AML & ATF Regulation: Federal Court Quashes FINTRAC AMP
In considering an appeal from the imposition of an administrative monetary penalty (“AMP”) by FINTRAC, the Federal Court recently made two findings that are likely to impact: (1) the scope of due diligence as a full defence to the imposition of an AMP; and, (2) how FINTRAC calculates the amount of an AMP.
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PC(ML)TFA”) recognizes due diligence as a full defence to an alleged violation sanctioned through the imposition of an AMP. It provides that a party cannot be faulted for the breach of the PC(ML)TFA if it took reasonable steps to avoid the breach.
In law, due diligence is considered to be one branch of the common law defence of reasonable care, the other branch being the defence of reasonable mistake of fact. It is available as a full defence if the party reasonably believed in a mistaken set of facts which, if true, would render the act or omission forming the breach innocent. The PC(ML)TFA does not specify reasonable mistake of fact as a defence, suggesting that Parliament did not intend it to be available as such.
In Kabul Farms, the Applicant money services business appealed to the Federal Court the imposition of a relatively small AMP totalling $6000. In part, the Applicant relied on the defence of due diligence. In finding that the defence had not been made out, Fothergill J. defined due diligence as both due diligence and reasonable mistake of fact; in other words, the defence of reasonable care.
Fothergill J. provided no reasons for this finding. Perhaps that is because judicial officers and counsel can all be faulted for innocently but frequently referring in the vernacular to the defence of reasonable care as due diligence. One may seriously question whether Parliament can be equally faulted. In many other regulatory statutes, it has carefully specified that both due diligence and reasonable mistake are available defences to violations. However, unless challenged by the FINTRAC in future cases, Fothergill’s J. finding should stand providing an additional defence to penalized parties.
Although the Applicant failed to reverse the AMP on the merits, Fothergill J. did provide relief to it as to the amount of the imposed AMP.
In calculating the amount of an AMP, FINTRAC starts with the maximum amount permitted by the legislation, deducting from the maximum a percentage intended to reflect the impact of the breach on compliance with the legislation (the “harm base amount”). The amount can be further reduced based on the violator’s compliance history and its size or financial ability to pay the AMP. Overall, Parliament has specified in the PC(ML)TFA that the size of the AMP must be determined, in each case, taking into account that AMPs have as their purpose of AMPs to encourage compliance rather than punish, the harm caused by the violation and other prescribed factors.
In Kabul, there was no transparency in the Notice of Violation as to how FINTRAC calculated the harm base amount. In its submissions, FINTRAC advised that it applied an unpublished formula that would always result in the same amount for the violation at hand without regard to the circumstances of the violation. Fothergill J. found this inconsistent with the overall principle requiring that FINTRAC consider the harm caused by the violation in each case, He quashed the AMP and returned the matter to FINTRAC for re-determination of whether an AMP should be imposed upon the Applicant and, if so, in what amount.
This is a welcome decision. Its effect will assist those unfortunate enough to be penalized in the future in deciding whether the AMP levied against them should be appealed. However, one large disappointment with the decision is that Fothergill J. did not review FINTRAC’s practice of starting the AMP calculus with the maximum penalty amount available under the legislation. In comparison to criminal and other penal proceedings, only in the most egregious circumstances does a sentencing justice impose the maximum penalty and only then after a thorough consideration of the aggravating and mitigating circumstances of the offence and the offender. To do otherwise offends the principle of proportionality. In this regime, FINTRAC starts with the proposition that every violation is so serious it deserves the maximum penalty without any consideration of the violator’s attempts to comply with the breached violations at hand, short of reasonable care. This is to be distinguished from the violator’s compliance history prior to the violations at hand, considered later in the calculus. Arguably, this approach offends the overall principle that the purpose of AMPs is to encourage compliance rather than punish because it treats no efforts to comply by a violator equally with some efforts.