your recent transactions with you.
Cheers,
Amber

Amber D. Scott, MBA, CIPP, CBP, CAMS
Founder & Chief AML Ninja, Outlier Solutions Inc.
Amber is a long time, self-described “compliance nerd”. Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].

Hey Compliance Nerd!

We buy and sell Bitcoin and a few altcoins in Canada, but we’re not a regulated entity under Canada’s AML rules. When we think that something shady is happening, we stop dealing with certain customers… Should we also be telling anyone about it if we suspect that there may be money laundering involved? We’re not sure who to talk to, and we want to make sure that we’re protecting our company and reputation.

Thanks!

Unregulated

 

Hey Unregulated,

If you think that someone might be laundering money, you can complete a voluntary report to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The report can be completed online here.

Although voluntary FINTRAC reporting cannot be completed anonymously, you and your company are protected when you make a report in good faith (meaning that you are making a report because you believe that something bad is happening, not just because you have a grudge).

The online form for voluntary reports includes step-by-step instructions, and allows you to upload documentation that may be relevant to the report. The details that you include in your report should include the facts (what happened) and an explanation of why you believe that the activity may be related to money laundering.

Cheers,

Amber

Amber D. Scott, MBA, CIPP, CBP, CAMS

Founder & Chief AML Ninja, Outlier Solutions Inc.

Amber is a long time, self-described “compliance nerd”.  Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].

Hey Compliance Nerd!

I have customers in Quebec but I don’t have any offices or staff located in Quebec, nor do I offer any services in French. Do I really need to get a money services business (MSB) license from the Quebec Authorite des Marches Financiers (AMF)?

I’d Rather Not

Hey I’d Rather Not,

I feel your pain.  Like most of us, you would rather not do extra work if you don’t have to… but in this case it may be necessary.  The AMF has taken the position that if you are conducting certain types of business (including operating bitcoin ATMs or exchanges) and you are serving customers who are located in Quebec, you must be licensed by the AMF.

This is true even if you don’t have any physical presence in Quebec and/or if you’re not offering your services “en français.” When Quebec first published the MSB Act, we reached out to the AMF on behalf of our customers to ask the same question.

If you’re not sure if your business should be licensed in Quebec, based on your business model, you can contact the AMF directly to ask.  The AMF has specific contacts for MSBs (and they generally respond by the next day).  While you don’t have to be French-speaking to speak to an agent, it can be helpful. I would also recommend that, if the AMF states that you don’t need to be licensed, you ask for that in writing (via email is fine).

If you do need to be licensed, you’ll need to have a reliable (and preferably French-speaking) representative, who either lives or worked in Quebec that responds to the AMF on your behalf (fittingly, these are known as “respondents”).  If you don’t know anyone that can serve as a respondent for you, we’ve compiled a short list of reliable resources. These are people that, as part of their business, act as respondents and advise customers with regards to the AMF (meaning that they will charge fees for their services).

Cheers,

Amber

Amber D. Scott, MBA, CIPP, CBP, CAMS

Founder & Chief AML Ninja, Outlier Solutions Inc.

Amber is a long time, self-described “compliance nerd”.  Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].

Hey Compliance Nerd!

I would like to serve customers in the USA, but I don’t plan to have staff or offices there (we’re based in Canada). I’ve tried reading through the New York Bitlicense and other money transmitter rules, but it seems complicated and expensive. Basically, I’d like to know if all of that is really necessary if all of our transactions take place online. I don’t want to get arrested or hit with a crazy fine, but I also don’t want to jump through these hoops unless it’s absolutely necessary.

America’s Hat

Hey America’s Hat!

Doing business with customers in the USA can be complicated.  When it comes to financial transactions, your location doesn’t matter as much as your customer’s location.  If you’re dealing with customers in the USA, you should be ready to either comply with their rules or risk penalties (which tend to be much more punitive than their Canadian counterparts).

While it can be tempting to think about serving “just a few” customers based in the USA, it’s useful to know that law enforcement agencies have been known to pose as customers in sting operations set up to catch unlicensed money remitters.  If that doesn’t give you the shivers, the dollar value of related penalties in the US can be quite high – for instance, the $700,000 USD fine against Ripple Labs earlier this year.

Ultimately, as a business owner, you need to do what’s best for your business, but there probably aren’t many business owners that will knowingly take this type of risk to serve a few customers in the USA.  If you choose to serve American customers, you should consider both the federal requirements, including registering with the Financial Crimes Enforcement Network (FinCEN) – they’re basically the American FINTRAC, as well as adhering to the state–by-state requirements.

Unfortunately, in some states this translates to “go big or stay home” since it would not be profitable for smaller, or even mid-sized, companies to meet these requirements.

Cheers,

Amber

Amber D. Scott, MBA, CIPP, CBP, CAMS

Founder & Chief AML Ninja, Outlier Solutions Inc.

Amber is a long time, self-described “compliance nerd”.  Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].

Hey Compliance Nerd!

I heard that bitcoin was regulated in Canada, so I tried to register my company as a money services business with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).  They wrote back and said that I can’t register because my business is not regulated. I notice that some exchanges in Canada are already registered with FINTRAC though…  Why is this?

Unregistered and Unsure

Hey Unregistered and Unsure,

At this point, there are three activities that are considered to be money service business (MSB) activities in Canada:

1. Conducting foreign exchange transactions (fiat to fiat),

2. Sending funds (fiat again) out of Canada, or bringing funds into Canada from abroad, and

3. Issuing or redeeming instruments like money orders or travellers cheques (you guessed it – for fiat currency).

Unless you’re doing one or more of these activities, you won’t be able to register with FINTRAC as an MSB yet.

Which brings us to the exchanges that are already registered.  While I can’t speak on behalf of all exchanges, some do offer limited fiat-to-fiat currency exchange transactions, which would cause these companies to fall within the current MSB definition.

Cheers,

Amber

 

Amber D. Scott, MBA, CIPP, CBP, CAMS
Founder & Chief AML NinjaOutlier Solutions Inc.
Amber is a long time, self-described “compliance nerd”. Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].

Hey Compliance Nerd!

I’ve just incorporated my company, and I can’t tell you what the business model is yet but it’s related to digital currency, and it’s going to be awesome. When I went to my bank to open a bank account for my company, they told me they don’t open accounts for digital currency businesses. One of my friends suggested that I go to another bank and just tell them I’m a software company. Will this get me in trouble (and if so how much)?

Bankless & Ready to Go

Hey Bankless,

Sadly access to banking services has become a pain point for digital currency companies.  Traditional money services businesses (MSBs) have been suffering as well.  In fact, the problem of “de-risking” (banks refusing to deal with industries that are deemed to be too risky) has become a global issue, attracting the attention of the Financial Action Task Force (FATF), the World Bank, and the G7 (to name a few). Closer to home, the Canadian MSB Association is working with stakeholders (both in Canada and internationally) to find solutions to the issue.

It’s baffling that access to basic banking services is one of the most difficult barriers to entry for many start-ups in Canada, and while I would never advise anyone to provide misleading information to their bank, I understand why many businesses have chosen to do so.

Generally speaking, when a bank discovers that someone has provided misleading information, the account will be closed.  This may be done with very little notice or opportunity for discussion.  In some cases, this may prevent the business from opening any additional account with that bank, even years later.  While I don’t have statistics, I’ve heard that the “life expectancy” for bank accounts opened this way is estimated to be somewhere between three months and a year.

One alternative is to work with a payment processor that is well versed in digital currency, such as TAYPE or Vogogo. While this won’t eliminate the need for a bank account, it can relieve a few of the pain points for you and your bank. If you are working with a payment processor, you can include this in the business plan that you present to your bank, and let the bank know that you will only need a basic operating account.

I wish you luck in opening a reliable bank account. As the de-risking debate continues, we’ll continue to publish updates…

Cheers,

Amber

PS:  If any of our readers happen to be bankers with an appetite for banking digital currency businesses, please drop us a line!

Amber D. Scott, MBA, CIPP, CBP, CAMS
Founder & Chief AML NinjaOutlier Solutions Inc.
Amber is a long time, self-described “compliance nerd”. Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].

Hey Compliance Nerd!
We have a customer that frequently sells bitcoin. She told us that her bitcoin is from mining, but we noticed that it usually seems to be coming from, or have passed through, a wallet that we think is associated with a “Silk Road” type of dark web site. What should we do? We’re not certain that she’s doing anything illegal, but if she is, I don’t want to share a jail cell with her!
Nervous

Hey Nervous,
First of all, congratulations on harnessing the power of the bitcoin’s blockchain to detect transactions that could be a little bit shady. You’re right to want to protect yourself and your business.
If you are already registered as a money services business (MSB), you can report the transaction(s) to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) electronically using the F2R system.
If you’re not registered and can’t submit reports electronically, you can still voluntarily submit a report to FINTRAC by fax or snail mail.
The transactions can be reported in a single Suspicious Transaction Report (STR). These reports aren’t set up for digital currency transactions, so you will need to provide the details in the freeform section of the report. You should start this section by describing the reasons that you are suspicious, then provide the details for each of the individual transactions, and any relevant links (for instance to the reason that you believe a wallet address is related to a site that is related to criminal activity).
When you submit this type of report, you are protected under the law as long as you are acting “in good faith” (meaning that you’re submitting the report because you think that something shady may be happening, rather than to get back at an ex-girlfriend). Do not let your customer know that you are submitting an STR about her activity.
Next up you’ll want to consider whether or not you want to keep this person as a customer. If you believe that you can manage the risk associated with the customer (for instance by continuing to monitor her account closely and collect additional information and/or identification from her), there is nothing that would prohibit you from keeping her as a customer… unless of course, you no longer want to deal with this customer.
If that’s the case, you can either let her know directly that her account will be closed. You are not obligated to provide any specific reasons for this (and if you do, you should not say that it was due to suspicious activity). Another option is to suspend the account pending additional verification, which may include verification of the customer’s identity and/or proof that the customer is mining bitcoin. In many cases, this type of request will cause a customer who is not above board to move their business elsewhere.
In all cases, you should document all of the steps that you are taking, including any STRs that you have submitted or additional information you collected from her. These records demonstrate that you’ve done your due diligence.
Cheers,
Amber

Amber D. Scott, MBA, CIPP, CBP, CAMS
Founder & Chief AML Ninja, Outlier Solutions Inc.
Amber is a long time, self-described “compliance nerd”. Amber is a firm believer in the idea that good compliance can enable good business. Find out how at www.outliercanada.com or reach out to her directly at [email protected].