By: Bamdad Attaran | May 20, 2022
Crowdfunding platforms have new regulatory obligations.
On April 5, 2022, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) introduced amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR). FINTRAC is responsible for administering and enforcing Canada’s anti-money laundering and anti-terrorist financing (“AML/ATF”) regime. The amendments primarily target crowdfunding platforms.
As the name suggests, crowdfunding is the practice of funding projects through donations or financial contributions from the public. Traditional fundraising methods depend on institutional investors, like banks, and are regulated by federal and provincial laws. By contrast, crowdfunding platforms allow individuals or groups to launch campaigns that appeal directly to donors or investors. Before the recent amendments to the PCMLTFR, proper oversight of crowdfunding platforms was lacking in Canada, and fell short of practices adopted by Canada’s international partners.
Several models of crowdfunding exist. For example, some crowdfunding platforms use an all-or-nothing approach that requires crowdfunding campaigns to indicate a financial target. If the campaign fails to reach its target, donors and investors get their money back. Crowdfunding platforms rely on third-party payment processors to accept and transfer payments. The most popular platforms include GoFundMe and IndieGoGo.
In 2015, the Financial Action Task Force, an intergovernmental organization of G7 countries, highlighted crowdfunding platforms as an “emerging area of risk for terrorist financing”. Similarly, a 2021 national assessment of the inherent risks of AML/MTF found that crowdfunding platforms imperilled Canada’s economy.
The threats posed by crowdfunding became apparent in February 2022, during the illegal blockades of the Ottawa Capital Region and elsewhere in Canada. The protestors’ funding, amounting to some US$20 million, originated in large part from crowdfunding supported primarily by individuals in the United States.
In response to the blockade, the federal government invoked the Emergencies Act for the first time since 1985. The government also introduced the Emergency Economic Measures Order and the Emergency Measures Regulations. These measures, which temporarily extended reporting obligations to crowdfunding platforms, were lifted on February 23, 2022. Soon after, the government announced its intention to introduce amendments permanently extending reporting obligations to crowdfunding platforms.
The PCMLTFR amendments categorize crowdfunding platforms as a “money services business” or “foreign money services business”. Consequently, crowdfunding platforms must register with and report certain transactions to FINTRAC, verify clients’ identities, and keep proper records.
These amendments are expected to impact positively on Canada’s financial system and economy. They will strengthen Canada’s AML/ATF regime, maintaining investor confidence and attracting new international investors. The amendments should also dispel perceptions that Canada is a haven for money laundering or raising terrorist funds.
It is unclear, however, how these amendments will impact start-ups and small businesses. The federal government predicts that the total cost to businesses will range from “approximately $18,000 to $20,240” over a 10-year period. During their early stages, many small businesses rely on crowdfunding campaigns to raise funds, but the amendments do not provide exemptions for these entities. Instead, FINTRAC is offering support to assist with compliance.
Bamdad Attaran is an incoming articling student at DLA Piper (Canada) LLP’s Toronto office.