On February 8, 2019 the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), in an initiative to increase the transparency of its compliance regime, released new guidance materials to assist regulated entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) in their compliance efforts. While FINTRAC provides that the new materials are not intended to establish any new regulatory requirements or expectations, it is clear from the materials that FINTRAC’s expectations go well beyond the legislative requirements.
The package of materials released consists of the following:
- An overview of FINTRAC’s compliance framework
- FINTRAC’s assessment manual (explaining the approach and methods used during examination)
- FINTRAC’s Administrative and Monetary Penalties (AMPs) policy
- Voluntary Self-Declaration of Non-Compliance notice
The Administrative Monetary Penalties Regulations to the PCMLTFA (AMP Regulations) provide the legislative authority for FINTRAC to impose AMPs on a regulated entity. In that regard, the AMP Regulations categorize violations by degree of importance and impose a range of fines for each category of violation, varying anywhere from C$1 to C$1,000, C$100,000 or to C$500,000, depending on the nature of the violation. FINTRAC also has the discretion to reduce the amount of the penalty, depending on certain factors.
In the Federal Court of Appeal’s decision in Canada v. Kabul Farms Inc. (Kabul Farms), the court was critical of the methodology (or lack thereof) that FINTRAC used to impose an AMP against the respondent, Kabul Farms. FINTRAC did not disclose the reasoning for choosing the amount of the penalty nor did it provide the methodology that it used to reduce the amount. The court, in determining if the assessment of penalties provided by FINTRAC was reasonable, noted that the percentage reduction in amount of the penalties “might have been plucked out of the air or adopted for reasons extraneous to the legislation.” The court was also critical of FINTRAC’s formula for reaching the actual amount of the penalty, noting that it was based on a secret guideline and it would not give any weight to it.
It is not surprising then that in light of the Kabul Farms decision, FINTRAC is changing its approach to be more transparent in how it approaches the implementation of AMPs. The materials published address this goal by setting out FINTRAC’s operating principles and framework in how it approaches and imposes AMPs.
FINTRAC provides the following six guiding principles for its AMP program:
FINTRAC notes that it will not automatically issue an AMP in response to non-compliance, but rather, AMPs are more generally used when other compliance options have failed or where there are either significant issues of non-compliance or “… a high impact on FINTRAC's intelligence mandate or on the objectives of the Act and its regulations”. This latter category is quite broad given that section 3 of the PCMLTFA provides that the object of the PCMLTFA is the implementation of measures to detect and deter money laundering and terrorist financing including by establishment of reporting, recordkeeping, and client-identification measures. What is clear from these newly released materials (and the new suspicious transaction reporting guidelines) is that FINTRAC will be emphasizing suspicious transaction monitoring and reporting in its examinations. For further information, please see our January 2019 Blakes Bulletin: New Guidance from FINTRAC: Expanding Suspicious Transaction Requirements.
In discussing non-compliance by regulated entities, FINTRAC states that it will look to the extent and the root cause of non-compliance. Moreover, each incidence of non-compliance will be assessed for its impact on FINTRAC’s intelligence mandate and on the achievement of the objectives of the PCMLTFA. Importantly, FINTRAC provides that it will consider non-compliance in a “holistic context”, considering factors such as a regulated entity’s compliance history. While this perspective seems very encouraging, in the examples of how to calculate AMPs provided with the materials, FINTRAC seems to focus on information provided in reports at a micro level.
HOW WILL FINTRAC CALCULATE AMPs?
FINTRAC notes that it will use the following guidelines as benchmarks in calculating a penalty amount:
Step 1: Assessment of Harm Done
FINTRAC defines “harm” as the degree to which a violation interfered with the objectives of the PCMLTFA or with its ability to carry out its mandate. The “harm done” is one of the criteria the PCMLTFA requires FINTRAC to consider in determining the amount of any penalties assessed. Again, this will likely place an emphasis on suspicious transaction reporting. In assessing the harm done by a violation, FINTRAC will consider both the potential and the resulting harm. FINTRAC defines “resulting harm” as a separate violation that comes from the original violation. By way of example, if policies do not address large cash reporting (LCTs), the resulting harm will be unreported LCTs. FINTRAC does not address the fact that unreported LCTs in such an example will separately attract AMPs. We note that a reviewing court may view such "double-counting" with suspicion.
In calculating a penalty amount in respect of harm done, FINTRAC will first look to see whether a reporting entity has failed to meet a requirement in whole or in part. Where a regulated entity has completely failed to meet a requirement, the base penalty will typically be the maximum amount set out in the AMP Regulations. Where a regulated entity has failed to meet part of a requirement, the base penalty will depend on the part that is non-compliant and the extent of the failure. In respect of the “extent of the failure”, FINTRAC notes that this will be measured using assessment criteria that have been established “based on the level of interference” with achieving the objectives of the PCMLTFA. This methodology, because it is based on the “objectives of the PCMLTFA”, provides FINTRAC with a significant amount of discretion in determining the amount of any base penalty.
Step 2: Compliance History and Non-Punitive Adjustment
In the second step of the penalty calculation, FINTRAC will look at the regulated entity’s compliance history as well as the stated purpose of the AMPs, which is to encourage compliance, rather than to punish. FINTRAC will then adjust the penalty amount for each violation based on whether the regulated entity has ever previously been levied an AMP for the violation (as distinct from whether it has ever committed the violation before but has not been fined in respect of it). For a first-time violation, the penalty is typically reduced by two-thirds. For a violation occurring a second time, the penalty is typically reduced by one-third. For the same violations that the regulated entity has been penalized for two or more times on previous occasions, the full base penalty is typically applied.
Interestingly, this methodology is drafted to apply to previous penalized violations as opposed to violations that the regulated entity has committed, but for which FINTRAC has not imposed a penalty. While there is some defined methodology in FINTRAC’s approach, which is welcomed, FINTRAC still maintains a great deal of discretion given the overarching guiding principle of “achieving the objectives” of the PCMLTFA.
The materials provided by FINTRAC also provide penalty calculation examples. These examples show the broad discretion that FINTRAC is accorded in determining the level of harm if there is missing or incomplete information in an LCT or other report.
Moreover, one of the violations in respect of filing reports is stated to be circumstances where a report was in fact filed but “information that enhances the efficiency of FINTRAC’s analysis is non-compliant”, a somewhat vague and legislatively questionable criterion. In the example provided of this instance, FINTRAC notes that “FINTRAC’s intelligence mandate is diminished due to the additional time required to conduct the analysis”, where only an initial of a person is provided rather than the entire first name. This approach is in keeping with the proposed new regulations under the PCMLTFA where there is heavy reliance on regulated entities to be data collectors for FINTRAC (see our January 2019 Blakes Bulletin: New Guidance from FINTRAC: Expanding Suspicious Transaction Requirements).
VOLUNTARY SELF-DECLARATION OF NON-COMPLIANCE
Although FINTRAC has never published a formal policy, regulated entities have been making voluntary self-declarations of non-compliance to FINTRAC for many years. With the release of these new materials, FINTRAC has now formalized its existing self-declaration framework. FINTRAC strongly encourages regulated entities to voluntarily disclose their non-compliance to FINTRAC in order to resolve any issues that they identify. In this regard, and consistent with past practices, FINTRAC indicates that if the non-compliance event is not a repeated issue and provided that the regulated entity has made disclosure prior to being notified of an upcoming examination, FINTRAC will not impose an AMP (and will work with the regulated entity to resolve the issue).
In these materials, FINTRAC sets out the information that it requires from regulated entities when they make a voluntary self-declaration (i.e., number of reports impacted, time period during which the non-compliance occurred, etc.). From a regulated entity perspective, it sometimes takes a long period of time to determine the exact impact of a non-compliance event and it may, in certain circumstances, require a manual and time-consuming review of certain types of records. In light of this, it is suggested that as soon as a regulated entity learns of a significant non-compliance event, it should voluntary self-declare to FINTRAC, providing what little information it may have with a commitment to report the full details of the non-compliant event once an internal investigation has been completed. By doing so, a regulated entity can protect itself in the event that it receives a notice of examination from FINTRAC before it has the opportunity to fully understand and report the impact of the non-compliance. This is noted in the assessment manual (discussed below) where FINTRAC notes that “any non-compliance identified by a business after [the date a regulated entity is advised of an examination] will not be eligible for voluntary self-disclosure consideration.”
It is also noteworthy that in the assessment manual, FINTRAC states that it looks at voluntary self-declarations of non-compliance in determining which areas of a regulated entity to examine. Accordingly, once a regulated entity makes a voluntary disclosure, it should ensure that it takes appropriate remediation steps to fully correct deficiency.
As promised, FINTRAC has released an examination manual (Manual) “in the spirit of openness and transparency” so that regulated entities can see how FINTRAC conducts its examinations. FINTRAC does provide transparency into its examination practices, which will undoubtedly be helpful to regulated entities.
The Manual is divided into numerous sections detailing how FINTRAC conducts its examinations, what it is looking for, and what it expects. Some of FINTRAC’s expectations go beyond the legislative requirements, so regulated entities are well advised to review the Manual and ensure that their practices align with FINTRAC’s expectations.
FINTRAC describes its examination framework in the Manual. In this regard, FINTRAC notes that it focuses its examinations on higher areas of risk. They also note that they focus less on technical compliance and more on the overall soundness of a program. While this may be encouraging for regulated entities, it is interesting that the PCMLTFA does not specifically provide FINTRAC with a safety and soundness regulatory power.
One thing is clear from reviewing the Manual. In carrying out its mandate to ensure compliance with the PCMLTFA, FINTRAC views as its role to review the decisions that regulated entities make in determining whether to file suspicious transaction reports. Specifically, FINTRAC notes the following in the Manual:
“We base our decisions on what we believe a reasonable, experienced and knowledgeable person in your business sector would have done if they were assessing the same set of facts and circumstances”. [emphasis added]
“We review the unusual transactions identified by your monitoring system that you did not report to confirm that your decisions were sound”. [emphasis added]
This is in stark contrast to the U.S. position set out in the Bank Secrecy Act Anti-Money Laundering Examination Manual, which notes:
“The decision to file a SAR [Suspicious Activity Report] is an inherently subjective judgment. Examiners should focus on whether the bank has an effective SAR decision-making process, not individual SAR decisions.” [emphasis added]
Indeed, although the FINTRAC Manual states that it does not “…instruct businesses on how to carry out their operations”, at least in the suspicious transaction reporting (STR) filing context FINTRAC's intention is to subject each STR determination made by a regulated entity to FINTRAC's own reasonableness standard – one that is elusively defined. This absence of any meaningful deference to regulated entities' own STR filing decisions is unfortunate, as it will very likely lead to regulated entities over-filing STRs rather than risking FINTRAC second-guessing such decisions in a compliance examination. Over-reporting in turn may dilute the value of financial intelligence that FINTRAC is mandated to receive under the PCMLTFA and could also raise privacy concerns.
FINTRAC provides a list of information that it will examine in order to assess the risk of a regulated entity’s business sector and to plan its examination. Some of the items that FINTRAC indicates it will review that are illustrative of its approach are:
- The content of voluntary self-declarations
- Previous questions a regulated entity asked about the requirements or requests for policy interpretations
- Information about your business or your clients available on the Internet
- History of enforcement actions taken by other regulatory bodies.
FINTRAC will likely review any issues that a regulated entity may have had with another regulator. As such, if there is public information in respect of a compliance issue related to money-laundering or terrorist financing, a regulated entity should be prepared to have that reviewed in a FINTRAC examination, even if the event occurred outside of Canada.
FINTRAC will also review a regulated entity’s past voluntary self-disclosures. As such, it is important to rectify any self-disclosed issues as soon as a regulated entity is reasonably able to resolve them.
Furthermore, FINTRAC notes that it will examine information about a regulated entity’s clients on the Internet. Interestingly, there is no obligation imposed on a regulated entity under the PCMLTFA to search the Internet in respect of its clients. It may choose to do so in respect of higher risk clients, but there is no legal obligation to do so. FINTRAC engaging in this type of activity again appears to be another example of FINTRAC second-guessing a regulated entity’s compliance practices.
Other important matters to take note of from the Manual in respect of examinations include the following:
- As most regulated entities are aware, FINTRAC may interview different members of a regulated entity’s staff and agents. The focus of these interviews is to confirm that both employees and agents are aware of the requirements applicable to their duties and seek clarification as needed. As such, it is important to train employees and agents so that they understand the requirements applicable to their positions. The Manual serves as a reminder of this obligation. If a regulated entity’s staff or agents are unable to answer basic questions about their roles or are unable to explain money laundering or terrorist financing, this will likely form part of FINTRAC’s examination report.
- Consistent with the AMP guidance, FINTRAC notes that it will focus less on technical compliance and more on the overall soundness of a compliance program. In this regard, FINTRAC notes that it will focus on the harm done by not meeting a requirement based on the nature, relative importance and extent of the non-compliance.
- In considering monetary penalties, FINTRAC notes that it will consider the unique factors of each case to determine if the examination should result in a penalty, providing FINTRAC with broad discretionary powers.
- Broad discretionary powers are also illustrative in the discussion of FINTRAC’s assessment methodologies. In that regard, FINTRAC notes that in determining what PCMLTFA requirements to examine (i.e., client identification, compliance program, record keeping, reporting) it will choose the requirements and assessment methods that best fit FINTRAC’s risk assessment of a regulated entity’s business.
- If a regulated entity has agents that carry out activities on its behalf, it is important that the regulated entity not just rely on the contractual arrangements in place but that it also engage in periodic audits of its services providers. In this regard, the Manual provides that as part of the examination, it will look to regulated entities to “verify how you ensure that your agent is using the verification methods required by law”. This implicitly shows a FINTRAC expectation for an audit function.
- In respect of ongoing monitoring, FINTRAC notes that it will review ongoing monitoring of low- and medium-risk business relationships to ensure that they are adequately monitored. This reflects one of FINTRAC’s concerns that regulated entities are not sufficiently monitoring low-risk relationships.
- In keeping with the “second guessing” theme, in respect of risk assessments, FINTRAC notes that it will review a business relationship that a regulated entity has rated as low or medium risk “to determine if this risk ranking is appropriate”.
The Manual contains a section discussing the role of the compliance officer. In that regard, section 71(1)(a) of the Regulations to the PCMLTFA provides that regulated entities are to appoint a compliance officer who is responsible for the implementation of a compliance program. That is the only statutory requirement under the PCMLTFA that applies to regulated entities in respect of appointing a compliance officer. This is one of the areas where the Manual goes beyond the statutory requirement. Specifically, FINTRAC provides that it will examine the appointment, selection, authority, knowledge and duties of the compliance officer. Moreover, FINTRAC indicates that it will also examine the compliance officer’s background and experience, something that is not dealt with in the PCMLTFA or the regulations, although federally regulated financial institutions are subjected to such requirements under Guideline B-8 issued by the Office of the Superintendent of Financial Institutions.
Similarly, in respect of training, the obligation under the PCMLTFA is to have a written ongoing compliance training program for employees and agents. In the Manual, FINTRAC notes that it will look at who receives training, what topics are covered, how often it takes place, and how it is delivered. Moreover, FINTRAC will also focus on whether the training helps employees and agents understand the requirements. Regulated entities should be prepared to respond to these types of inquiries and to the extent they are not already doing so, they should document the who, what, where and when of training programs.
As previously noted, there are many references in the Manual to the use of public information. In discussing ongoing compliance training, FINTRAC notes that it will “verify how you use publicly available information to inform your compliance program”. In the STR testing section FINTRAC notes that “we look at how you use publicly available information as part of your risk assessment, monitoring and Suspicious Transaction Report process”. As such, while there is no requirement to engage in public searches in respect of all of a regulated entity’s clients as part of the know-your-client process, there seems to be an implicit expectation for regulated entities to use the Internet to investigate clients. While this may be appropriate for high-risk clients, there is no regulatory requirement to do so.
In terms of what “publicly available information” entails, while FINTRAC refers to news releases by industry regulators (i.e., police and law enforcement) it also includes references to mainstream news media and “other credible sources”. It is unclear whether FINTRAC expects regulated entities to review Facebook and LinkedIn profiles of their clients, which in and of itself raises its own unique set of privacy issues.
In terms of trends, it is important to note that FINTRAC will look to changes in reporting behaviour to see if there is an increase or decrease in reporting. In respect of reporting, FINTRAC notes that when it examines reports where fields are left blank, they will review a regulated entity’s records to see if they had the omitted information at the time of the transaction. If not, they will look for the regulated entity to explain why. As such, it is important for regulated entities to ensure that if they have information in their records that they include it as part of their FINTRAC reports.
The Manual contains a lot of information in respect of FINTRAC’s process and procedures when it conducts an examination. Regulated entities are encouraged to review it and adopt their compliance practices to meet FINTRAC’s expectations. While regulated entities may not be in full agreement with FINTRAC’s methodologies, the Manual and other materials released do illustrate FINTRAC’s efforts in being more transparent in their processes.
For further information, please contact:
Jacqueline Shinfield 416-863-3290
or any other member of our Financial Services Regulatory group.