AML & ATF Regulation: Unreasonable to Tinker With Reasonable Grounds to Suspect – Proposed Regulatory Changes Increase Regulatory Risk
On July 4 FINTRAC released its proposed amendments to many of the regulations promulgated under the PC(ML)TFA. One of the proposed changes to the PC(ML)TFSTR would amend s.9(2) deleting “that constitutes reasonable grounds to suspect” and substituting it with “could reasonably be expected to raise reasonable grounds to suspect” so that the requirement would read:
The report shall be sent to the Centre within 30 days after the person or entity or any of its employees or officers first detects a fact respecting a financial transaction or an attempted financial transaction that could reasonably be expected to raise 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.
There are no amendments to s. 7 of the PC(ML)TFA proposed, nor to s. 9(1) of the PC(ML)TFR.
The same language is proposed in the new s. 54.2(3) of the PC(ML)TFR triggering when financial entities must take reasonable measures to determine whether an existing account holder is a politically exposed foreign person etc.
Although the purpose of the STR amendment may be to assist regulated entities in understanding when the 30-day clock starts to run, arguably the effect is to require reporting in situations when entities would have concluded there are no reasonable grounds to suspect a transaction is related to a ML or TF offence.
“Reasonable grounds to suspect” (“RGS”) is a standard borrowed from our criminal law. It is commonly used to identify the circumstances in which a police officer may employ investigative techniques that intrude on an individual’s privacy but in a limited manner and therefore do not engage the requirement to obtain a search warrant. However, the police officer must be in possession of objectively discernable facts supporting her/his conclusion that there are RGS, permitting a judge to subsequently review the circumstances of the intrusion and determine whether it was reasonable and therefore lawful.
RGS is a very low threshold in that it is concerned with possibilities as opposed to probabilities. It is certainly more than a mere suspicion in the sense that its positive determination must be objectively defensible to a third party. But it is less than the more frequently applied “reasonable and probable grounds to believe” standard engaging the reasonable probability that something is true.
Noteworthy is that, on the totality of the circumstances, RGS need not be the only inference that can be drawn from a particular fact or combination of facts. There may be an innocent explanation for a suspicious fact or facts. Our courts have held that this is acceptable in the criminal context because the RGS standard addresses the possibility of uncovering wrongdoing, and not the probability of doing so.
The difference between the use of RGS in AML/ ATF regulation and the criminal law is that in the former it is the threshold at which action is required i.e. the filing of an STR. In the latter, it justifies police action. There is no substantive difference, however, in definition.
In its present form, s. 9(2), in combination with s. 7 of the PC(ML)TFA and s. 9(1), permits an interpretation that a regulated entity may conclude that the circumstances surrounding a transaction do not support RGS that a transaction is related to a ML or TF offence and therefore need not be reported. On the existing case law interpreting RGS, it should be irrelevant that, on the objectively discernable facts, FINTRAC subsequently concludes otherwise, so long as the non-reporting is reasonable – the entity has considered all the circumstances, followed its satisfactory procedures and acted in good faith. That is because RGS need not be the only inference that can be drawn from a particular fact or combination of facts.
If amended as proposed, s. 9(2) will close the door on reasonable decisions not to report. If a fact is one that could reasonably be expected to raise RGS, it is irrelevant that the entity concluded otherwise. If a third party (i.e. FINTRAC or a Federal Court Judge) could conclude there are RGS, the transaction is reportable.
Some might argue that the amendment to s. 9(2) does not change the status quo and is consistent with the law as it presently stands. This would seem to be FINTRAC’s interpretation as disclosed in the position it frequently takes while conducting audits. But the fact is there are no decisions of the Federal Court supporting this interpretation and suggesting this analysis is incorrect.
FINTRAC may support its interpretation by suggesting an entity’s decision not to report can be “exculpated” by it establishing the defence of due diligence. But look at the result of that reasoning: FINTRAC is relieved from having to prove that an entity’s decision not to report was contrary to s. 7 of the PC(ML)TFA leaving the entity to its chances in proving its innocence by establishing due diligence. That is not a fair trade off.
It is good practice to err on the side of caution in STR reporting. The foregoing is not intended to suggest otherwise. An entity can be penalized (and penalized severely) only if it fails to report when required, not if it over reports. But if this amendment is implemented as proposed, many reporting entities should be rethinking their procedures to ensure that on facts of concern reporting is the rule and non-reporting the exception.