Federal Court clarifies approach to administrative monetary penalties for failing to report suspicious transactions
The Federal Court’s decision in Norwich Real Estate Services Inc. (dba RE/MAX Kelowna) v. Financial Transactions and Reports Analysis Centre of Canada (2024 FC 1996) highlights critical issues that arise when parties are faced with administrative monetary penalties (AMPs) for failing to report suspicious transactions under Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
The case emphasizes that, while AMPs should encourage compliance, they are not meant to be punitive. The Federal Court set aside the AMP that the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) imposed on Norwich Real Estate Services Inc. (Norwich). The matter was remitted back to FINTRAC for redetermination with clearer guidance on how to weigh factors such as a party’s compliance history, the harm done, and promoting adherence to anti-money laundering requirements rather than punishing violators.
Background
One of the key measures established by the PCMLTFA is the confidential submission to FINTRAC of suspicious transaction reports (STRs). Various businesses and professionals regulated by FINTRAC, such as banks, credit unions, real estate brokers, casinos, accountants, and money services businesses (Reporting Entities) are required to submit an STR whenever they have reasonable grounds to suspect that a financial transaction (or attempted transaction) is related to money laundering or terrorist activity financing.
In March 2021, FINTRAC conducted a compliance examination of Norwich. The regulator found that Norwich had failed to file STRs regarding certain real estate transactions that were alleged to involve money laundering. At the time, Norwich believed that filing STRs concerning these transactions was unnecessary. Law enforcement and government authorities were already taking enforcement measures against the parties in question, and Norwich believed the matter had moved beyond mere “suspicion.” In the circumstances, Norwich believed that filing STRs would be redundant.
FINTRAC disagreed, concluding that Norwich’s failure to file STRs was a “very serious” violation of the PCMLTFA. The regulator claimed the failure to report resulted in “a complete loss of financial information, as the report is not available for FINTRAC’s analysis to produce financial intelligence that can be disclosed for investigation and prosecution of ML and TF offences.” After, (a) reducing the maximum penalty of $500,000 by $25,000 in recognition of Norwich filing a late STR, and (b) reducing the penalty by two-thirds because this was Norwich’s first offence, the regulator imposed an AMP of $156,750.
On appeal, Norwich did not contest that it had failed to report the transactions but argued that such a severe penalty was unwarranted and punitive. The Federal Court agreed.
Analysis
By the time of the hearing, Norwich accepted that, despite at least some government agencies having been aware of the apparent money laundering, the company had nonetheless been required to submit STRs in connection with the sale of the relevant properties.
The question before the Federal Court was solely whether FINTRAC had erred in determining that the appropriate AMP for that violation was $156,750.
The Federal Court ruled that any analysis of AMPs under the PCMLTFA must take into account three distinct elements:
- the harm done by the violation;
- the entity’s history of compliance, and
- the principle that penalties should encourage compliance rather than punish.
With respect to the first element, the Court found that FINTRAC failed to properly analyze how the prior involvement of law enforcement might have mitigated any practical harm caused by Norwich’s late STR. This included the unique circumstances that, at the time the properties were sold, they were already subject to enforcement action by the BC Civil Forfeiture Office.
With respect to the second and third elements, the Court found that FINTRAC improperly conflated the non-punitive rationale behind AMPs with Norwich’s first-time non-compliance reduction. While FINTRAC had given Norwich a reduction from its maximum penalty in light of this being Norwich’s first infraction, FINTRAC had failed to independently consider the amount that would be sufficient to encourage future compliance with the STR requirement without crossing the line into punishment.
The Court remitted the matter back to FINTRAC to be redetermined in accordance with these principles.
Implications
The Federal Court’s ruling offers several important takeaways for businesses and professionals subject to Canada’s anti-money laundering and terrorist financing regime.
First, the Court’s call to separately assess each penalty factor—history of compliance, harm done, and the non-punitive rationale—reaffirms that the process for determining AMPs should be both transparent and context-sensitive. Reporting Entities facing compliance issues should highlight specific mitigating circumstances as well as any corrective measures undertaken post-violation.
Second, the decision confirms that a perceived overlap with law enforcement’s awareness of underlying transactions has no bearing on a Reporting Entity’s duty to file a STR. Multiple government agencies play roles in combatting money laundering and terrorist financing, and Reporting Entities should not assume what information has been shared between them. Even if they expect their report will be redundant, Reporting Entities must err the side of caution and submit an STR any time they have reasonable grounds to suspect money laundering or terrorist financing.
Finally, Reporting Entities with robust compliance policies will be better positioned to argue against higher-end AMPs when violations do occur. A strong track record, immediate remedial action, and clear explanations of mitigating factors all work in Reporting Entities’ favour if they ever find themselves outside the requirements of the PCMLTFA.
