One Issue FINTRAC Doesn’t Include in its New Suspicious Transaction Reporting Guidance
Failing to file a Suspicious Transaction Report (“STR”) is as serious as it can get when it comes to violations, with penalties that can be assessed up to a maximum of $500,000 per occurrence. The new Guidance, released in January 2019, provides a description of the threshold that triggers the reporting requirement for Regulated Entities (“REs”), Reasonable Grounds to Suspect (“RGS”). But, it omits a key characteristic of RGS of which REs need to be aware and prepared to respond.
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. An everyday example is when a police sniffer dog is used to selectively check airport luggage for drugs.
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 grounds to believe” standard engaging the reasonable probability that something is true.
The new Guidance includes much that speaks to the foregoing, with this exception: RGS need not be the only conclusion that can be reached in relation to a particular transaction. Because RGS is concerned with possibilities and not probabilities, our law recognizes that two persons may reasonably form different conclusions about a transaction. What is important is that, the circumstances that cause a party to conclude there is RGS, are objectively identifiable to a third party.
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 as opposed to permitted; that is, the filing of an STR versus conducting a warrantless search. Although the conclusion – RGS – in both areas must be objectively defensible to a third party, in the AML/ATF context the likely third party – a FINTRAC Compliance Officer conducting an examination – is going to be concerned as to why a particular transaction the Officer reasonably suspects is suspicious was not reported as opposed to those that were. In other words, the RE must be in a position that it can demonstrate the reasonableness of its grounds not to suspect and therefore not report just as it should be when it reports.
The new Guideline hints at this scenario:
There may be times where you initially assessed transactions as suspicious, but as a result of your re-assessment, later negated the suspicions and determined the transactions reasonable. As a best practice, you may want to document the rationale and keep a record as to why the suspicion was negated. Keeping a record of these decisions is not required but may be helpful to you in the context of a FINTRAC assessment.
Respectfully, the last sentence is a huge understatement. In the situation when, during the course of an examination, a Compliance Officer concludes that a re-assessed, unreported, transaction should have been reported as suspicious, the RE is in real jeopardy and could be penalized unless it can provide a reasonable explanation for not reporting. This speaks to the need to document non-reporting, and document it with the same rigor Part G of the STR requires. Specifically, it should include the information necessary to permit the Compliance Officer to determine that it was reasonable for the CAMLO to conclude, after examining the facts, context and ML/TF indicators, that the unreported transaction was not suspicious. Should a penalty still be assessed, such a record will also be essential to support the RE in any review or appeal that might follow.
The foregoing is not intended to depart from I have written in previous articles: it is good practice to err on the side of caution in STR reporting. An entity can be penalized only if it fails to report when required, not if it over reports.