A definition based on activity
In Canada, a money services business, usually shortened to MSB, is a person or entity that carries on certain financial activities as a business and is not a bank, credit union or other institution already regulated as a financial entity. The definition sits in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, known as the PCMLTFA, and its regulations.
The test looks at what a business does, not what it calls itself. A software company that moves client money between countries can be an MSB. A travel agency that sells foreign banknotes as a regular sideline can be one too. A firm that describes itself as a fintech, a payment platform or a treasury service does not escape the definition by choosing a different label.
Once a business falls within the definition, it must register with FINTRAC, the Financial Transactions and Reports Analysis Centre of Canada, before it offers the services. It also takes on the full set of anti-money laundering duties that the PCMLTFA places on reporting entities.
The activities that make a business an MSB
The activities that bring a business within the MSB definition are set out in the legislation. In general terms they are:
- Foreign exchange dealing: exchanging one currency for another for clients, whether in cash, by account transfer or otherwise.
- Remitting or transmitting funds: moving money on behalf of clients by any means, through any person or entity, or through an electronic funds transfer network.
- Issuing or redeeming money orders, traveller's cheques or similar negotiable instruments, other than ordinary cheques payable to a named person.
- Dealing in virtual currencies: exchange services between virtual currency and fiat or between virtual currencies, and virtual currency transfer services.
- Crowdfunding platform services, which were brought within the regime more recently.
- Transporting currency or negotiable instruments by armoured car, also a more recent addition.
A business needs to carry on only one of these activities to be an MSB. Many carry on several. An international payments firm will usually be registered for foreign exchange dealing and for money transferring, and a firm that converts fiat to digital assets will also be registered for virtual currency dealing.
Examples of who is and is not caught
Some illustrations help. They are simplified and are not a substitute for legal advice on a particular business model.
- A firm that converts a client's euros into Canadian dollars and wires them to a supplier is dealing in foreign exchange and transmitting funds. It is an MSB.
- A company that collects payments from many customers into its own account and pays them out to merchants is likely to be transmitting funds on their behalf, and is likely to be an MSB.
- A platform that lets clients buy a stablecoin with Canadian dollars and send it to an external wallet is dealing in virtual currency.
- A manufacturer that pays its own overseas suppliers from its own bank account is not providing a service to anyone. It is a client of a bank or MSB, and is not an MSB itself.
- A pure software vendor that supplies payment software but never receives, holds or moves client funds, and never directs how they move, may fall outside the definition. This is a fact-specific question, and FINTRAC publishes interpretation notices and policy decisions on borderline cases.
The deciding factors tend to be whether the business handles or controls client money, whether it does so for others, and whether it does so as a business rather than as a one-off.
Foreign MSBs
A business does not have to be located in Canada to be caught. A foreign money services business is one that has no place of business in Canada but directs and provides MSB services to people or entities in Canada. Foreign MSBs must register with FINTRAC and meet broadly the same obligations as domestic MSBs, including the compliance programme, client identification, record keeping and reporting.
Whether a foreign business is directing services at Canada depends on the facts. FINTRAC looks at indicators such as marketing aimed at Canadians, a Canadian domain name or Canadian contact details, listing Canadian dollars or Canadian provinces in its sign-up process, and actually having Canadian clients. A business that serves clients in Canada without registering takes a real regulatory risk.
The reverse question also arises. A Canadian MSB that serves clients abroad must still meet Canadian requirements for that business, and may also have to consider the rules of the countries where its clients sit. Registration in Canada does not grant any permission to operate in another country.
What an MSB must do
Registration is the entry ticket. The ongoing obligations are what make up the daily work of a compliant MSB. They include:
- A compliance programme with a named compliance officer, written policies and procedures kept up to date, a documented risk assessment, an ongoing training programme and an effectiveness review at least every two years.
- Verifying the identity of clients, determining whether clients act for third parties, and obtaining beneficial ownership information for entities at the 25% level.
- Determining whether a client is a politically exposed person, a head of an international organisation, or a family member or close associate of one.
- Keeping records for at least five years.
- Reporting to FINTRAC: suspicious transactions, large cash transactions of CAD 10,000 or more, large virtual currency transactions of CAD 10,000 or more, international electronic funds transfers of CAD 10,000 or more, and property owned or controlled by terrorists or other listed persons.
- Applying the travel rule, so that originator and beneficiary information accompanies funds transfers and virtual currency transfers.
- Complying with Canadian sanctions laws, which apply to everyone in Canada, not only to reporting entities.
How an MSB differs from a bank
Banks and MSBs both move money, and both are reporting entities under the PCMLTFA. Beyond that they sit in very different places in the regulatory system.
A bank in Canada operates under the Bank Act and is supervised by the Office of the Superintendent of Financial Institutions for safety and soundness. It may take deposits, lend money and create credit. Eligible deposits at member institutions are protected by the Canada Deposit Insurance Corporation up to set limits. Banks hold capital against their risks and are subject to detailed prudential rules.
An MSB is registered with FINTRAC for anti-money laundering purposes. FINTRAC registration is not a prudential licence. An MSB may not take deposits in the banking sense, and its client balances are not covered by deposit insurance. Funds pass through an MSB to complete a transaction, such as a currency conversion or a payment, rather than sitting there as savings.
The practical consequence for clients is simple. An MSB is a service provider for transactions. It is a sensible choice for foreign exchange and cross-border payments, especially where a specialist understands the client's sector, but it is not a substitute for a bank account for holding long-term balances.
Other rules that can apply
FINTRAC registration is the federal anti-money laundering layer. It is not always the only regime an MSB has to consider.
Quebec has its own provincial licensing regime for money services businesses, so an MSB operating in that province will also need to look at provincial requirements. Federally, the Retail Payment Activities Act, supervised by the Bank of Canada, applies to certain payment service providers and focuses on operational risk management and the safeguarding of end-user funds. Whether it applies depends on the activities carried out and the clients served.
Firms dealing in virtual currency may also have to consider securities law where a product looks like an investment or involves holding assets for clients. Securities regulation is provincial and territorial, and is outside FINTRAC's role.
For a client, the lesson is to ask a provider which regimes it falls under and why. A well-run MSB will be able to explain this plainly and point to the relevant public registers.
Why the label matters to clients
Knowing that a provider is an MSB tells a client a few useful things. The provider is registered with FINTRAC, and its registration can be checked on the public MSB registry. It operates a compliance programme, so it will ask questions about identity, ownership and the purpose of payments. It reports certain transactions to FINTRAC as a matter of routine. And its client funds are not deposits protected by deposit insurance.
The label does not say anything about the provider's financial strength, its service quality or the safety of a particular transaction. Those questions call for ordinary commercial due diligence: who owns and runs the business, how long it has operated, which banks it works with, how it holds client funds while a transaction is in progress, and how clearly it explains its processes.
A client that understands what an MSB is will also find onboarding easier. The questions a provider asks follow directly from the obligations described above. Having documents ready and explaining the business openly is the quickest route through the process.
Before you act
This article is general information about the MSB regime in Canada. It is not legal advice. If you are unsure whether your own business is an MSB, or whether it is directing services at Canadian clients, take advice from a Canadian lawyer who works in this area.
CCYFX PAY INC provides Foreign exchange, International payments, Collections and payouts, and Digital asset conversion for businesses. Our how it works page explains a typical transaction from start to finish.
