Guidance for industry participants as anti-money laundering examinations restart

After a temporary pause, Canada’s anti-money laundering regulator, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), is now resuming desk examinations of industry players’ potential breaches of anti-money laundering (AML) and anti-terrorist financing (ATF) legislation, amid ongoing efforts to enforce compliance in the industry.

Additionally, the Office of the Superintendent of Financial Institutions (OSFI) is resuming its efforts to collaborate with FINTRAC on AML and ATF supervision for federally regulated financial institutions (FRFIs). FINTRAC will assume the primary responsibility for assessing FRFI compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and OSFI will focus on the prudential implications of FRFIs’ AML and ATF compliance, in an effort to eliminate a duplication of efforts and reduce the regulatory burden on FRFIs¹.

This article provides guidance for reporting entities (REs) on how best to prepare for a FINTRAC examination, while considering the challenges posed by the ongoing pandemic.

Desk examinations resume

FINTRAC’s response to COVID-19 included their announcing a temporary suspension of new examinations with a focus on examinations already in progress. FINTRAC introduced the suspension in recognition of the challenges for REs in meeting their obligations under the PCMLTFA, along with reduced staffing and the reprioritizing by REs of internal resources.

Financial institutions should be mindful of FINTRAC’s evolving approach to the imposition of administrative monetary penalties and their subsequent eagerness to step up enforcement efforts.

During the examination freeze, FINTRAC continued to focus on reporting issues, noting that RE should prioritize submitting Suspicious Transaction Reports (STRs). Importantly, since June 1, 2020 STRs must be filed “as soon as practicable” (instead of 30 days after the day of detection), following measures to establish that there are reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering or terrorist financing offence².

FINTRAC maintains that it will be flexible and reasonable in its assessments, including with respect to:

• providing REs with additional time to prepare necessary documentation and respond to requests; and
• assessing overall compliance with the PCMLTFA, and with time-bound obligations and the requirement to periodically update policies and procedures.

FINTRAC will not resume onsite examinations until the COVID-19 restrictions are lifted.

Preparing for a FINTRAC examination: be proactive

REs should adopt a proactive approach in order to reduce risks of enforcement action before and throughout a FINTRAC examination. For the duration of the pandemic, REs should also keep comprehensive records whenever they are not able to meet their compliance obligations, including recording all measures taken to mitigate the risks of non-compliance, in order to provide additional colour regarding deficiencies. REs should also be mindful of FINTRAC’s evolving approach to the imposition of Administrative Monetary Penalties (AMPs) following decisions of the Federal Courts in 2016, and FINTRAC’s subsequent eagerness to step up enforcement efforts and issue AMPs more aggressively.

The overall objectives for REs in taking this proactive approach should be to: 1) avoid the issuance by FINTRAC of a Notice of Violation, which now automatically results in being named publicly; 2) avoid the imposition of significant penalties (as the risk of significant penalties has increased); and 3) reduce the risk of the imposition of a compliance agreement³.

While it remains to be seen how AMPs will be imposed in light of COVID-19, REs should prepare to reduce risks of enforcement action at each stage of a FINTRAC examination, as follows:

1. Implementation or audit of AML processes

REs should design and/or update internal audit/sampling procedures to build a record of ensuring compliance. This will allow REs to identify breaches to their policies and practices. REs should also consider making voluntary self-declarations of non-compliance to FINTRAC before receiving notices of upcoming FINTRAC reviews, which may prevent FINTRAC from issuing an AMP.

2. FINTRAC assessments

During the assessment stage consisting of interviews and a review of records and transactions, REs should provide FINTRAC with factual information while remaining aware of the risks associated with information disclosure. REs should also focus on demonstrating the strength of internal controls. If there is a breach identified, REs should rapidly correct it as required.

3. Compliance Assessment Report

REs have 30 days following receipt of a Compliance Assessment Report from FINTRAC to provide additional information to FINTRAC if a penalty is recommended. REs should thoroughly review the report and provide comments to FINTRAC with respect to the:

• fact situation;
• RE’s legal position;
• soundness of remediation plans and control measures; and
• imposition of a penalty.
  
  

4. Recourse

REs can make representations to FINTRAC’s Director for review of the notice of violation and the AMP amount. REs should advocate against the issuance of a Notice of Violation to remove or reduce an AMP, and should develop and submit representations that are organized, comprehensive and supported by legal arguments.

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¹ In connection with this transition, OSFI is considering whether amendments to Guideline E-13 are needed and if Guideline B-8 should be rescinded or incorporated into a revised Guideline E-13 and is seeking FRFI views by November 30, 2020.

² REs must now take the following measures as part of the process of submitting STRs: (i) screening for and identifying suspicious transactions; (ii) assessing the facts and context surrounding the suspicious transaction; (iii) linking money laundering/terrorist financing indicators to the RE’s assessment of the facts and context; and (iv) explaining the RE’s grounds for suspicion in an STR, where the RE articulates how the facts, context and money laundering/terrorist financing indicators allowed the RE to reach its grounds for suspicion.

³ Penalty amounts continue to range from $1 to $1,000 per violation for minor violations, $1 to $100,000 per violation for serious violations, and for very serious violations, from $1 to $100,000 per violation for individuals, and $1 to $500,000 for entities.