Is it Time to Rethink Suspicious Transaction Reporting?
With the amendment to ss.9(2) of the Suspicious Transaction Reporting (STR) Regulations coming into effect on June 1, it is appropriate to take a critical look at the scope and application of the obligation it, in combination with s.7 of the PC(ML)TFA, places on Regulated Entities (REs):
The person or entity shall send the report to the Centre as soon as practicable after they have taken measures that enable them to establish that there are reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering offence or a terrorist activity financing offence.
The change to “as soon as practicable” from within 30 days is intended to require reporting as soon as possible in the circumstances. The phrase “after they have taken measures” refers to the point in time when the RE has taken the measures necessary to determine whether there are reasonable grounds to suspect (“RGS”) that a transaction is related to ML or TF offences
In addition, the amended provision changes the point from which the reporting clock starts to run, from the date that the RE detects a fact that constitutes RGS, to “after they have taken measures”. More on this follows below.
Unfortunately, what remains unchanged is the threshold at which an RE is required to file an STR, specifically, RGS. In practice, it has emerged as a concept ill-suited for use in the AML context. In the result, REs are left exposed to hind-sighted, second-guessing by FINTRAC compliance officers, who, on the same set of facts, frequently conclude during compliance reviews, that, contrary to the RE’s conclusion, there was RGS requiring the RE to report one or more transactions as suspicious.
Within the criminal and constitutional law, RGS is a legal standard developed by the courts to authorize police investigative techniques that intrude on an individual’s privacy, but in a limited manner not engaging the requirement to obtain a search warrant. So long as the reasons for the suspicion are reasonably held in that they are objectively demonstrable to a judge, the search is lawful, even if a third party may have come to the opposite conclusion that, under the same circumstances, there was an absence of RGS justifying the search.
That is because RGS need not be the only conclusion that can be reached in relation to a particular transaction. RGS is concerned with possibilities, not probabilities, meaning two persons may reasonably form different conclusions about a specific transaction. What is important is that the circumstances that cause a party to conclude there is RGS are objectively demonstrable to a third party.
As to the content of the circumstances, within the context of criminal law enforcement, the Supreme Court of Canada (R. v. Chehil,  3 S.C.R. 220), has stressed:
Reasonable suspicion must be assessed against the totality of the circumstances. The inquiry must consider the constellation of objectively discernible facts that are said to give the investigating officer reasonable cause to suspect that an individual is involved in the type of criminal activity under investigation. This inquiry must be fact-based, flexible, and grounded in common sense and practical, everyday experience….
Moreover, reliance on a single factor to determine RGS is the exception and not the rule:
While some factors, such as travelling under a false name, or flight from the police, may give rise to reasonable suspicion on their own…other elements of a constellation will not support reasonable suspicion, except in combination with other factors. Generally, characteristics that apply broadly to innocent people are insufficient, as they are markers only of generalized suspicion. The same is true of factors that may “go both ways”, such as an individual’s making or failing to make eye contact. On their own, such factors cannot support reasonable suspicion; however, this does not preclude reasonable suspicion arising when the same factor is simply one part of a constellation of factors.
It is this aspect of RGS that has caused difficulty in its application in the AML context. For some transactions, a single, obvious fact may provide the basis for RGS. But, too often in compliance reviews, FINTRAC officers seize on one or two facts, less obvious in combination with others, supporting its disagreement with the RE under review that one or more transactions were not reportable because the RE, relying on the constellation of available facts, has concluded there was an absence of RGS.
The officers’ practice may appear to be consistent with the current reference in ss.9(2) to “a fact” that constitutes RGS. But, it is inconsistent with the Supreme Court’s emphasis on a constellation of factors, reflected throughout the FINTRAC’s STR Guidance, which extensively lists ML/TF indicators, separated by industry.
It does not assist that, within the AML context, there is no judicial finding, at least yet, questioning the lawfulness of FINTRAC’s approach. But by substituting its conclusion for that of the RE, FINTRAC officers disregard: (1) the obligation that s.7 and ss.9(2) place on REs (not FINTRAC officers) to come to a conclusion; and, (2) that the law interpreting RGS permits two competing conclusions, so long as they are both objectively demonstrable.
In the result, the RE may be left with a findings letter that concludes that the RE failed to file one or STRs, jeopardizing its commercial relationships with other REs, in addition to exposing it to an AMP.
Deleting the reference to “a fact” from ss.9(2) could reasonably be construed as an attempt to bring it into alignment with the Supreme Court’s interpretation of RGS. But, the Regulatory Impact Statement accompanying the amending regulation makes no reference to the reason for the amendment, other than stating that it is intended to reflect the current standard practice of many REs. Moreover, the STR Guidance continues to imply that the presence of a single indicator or fact can support a finding of RGS (“On its own, a single ML/TF indicator may not appear suspicious…”). Rather ironic, given the extensive listing of ML/TF indicators throughout the remainder of the Guidance. Most importantly, the practice of Compliance Officers conducting reviews after the amendment was Gazetted in June 2019 has not changed.
Post-amendment, there is nothing to suggest that the use of RGS as a standard requiring action, as opposed to authorizing it, will not remain problematic. RGS works within the criminal domain as an authorizing standard because the lawfulness of police conduct in the course of an investigation is always an issue that can be tested before an impartial judge at trial. Absent the appeal of an AMP to the Federal Court (an unenviable position no RE wants to be in), there is no such impartial mechanism in AML/ATF regulation that can operate as a check against the adverse findings of a Compliance Officer. In the result, the use of RGS as the reporting threshold is only fair to REs, and, for that matter, lawful, if FINTRAC through its compliance officers accepts that REs can reasonably come to a conclusion, contrary to that of FINTRAC, that a transaction is not reportable. Unfortunately, that is seldom, if ever, the case.
FINTRAC’s approach is more consistent with a reporting requirement that emphasizes the need for reporting when the RE has enough information available to it to form a constructive suspicion that a transaction is subject to reporting. The suspicion is “constructive” because, on the information available to it, the RE ought to conclude the transaction at issue is suspicious and therefore reportable. The analysis does not permit the possibility of contradictory conclusions inherent in that for RGS, because “ought to have reported” means that a reasonable RE, looking at the available information before it, would have concluded that the transaction was suspicious and therefore subject to reporting.
The effective use of constructive reporting standards in regulatory reporting provisions is nothing novel in Canadian law. There are probably other equally effective means. Parliament obviously had its reasons in opting for the use of RGS, but, respectfully, its decision to do so deserves reconsideration.
Unless and until that happens, here is some practical (but not legal) advice for REs: After referring to the relevant industry-specific ML/TF indicators within the FINTRAC Guidance, in addition to any of its own, garnered through its operating experience, an RE concludes that a transaction could, objectively, in the judgement of a third party, be determined to be suspicious and subject to reporting, it should err on the side of caution by reporting it as soon as practicable. FINTRAC may subsequently criticize the RE for over-reporting (that’s right, for being too careful), but, unlike the situation of under-reporting, it cannot be penalized.
Update: On April 21, FINTRAC released its new guidance on STRs that is intended to come into force on June 1, replacing that dated January 2019. Included is the following information as to reporting as soon as practicable:
As soon as practicable should be interpreted to mean that you have completed the measures that have allowed you to determine that you reached the RGS threshold and as such the development and submission of that STR must be treated as a priority report. FINTRAC expects that you are not giving unreasonable priority to other transaction monitoring tasks and may question delayed reports. The greater the delay, the greater the need for a suitable explanation. STRs can be complex yet you must treat them as a priority and ensure they are timely; you must also complete the measures that enabled you to conclude that you have RGS the commission of an ML/TF offence before you submit the report to FINTRAC.
What remains unchanged is FINTRAC’s advice that RGS means that an RE can articulate its suspicion in such a way that another RE with similar knowledge, experience and training would, based on the same information, likely reach the same conclusion. Respectfully, this remains a distortion of RGS, which, if interpreted properly, means another RE with similar knowledge, experience and training and, based on the same information, may or may not arrive at the same conclusion. FINTRAC’s interpretation remains more consistent with constructive suspicion as the reporting standard.