Docket: T-1128-11
Citation:
2015 FC 628
Ottawa, Ontario, May 15, 2015
PRESENT: The
Honourable Mr. Justice Fothergill
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BETWEEN:
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KABUL FARMS INC
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Applicant
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and
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HER MAJESTY THE
QUEEN
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Respondent
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JUDGMENT AND REASONS
I.
Introduction
[1]
Kabul Farms Inc. [the Applicant] has brought an
appeal under s 73.21 of the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act, SC 2000, c 17 [the Act] of a decision made by the
Director of the Financial Transactions and Reports Analysis Centre of Canada
[FINTRAC] to impose an administrative monetary penalty on the Applicant in the
amount of $6,000. The penalty was imposed as a result of the Applicant’s alleged
failure to develop and apply written compliance policies and procedures, perform
a risk assessment, and develop a written training program for its employees and
agents in accordance with the Act and its Regulations.
[2]
For the reasons that follow, the appeal is
allowed in part and the matter is returned to the Director for re-determination
of whether an administrative monetary penalty should be imposed upon the
Applicant and, if so, the amount of that penalty.
II.
Background
[3]
The Applicant is a family-run business located
in the Greater Toronto Area. It operates a grocery store and a butcher shop together
with a small restaurant. It also transfers funds on behalf of its customers to
Afghanistan, Pakistan and Bangladesh through a “hawala”
system. According to the corporation’s representative, the amounts transferred
are small and are typically used to support family members in these
impoverished countries. On August 22, 2008, the Applicant registered with FINTRAC
due to its business of “remitting/transmitting funds”.
[4]
On January 5, 2010, a FINTRAC compliance officer
communicated with Costa Abinajem, an authorized representative of the Applicant.
The officer informed Mr. Abinajem, both by telephone and by letter, that the
Applicant had been selected for a compliance examination under the Act and its
Regulations. The period under examination would be from October 1, 2009 to
January 15, 2010, and the examination would take place on February 22, 2010. FINTRAC’s
letter also requested that the Applicant provide certain documents in advance
of the examination.
[5]
The examination proceeded as scheduled. The Applicant
provided the compliance officer with a document titled “Money
Transfers (Hawala) Policy” and a list of money transfers that had taken
place between November 1, 2009 and January 31, 2010. The document confirmed
that during those three months the Applicant conducted 44 international money
transfers with a total value of $2,905.
[6]
On August 6, 2010, another FINTRAC officer sent
a letter containing the findings of the examination to Yadgar Mohammad, the Applicant’s
Director, and to Shanawazi Sardar, the Applicant’s President. The letter stated
that the Applicant was not in compliance with the Act.
[7]
First, the officer noted that the Applicant had
an obligation to implement a compliance regime as specified in s 71(1) of the Proceeds
of Crime (Money Laundering) and Terrorist Financing Regulations,
SOR/2002-184 [the Regulations]. The Applicant’s policies and procedures were found
to be inadequate. The following matters needed to be addressed: record-keeping
measures, reporting obligations, suspicious transaction indicators and
procedures for identifying politically exposed foreign persons. An ongoing
documented training program also had to be put in place. In addition, no risk
assessment of the Applicant’s money transfer activities had ever been
conducted.
[8]
Second, the officer noted that the Applicant had
an obligation to keep a transaction ticket for each foreign currency exchange
transaction as specified in s 30(f) of the Regulations. In particular, the officer
stated that the Applicant should record the method and currency of payment for
each transaction.
[9]
The letter concluded by asking the Applicant to
provide an action plan identifying the steps that had been or would be taken to
rectify these matters within 30 days. The letter included the following
warning: “independent of other compliance actions,
deficiencies such as those cited in this letter could lead to civil or criminal
penalties”.
[10]
Later the same day, Mr. Abinajem sent an updated
hawala policy to FINTRAC.
[11]
On August 13, 2010, the FINTRAC officer
responded with a letter addressed to both Mr. Mohammad and Mr. Sardar. The
officer stated that FINTRAC continued to have concerns regarding the updated
policy.
[12]
With respect to s 71(1) of the Regulations, the
officer observed that only minimal changes had been made to the policy – mainly
the addition of a list of indicators for suspicious transactions. The policy continued
to be deficient with respect to record-keeping, client identification and
reporting obligations. There was no procedure for reporting electronic fund
transfers, suspicious transactions or terrorist property, nor any details regarding
the kinds of records that would be kept. A risk assessment still had not been
performed. The training plan was not acceptable, as it informed staff that “you may be asked to attend a training session or
rules-update session about once every year”. The officer explained that
a training plan must describe the “what, who, how and
when” of training. It could not be optional. All agents and staff had to
be trained on an ongoing basis.
[13]
The officer also noted that the updated policy
did not address the obligation to keep a transaction ticket for each foreign
currency exchange transaction in accordance with s 30(f) of the Regulations.
[14]
The officer requested an updated action plan
within 15 days. The warning that deficiencies could lead to civil or criminal penalties
was repeated. No reply was received from the Applicant by August 31, 2010, and
accordingly FINTRAC sent another letter requesting a response.
[15]
Mr. Abinajem eventually replied on September 10,
2010. He said that he had amended the policy after consulting FINTRAC’s website,
and that it now incorporated those rules that he believed could apply to the Applicant.
He emphasized that the Applicant is a small company that does not specialize in
transferring funds. He explained that funds are usually transferred out of the
country only once or twice a year through a banker acting on the instructions
of “the owner”. None of the employees were
permitted to wire money. Mr. Abinajem also stated that he could not institute
extensive training for his cashiers because of high employee turnover. He
concluded by expressing his belief that the Applicant had complied with all of
FINTRAC’s policies, rules and recommendations.
[16]
On December 7, 2010, FINTRAC issued a Notice of
Violation to the Applicant. It identified four violations that had been
committed as of February 22, 2010 (the date of the examination):
1. Failure to develop and apply written compliance policies and
procedures that are kept up to date, contrary to s 9.6(1) of the Act and s
71(1)(b) of the Regulations.
2. Failure to assess and document the risk referred to in s 9.6(2) of
the Act, taking into consideration prescribed factors, contrary to s 9.6(1) of
the Act and s 71(1)(c) of the Regulations.
3. Failure to develop a written ongoing compliance training program for
employees and agents, contrary to s 96.1(1) of the Act and s 7(1)(d) of the
Regulations.
4. Failure to keep prescribed records, contrary to s 6 of the Act and s
30(f) of the Regulations.
[17]
The Notice of Violation proposed a total
monetary penalty of $7,120. However, it also informed the Applicant of its
right to make representations to the Director of FINTRAC. On January 5, 2011 Mr.
Abinajem wrote to FINTRAC requesting details of each violation and the method
for calculating the penalty.
[18]
On January 24, 2011, FINTRAC responded to Mr.
Abinajem. The officer stated that the four violations resulted in penalties of
$50,000; $75,000; $25,000; and $28,000 respectively. A 20% reduction was
applied to reflect the Applicant’s compliance history, and a further 95%
reduction was applied to reflect its ability to pay, given that the Applicant
is “a micro-business with less than 5 full-time
employees”. The adjusted total was therefore $7,120. The officer gave Mr.
Abinajem a further 15 days to make submissions.
[19]
The Applicant did not respond within 15 days.
However, on March 18, 2011, Mr. Abinajem objected to each penalty and alleged
violation for the following reasons.
1.
The Applicant is not a money services business open
to the public. He suggested that this placed it outside the scope of the Act
and Regulations.
2.
The updated hawala policy addressed the
deficiencies raised by FINTRAC’s officers.
3.
The penalties were draconian because there was
no evidence of actual money laundering or terrorist financing. Nor were any
transfers above the legal limit.
4.
It is unclear how and why FINTRAC granted the
Applicant two consecutive penalty reductions of 20% and 95%. He expressed
gratitude for the reductions, but added that he could not understand the
decision-making process and suggested that a 100% reduction would be
appropriate.
5.
The transfers did not cause any harm to anyone
except to financial institutions by eating into their profits.
6.
FINTRAC lacked jurisdiction over the Applicant
because it did not transfer money electronically. The owner simply transmitted
instructions by telephone.
[20]
On June 8, 2011, the Acting Deputy Director of
FINTRAC [the Director] rendered his decision. He found that the Applicant had
committed the first three violations but not the fourth. The total administrative
monetary penalty was therefore reduced to $6,000.
[21]
On July 8, 2011, the Applicant filed a Notice of
Application with this Court. In its written submissions to this Court, the
Applicant stated that it no longer offers a hawala service.
III.
Issues
[22]
The following issues are raised by this appeal:
A.
Whether the Applicant’s activities fell within
the scope of the Act and Regulations;
B.
Whether the Director’s finding that Applicant had
committed the three violations was reasonable; and
C.
Whether the administrative monetary penalty
imposed on the Applicant was reasonable.
IV.
The Director’s Decision
[23]
In his decision, the Director of FINTRAC noted
that the Applicant had an obligation to comply with the Act because “[o]ffering money transfers to customers, regardless of
whether it is offered in conjunction with other retail activities”, is
an activity that is subject to the Act. When the Applicant transmitted or
remitted funds, it acted as a money services business. In addition, s 5 of the
Act applies to persons and entities that remit or transmit funds “by any means”. An “electronic
funds transfer”, as defined in the Regulations, includes the
transmission of instructions by telephone.
[24]
With respect to the first violation, the Director
found that the Applicant’s policies and procedures did not comply with certain
requirements, such as reporting suspicious transactions, reporting large cash
transactions and record-keeping. He also noted that corrective measures that
were implemented after the date of the examination had no bearing on his
decision, because the period of examination was in respect of the preceding
four months.
[25]
The Director’s decision did not expand upon the
reasons given previously for the finding that the Applicant had committed the
second and third violations. In earlier correspondence, FINTRAC concluded that
the Applicant had never conducted a formal risk assessment and had not
implemented an acceptable training plan for its employees and agents.
[26]
The Director then stated that the finding
regarding the fourth violation was withdrawn, and the penalty was reduced
accordingly.
[27]
With respect to the calculation of the penalty,
the Director noted that FINTRAC considers a number of factors, including any
harm done, compliance history and ability to pay. In addition, the Proceeds
of Crime (Money Laundering) and Terrorist Financing Administrative Monetary
Penalties Regulations, SOR/2007-292 [the Penalties Regulations] list all of
the possible offences and classify them as minor, serious or very serious. A
range of penalties for each class is also prescribed.
V.
Analysis
[28]
The decision under review involves the
application of specialized legislation to particular facts. The standard of
review is reasonableness (Dunsmuir v New Brunswick, 2008 SCC 9 at paras
53-54; Max Realty Solutions Ltd v Canada (Attorney General), 2014 FC 656
at paras 27-32 [Max Realty]; Homelife/Experience Realty Inc v Canada
(Finance), 2014 FC 657 at paras 27-32 [Homelife]).
A.
Whether the Applicant’s activities fell within
the scope of the Act and Regulations.
[29]
The Applicant concedes that a hawala remittance
system is subject to the Act. However, it argues that there must be “some differentiation” between a minor operation such
as the one conducted by the Applicant and a large-scale money transfer business.
The Applicant remitted small sums ranging from $50 to $150 to clients’ family
members in impoverished countries. The hawala system was not run for profit,
but rather as a marketing tool in support of the Applicant’s grocery store,
butcher shop and restaurant. The Applicant almost always waived the 2% fee.
Furthermore, there is no evidence that the Applicant’s hawala system ever
contributed to money laundering or terrorist financing.
[30]
Despite its small scale, there can be no doubt
that the Applicant’s hawala business fell within the scope of the Act and its
Regulations. Subsection 5(h) of the Act provides as follows:
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5. This Part
applies to the following persons and entities:
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5. La présente
partie s’applique aux personnes et entités suivantes :
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h) persons and
entities engaged in the business of foreign exchange dealing, of remitting
funds or transmitting funds by any means or through any person, entity or
electronic funds transfer network, or of issuing or redeeming money orders,
traveller’s cheques or other similar negotiable instruments except for
cheques payable to a named person or entity…
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h) les personnes
et les entités qui se livrent aux opérations de change, ou qui exploitent une
entreprise qui remet des fonds ou transmet des fonds par tout moyen ou par
l’intermédiaire d’une personne, d’une entité ou d’un réseau de télévirement
ou qui émet ou rachète des mandats-poste, des chèques de voyage ou d’autres
titres négociables semblables, à l’exclusion des chèques libellés au nom
d’une personne ou d’une entité…
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[31]
The definition of “electronic
funds transfer” provided in s 1(2) of the Regulations explicitly
includes the provision of instructions by telephone.
[32]
Small hawala systems such as the one operated by
the Applicant are not exempt from the Act, nor would one expect them to be. The
amounts remitted in this case were modest, but the capacity to transfer larger
sums existed. The Applicant’s revised hawala policy contemplated that amounts up
to $3,000, and even as large as $10,000, could be transferred, although this
never occurred. The Act and its Regulations are intended, among other things,
to prevent the abuse of vulnerable money services businesses such as the one operated
by the Applicant. The Applicant’s activities fell within s 5(h) of the Act and were
therefore subject to the Act and its Regulations.
B.
Whether the Director’s finding that Applicant
had committed the three violations was reasonable.
[33]
With respect to the first violation, the Applicant
says that its “Money Transfers (Hawala) Policy”
was a good-faith attempt to establish a compliance regime. After receiving
notice of FINTRAC’s concerns, the Applicant amended its policy to address them,
notably by listing indicators of suspicious transactions for the benefit of its
employees. The Applicant maintains that its policy was an appropriate
compliance regime given the limited nature of its money transfer business.
[34]
With respect to the second violation, the Applicant
says that its policy listed indicia of suspicious transfers. Moreover, a log
was kept with the name and telephone number of each client. The policy
instructed employees to verify valid government-issued photo identification
before accepting sums from clients. These precautions were sufficient to
minimize risk. The Director’s decision to withdraw the fourth alleged violation
confirmed that the Applicant kept adequate records for the purposes of the Act.
[35]
With respect to the third violation, the Applicant
says that its compliance training program was adequate given that it is a small
family-run business. The transfers themselves were always overseen by the
owner, who made the transfers on only a few occasions each year. A hawala system
does not entail the immediate transfer of funds from Canada to places abroad.
Employees were instructed to keep the hawala funds separate from the grocery
proceeds. It was impractical to provide ongoing training to cashiers due to
regular turnover. While a more comprehensive training program might be appropriate
for a business with employees who regularly and immediately transfer funds
abroad, it should not be required for casual employees who are not permitted to
transfer funds themselves. The employees received adequate instructions for
accepting and recording funds. The owner made the final decision to complete a particular
transfer following his assessment of risk. Since the owner developed the hawala
policy, he could hardly be expected to regularly train himself on how to follow
it.
[36]
The Respondent points out that the period under
examination that gave rise to the Notice of Violation was October 1, 2009 to
January 15, 2010. The Applicant did not have adequate written compliance
policies and procedures in place at the time that the examination took place on
February 22, 2010. The hawala policy presented to FINTRAC on that date did not
meet the requirements of the Act or Regulations. The Applicant’s policies and
procedures did not properly address reporting obligations, suspicious
transaction indicators, or training. The Applicant effectively acknowledged
that its policy was inadequate when it submitted an updated policy which
addressed some, but not all, of the deficiencies identified by FINTRAC.
[37]
I agree with the Respondent. The policy that was
in effect when the examination took place was concerned only with the limited activities
of the cashiers, and provided no detail regarding the procedures to be followed
by the “owner” or any other participants in the
transaction when funds were transferred abroad. There were no procedures to identify
or minimize the risk of suspicious transactions, nor any reporting requirements.
The Director reasonably concluded that the Applicant committed the first
violation.
[38]
The Applicant never conducted a risk assessment of
its activities. The absence of evidence of any actual money laundering or
terrorist financing is immaterial. Given that no risk assessment was ever conducted,
the Director reasonably concluded that the Applicant committed the second
violation.
[39]
Finally, the Applicant did not develop or maintain
an ongoing written compliance training program for its cashiers, the “owner” or any other participant in the transaction
when funds were transferred abroad. The policy shown to FINTRAC during the
examination did not address training at all. Given the absence of any kind of
training program, the Director reasonably concluded that the Applicant had
committed the third violation.
[40]
The Applicant also raises a defence of due
diligence. Although due diligence is recognized as a defence in s 73.24 of the
Act, it was not raised by the Applicant, either expressly or implicitly, in its
submissions to the Director. Even if this Court were to permit the defence to
be raised for the first time on appeal, it is simply unavailable to the
Applicant in this case. In R v Sault Ste Marie, [1978] 2 S.C.R. 1299 at
1326, the Supreme Court described the defence of due diligence as follows:
The defence will
be available if the accused reasonably believed in a mistaken set of facts
which, if true, would render the act or omission innocent, or if he took all
reasonable steps to avoid the particular event.
[41]
As the Ontario
Court of Appeal observed in R v Raham, 2010 ONCA 206, 99 OR (3d) 241 at para 48:
The due diligence defence relates to the
doing of the prohibited act with which the defendant is charged and not to the
defendant’s conduct in a larger sense. The defendant must show he took
reasonable steps to avoid committing the offence charged, not that he or she
was acting lawfully in a broader sense.
[42]
The evidence relied upon by the Applicant in
asserting a defence of due diligence relates primarily to events that occurred
after the date of the examination. There is no evidence that prior to the date
of FINTRAC’s examination on February 22, 2010 the Applicant took all reasonable
steps to comply with the specific provisions of the Act and its Regulations
that gave rise to the Notice of Violation. The Applicant’s policy that was in effect
on February 22, 2010 demonstrated only rudimentary efforts to address the
minimum requirements of a compliance policy as described in FINTRAC’s Guideline
4, Implementation of a Compliance Regime, i.e., reporting,
record-keeping, client identification, risk assessment and risk mitigation. Some
of the requirements were not addressed at all, e.g., reporting and risk
mitigation. I am satisfied that the Director’s conclusions regarding the
Applicant’s non-compliance with the Act and its Regulations were well-founded,
and they were therefore reasonable.
C.
Whether the administrative monetary penalty
imposed on the Applicant was reasonable.
[43]
Administrative monetary penalties for
non-compliance are addressed in ss. 73.11 to 73.19 of the Act. Section 73.11
provides as follows:
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73.11 Except if a penalty is fixed under paragraph 73.1(1)(c), the
amount of a penalty shall, in each case, be determined taking into account
that penalties have as their purpose to encourage compliance with this Act
rather than to punish, the harm done by the violation and any other criteria
that may be prescribed by regulation.
[…]
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73.11 Sauf s’il est fixé en application de l’alinéa 73.1(1)c), le
montant de la pénalité est déterminé, dans chaque cas, compte tenu du
caractère non punitif de la pénalité, celle-ci étant destinée à encourager
l’observation de la présente loi, de la gravité du tort causé et de tout
autre critère prévu par règlement.
[…]
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[44]
The Applicant says that it is unclear why
certain violations were deemed “serious” and
others “minor”. However, a lengthy schedule
attached to the Penalties Regulations classifies every possible violation as “minor”, “serious” or “very serious”. Section 5 of the same Regulations
establishes a range of penalties for each category. In this case, the Director
applied the correct classification to each of the violations.
[45]
It is considerably less clear how the Director
arrived at the “harm base amount” of $50,000,
$75,000 and $25,000 for the three violations. Counsel for the Respondent said
in the course of oral submissions that the Director applies an unpublished
formula to determine the penalty that results from a particular violation. Pursuant
to the formula, a failure to develop and apply written compliance policies and
procedures, contrary to s 9.6(1) of the Act and s 71(1)(b) of the Regulations,
will always result in a fine that is 50% of the maximum available. A failure to
assess and document the risk referred to in s 9.6(2) of the Act, contrary to s
9.6(1) of the Act and s 71(1)(c) of the Regulations, will always result in a
fine that is 75% of the maximum available. A failure to develop a written
ongoing compliance training program for employees and agents, contrary to s
96.1(1) of the Act and s 7(1)(d) of the Regulations, will always result in a
fine that is 25% of the maximum available. This formula is applied regardless
of the particular circumstances in which the violation takes place.
[46]
Section 73.11 of the Act requires the Director
to impose a penalty “taking into account that penalties
have as their purpose to encourage compliance with this Act rather than to
punish, the harm done by the violation and any other criteria that may be
prescribed by regulation.” The application of a rigid formula that does
not take into account the specific circumstances in which a violation occurs is
inconsistent with the plain language of the Act.
[47]
The Respondent argues that harm may be assessed
without regard to the specific circumstances of the violation, citing this
Court’s decision in Mega International Commercial Bank (Canada) v Canada
(Attorney General), 2012 FC 407 at paras 55-57 [Mega Bank]. In that
case, which concerned an administrative monetary penalty imposed by the
Financial Consumer Agency of Canada, Justice de Montigny ruled that actual harm
was not a prerequisite to the imposition of a penalty for failing to make complete and accurate information
available to the public:
[56] … The Regulations
are akin to consumer protection provisions, and their purpose is to provide
customers with better information regarding financial products offered by
competing banks, so that they are in a position to make informed choices.
As such, it can be presumed that harm is established whenever a bank does not
adhere to the requirements of the Regulations, thereby depriving their
consumers of the information and disclosure to which they are entitled.
[48]
The Act at issue in this appeal is not consumer
protection legislation, nor is it concerned with ensuring the disclosure of
information to ensure that customers are in
a position to make informed choices. Furthermore, this Court’s decision
in Mega Bank does not stand for the proposition that the degree of
actual harm should not be considered in imposing an appropriate penalty; only
that actual harm is not a prerequisite. Here, the Director made no assessment
of any actual harm that resulted from the Applicant’s non-compliance. Nor did
he explain why the penalty for the second violation was three times higher than
that for the third. Furthermore, the Respondent did not disclose to the
Applicant the use of a rigid formula to calculate the penalties, and thereby
denied it the opportunity to make submissions on whether the application of the
formula was appropriate in this case.
[49]
The “harm base amount”
of the penalty calculated by the Director was $150,000. This was then reduced
by 20% to reflect the Applicant’s compliance history, and by a further 95% to
reflect its ability to pay.
[50]
In Max Realty and Homelife,
Justice Strickland returned two decisions to the Director for re-determination
of the administrative monetary penalties that had been imposed. In Max
Realty, she said the following at para 76:
There is also no explanation as to why this
penalty was chosen, what factors were considered in sentencing, whether the use
of a compliance agreement was considered, nor whether the exercise of the
discretion afforded to the Director to impose the penalty proposed, a lesser
penalty or no penalty was considered (subsection 73.15(2)).
[51]
The Director’s decision in this case suffers
from similar defects. There was no analysis of the objectives of the Act or how
the statutory criteria for the imposition of administrative monetary penalties applied
to the particular facts of the case. It is impossible to assess whether an
intelligible, transparent and justifiable decision-making process preceded the imposition
of the penalties. In these respects, the Director’s imposition of an
administrative monetary penalty in the amount of $6,000 was unreasonable.
VI.
Conclusion
[52]
For the foregoing reasons the appeal is allowed in
part and the matter is returned to the Director for re-determination of whether
an administrative monetary penalty should be imposed upon the Applicant and, if
so, the amount of that penalty. Because success on the appeal was mixed, there
is no award of costs to either party.
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