Canada: FINTRAC's New AMP Policy: Does It Solve Issues Only To Create Others?

FINTRAC has completed a comprehensive review of its policies for issuing administrative monetary penalties (AMP) for violations of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations (PCMLTFA). With the updated policies in place, financial institutions, securities dealers, money services businesses and other reporting entities should expect FINTRAC to step up its enforcement of the PCMLTFA and to resume issuing AMPs. However, it remains to be seen whether the revised policies have given FINTRAC too much, or too little, discretion in calculating penalty amounts and publically naming offenders.

What you need to know

• FINTRAC's review has resulted in five documents: (a) the Compliance Framework; (b) the Assessment Manual; (c) the AMP policy; (d) sample penalty calculations; and (e) a voluntary declaration of non-compliance policy.
• The AMP policy includes a two-step process for calculating AMP amounts for violations of the PCMLTFA when FINTRAC determines, in its discretion, to issue an AMP:
  • First, classifying the violation and assessing the harm done. Harm is defined as the degree to which a violation interferes with achieving the objectives of the PCMLTFA or FINTRAC's ability to carry out its mandate.
  • Second, assess the reporting entity's compliance history. Penalties for first-time violations will generally be reduced by two-thirds the base amount, second-time violations (meaning the reporting entity has previously been penalized for a violation of the same type) will generally be reduced by one-third the base amount, and penalties for third time violations will be at the full base amount.
• The voluntary declaration of non-compliance policy provides that where (a) the declared non-compliance issue is not a repeated instance of a previously voluntarily disclosed issue; and (b) the declaration has not been made after the reporting entity has been notified of an upcoming examination, FINTRAC will not issue an AMP.
• FINTRAC has also provided new guidance on when it "may" publically "name" AMP recipients. It may do so under any of the following circumstances: (a) the person or entity has committed a very serious violation; (b) the final penalty amount is equal to or greater than $100,000; or (c) the person or entity has previously been subjected to an AMP.

The court decisions

The impetus for FINTRAC's policy review was the decisions of the Federal Court and the Federal Court of Appeal in Max Realty Solutions v. Attorney General of Canada,¹ Kabul Farms v. R,² and Contrevenant No. 10 v. Attorney General of Canada.³ The facts of the three cases differ, but the courts reached the same conclusion in all three: FINTRAC had a valid basis for finding that the reporting entity violated the PCMLTFA, but they set aside the AMPs because FINTRAC failed to supply an adequate rationale for how it calculated the AMPs.

In Kabul, the leading case, the Court of Appeal explained that "[a]s part of procedural fairness, a party potentially liable for an administrative monetary penalty, such as the respondent, needs to know about any formula, guideline or supporting analysis the Director will rely upon in his assessment of penalties."⁴ In the case of Kabul, FINTRAC's Director had used an unpublished formula to determine the AMP. Furthermore, the court held that the formula appeared to conflict with the criterion set by legislation as the "formula is based only on the type of violation, not the particular mitigating or aggravating facts underlying it relating to harm." To be justifiable, "the sorts of figures the Director chose at each step in this methodology" should have been "underpinned or justified by some reasoning or evidence in the record."⁵ The Court of Appeal found that this reasoning was lacking: based on the record, FINTRAC "might have plucked the numbers from the air."⁶

FINTRAC's policy review and updated policies

To address the courts' decisions, FINTRAC undertook a comprehensive review of its AMP program. FINTRAC's new AMP program addresses the concerns raised by the federal court by:

1. Ensuring that decisions on AMPs will consider the unique factors in each case based on the harm caused by the violations, and that the factors that lead to the penalty calculation are clearly outlined; and
2. Publishing its new administrative monetary penalties policy.

Penalty amounts continue to range from $1 to $1,000 per violation for minor violations, $1 to $100,000 per violation for serious violations, and for very serious violations, the penalties range from $1 to $100,000 per violation for individuals, and $1 to $500,000 for entities.

The AMP policy's rules for calculating AMP amounts

FINTRAC achieves the first objective by identifying in its new policy a step-by-step approach to "assist FINTRAC officers in the calculation of a penalty amount, while taking into consideration the circumstances of each case." The AMP policy explains that a violation may not result in FINTRAC levying an AMP. For example, on identifying a violation, FINTRAC may decide to take no further action or to conduct follow-up compliance activities. If FINTRAC decides that a violation warrants levying an AMP, it will proceed in two steps to determine the AMP amount.

As part of step one, FINTRAC classifies the violation as minor, serious, or very serious. As explained above, there are different ranges of penalties, depending on the severity of the violation.

FINTRAC also conducts a harm done assessment. This assessment examines the level of harm caused by the violation. Harm is defined as "the degree to which a violation interferes with achieving the objectives of the Act" or FINTRAC's ability to carry out its mandate, and is assigned a level ranging from 1 (most harm) to 4 (least harm). For example, with respect to the obligation to report large cash transactions, a failure to report a large cash transaction is a level 1 harm because it causes a "complete loss of financial intelligence," whereas reporting the transaction but failing to provide prescribed information can cause harm ranging from levels 2-4 (depending on the information). Where a "reporting entity has completely failed to meet a requirement, FINTRAC will generally levy the maximum available penalty."

During step two, FINTRAC examines the entity's compliance history and adjusts the penalty's amount for each violation based on whether or not the entity had previously been subject to an AMP for the violation. As noted above, FINTRAC will reduce the penalty during the first two occurrences of a given violation and only apply the full penalty after a specific violation has been committed a third time.

The sample penalty calculation set out below (which is taken directly from FINTRAC's website) provides the penalty calculation in a situation where a reporting entity fails to report cash transactions of $12,000 and $10,000:

AMP policy adds transparency, and uncertainty

Based on our review, it appears that FINTRAC's new AMP policy seeks to address the Federal Court of Appeal's concerns by publishing a formula which they hope will provide the transparency necessary to withstand the courts' scrutiny. Although this may provide AMP recipients with a greater understanding about how a penalty was calculated, the limits this new policy impose on the ability of FINTRAC officials to exercise discretionary decision-making raises concerns about how this policy will be enforced. For example, with respect to the compliance history adjustment, it raises questions about how the regulator would take into account circumstances such as:

• If several years have elapsed between a first and second violation (or second and third violation).
• A subsequent violation committed by a different business unit of the same reporting entity.
• The reporting entity's remedial steps taken between a first and second violation.

Although FINTRAC has taken steps to increase transparency in its policies, its efforts to introduce a calculation approach to AMPs appears to reduce the Directors' discretion in making decisions on AMPs, which is, as noted in Kabul, "an imprecise, fact-based task that calls for subjective judgment informed by experience regulating this specialized field and knowledge about it." It will be interesting to see how the policy will be applied to real cases with differing fact situations.

Footnotes

1 2014 FC 656

2 2015 FC 628 aff'd 2016 FCA 143

3 2017 CF 416; 2018 CAF 150

4 2016 FCA 143, para. 44

5 2016 FCA 143, para. 26

6 2016 FCA 143, para. 28

7 FINTRAC divides the harm that results from failing to report a large cash transaction into four levels.

8 The four levels of harm involve penalties of $250 for level four, $500 for level three, $750 for level two, and $1,000 for level one.

9 CH means "compliance history;" NP means "non-punitive."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.