Fintrac's money-laundering penalties in limbo after court ruling

Canada's watchdog against terror financing and money laundering has been partially neutered after losing a landmark court case over the way it penalizes offending businesses.

Since May 2016, the federal agency known as Fintrachas been unable to levy fines on firms that violate tough financing regulations and will remain toothless until at least the summer when areview of itspenalty programis completed.

That two-year hiatus in Fintrac's ability to do its basic enforcement job began when the Federal Court of Appeal ruled on May 6, 2016, that the way the agency calculates fines against financial institutions is opaque and needs to be more transparent.

The ruling knocked the legs out from under the so-called Administrative Monetary Penaltiesprogram, or AMP, launched in January 2009 to hit firms with fines for breaking the rules on reporting financial transactions.

In addition to tipping police to potential criminal cases, Fintracalso acts as a regulator to ensure the 31,000 Canadian businesses covered by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act follow proper reporting rules over money transfers.

But the fines system has been repeatedly challenged in Federal Court. A three-justice panel of the appeal division finally quashed a $6,000 fine against Kabul Farms Inc., and effectively put the entire penalty program on hiatus.

The justices ruled that the way fines are calculated is nowhere clearly stated, leaving businesses in the dark, unable to effectively challenge the amounts. (The court accepted Fintrac's ruling that Kabul Farmshad indeed violated the regulations.)

In response, Fintracshort for the Financial Transactions and Reports Analysis Centre of Canadalaunched a wide-ranging review of the penalty program, expected to be completed this summer or more than two years after the adverse appeal court ruling.

Penalty review requires 'thorough analysis'

Agency officials defend the long wait, saying the review process is "complex and requires a thorough analysis" as well as "extensive research and consultations with legal experts and stakeholders."

In the meantime, the agency has repealed six notices of violation that had been in process against firms facing penalties; has not been able to fine any new firms since May 2016; and has worked to conclude eight Federal Court cases that are now in jeopardy after the legal setback in the appeal court.

The effect has been to suspend the agency's own enforcement mechanism even as new violations of the regulations pile up.

A spokesperson for Fintractold CBC News the agency's work continues, despite the blow to the penalty program.

"Fintraccontinues to monitor and assess the compliance of businesses," Erica Constant said in an email, " including observation letters, reporting entity validations, reports monitoring, compliance meetings, compliance assessment reports, examinations, follow-up examinations and non-compliance disclosures to police."

Sanctions need to be applied when non-compliance occurs.- Alesia Nahirny, executive director ofTransparency International Canada, on the importance of timely fines against firms violating rules against money laundering and terror financing

She suggested that once the penalty review is finished, likely this summer, companies identified as breaking the rules over the last two years could still be fined, and the six repealed notices of violation could be reinstated.

"Once Fintraccompletes the review of the Administrative Monetary Penalties program's policies and methodologies, the repealed Notices of Violations will be reassessed and actioned as appropriate," Constant said.

"Administrative Monetary Penalties for which proceedings had already concluded prior to the Federal Court of Appeal's decision will not be reassessed," she added.

The head of Transparency International Canada, a branch of the global anti-corruption group, said timely penalties are essential to the agency's work.

First bank ever finedgranted anonymity

"A transparent administrative monetary penalty system and other sanctions need to be applied when non-compliance occurs," said executive director Alesia Nahirny.

"TI Canada looks forward to seeing how Fintracwill improve the penalty regime system in a timely manner."

Fintracmade headlines after it announced in April 2016 that it had fined a Canadian bank $1.15 million under the AMP for breaking the rules but then granted the institution anonymity.

CBC News later reported the offending institution was Manulife Bank, and questions were raised about why GraldCossette, then Fintrac's director, protected the bank's name.

Cossette said he made the anonymity deal with Manulife to avoid the bank taking court action, with the aim of sending a strong signal to the banking community about the consequences of failing to follow the rules. Manulife was the first bank ever fined under the program, and the penalty was the largest ever levied on any firm, bank or otherwise.

But the Manulife case turnedout to be a prelude to a much wider problem, with the entire penalty system itself called into question. Fines under the AMP can range up to $500,000 for each transaction not reported to Fintrac.

The agency is already struggling with what it calls a "significant gap" in its ability to track money launderers and terrorist financing.

A landmark February 2015 ruling from the Supreme Court of Canada said lawyers are not required to report the transactions of their clients under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, a decision that effectively drew a dark curtain across many deals, including real estate transactions.

"This means that large cash transactions and suspicious transactions tied to a real estate transaction are not being reported to Fintracby lawyers," says an internal document obtained by CBC News under the Access to Information Act.

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