Montecristo Jewellers Inc. v. Canada (Attorney General)

Montecristo Jewellers Inc. v. Canada (Attorney General)
Court (s) Database
Federal Court Decisions
Date
2024-02-26
Neutral citation
2024 FC 309
File numbers
T-575-22
Decision Content
Date: 20240226
Docket: T-575-22
Citation: 2024 FC 309
Ottawa, Ontario, February 26, 2024
PRESENT: The Honourable Madam Justice Kane
BETWEEN:
MONTECRISTO JEWELLERS INC.
Appellant
and
THE ATTORNEY GENERAL OF CANADA
Respondent
JUDGMENT AND REASONS
[1] This is an appeal pursuant to subsection 73.21(1) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, SC 2000, c 17 [the Act]. The Appellant, Montecristo Jewellers Inc, seeks to quash the decision of the Director and Chief Executive Officer [Director] of the Financial Transactions and Reports Analysis Centre of Canada [FINTRAC]. The Director found that Montecristo Jewellers Inc. had committed four violations of the Act and imposed a total administrative monetary penalty of $222,750.
[2] For the reasons that follow, the Appeal is dismissed with respect to three of the four violations.
I. Overview [3] The Appellant, Montecristo Jewellers Inc [MJI], is a jewellery business with three locations in the Vancouver area.
[4] On September 3, 2019, FINTRAC notified MJI by letter that FINTRAC would be examining MJI to assess MJI’s compliance with Parts 1 and 1.1 of the version of the Act in force at the relevant time, which was from October 1, 2018 to March 31, 2019 [Compliance Period]. FINTRAC conducted the examination, including interviews with employees, in October 2019. FINTRAC notified MJI of its initial findings (including alleged deficiencies) via letter in June 2020. MJI disputed these alleged deficiencies. In October 2021, FINTRAC issued a formal Notice of Violation [NOV] to MJI identifying four violations of the Act and the applicable regulations.
[5] On February 17, 2022, the Director of FINTRAC issued a decision confirming that MJI had committed all four violations. The Director imposed an administrative monetary penalty [AMP] totalling $222,750.
II. Overview of Statutory Framework [6] In Violator no 10 v Canada (Attorney General), 2018 FCA 150 [Violator no 10], the Federal Court of Appeal described the Act and the role of FINTRAC at paras 3-6:
[3] FINTRAC was established under section 41 of the Act. Subsection 40(b) provides that its object is to assist in the detection, prevention and deterrence of money laundering and of the financing of terrorist activities. To this end, FINTRAC collects and analyzes information concerning certain financial transactions that it considers relevant to money laundering activities or the financing of terrorist activities and may disclose this information to the appropriate police force and to other agencies listed in subsection 55(3) of the Act.
[4] The Act provides that the entities listed in section 5, ||||||||||||||||||||||||||||||||||||||||||||||||||||||||, are required to put in place certain mechanisms and programs, keep certain records, and produce various reports to FINTRAC with respect to financial transactions carried out in the course of their activities. Section 7 provides, among other things, that entities subject to the Act must report every financial transaction in respect of which there are “reasonable grounds to suspect that the transaction is related to the commission . . . of a money laundering offence . . . [or] a terrorist activity financing offence.”
[5] Given the crucial role reporting entities play in the collection of the information necessary for the effective operation of the system, section 62 of the Act provides that FINTRAC may take compliance measures and examine the records and inquire into the business and affairs of any of these entities for the purpose of ensuring compliance with their obligations under the Act. If, after such an examination, FINTRAC believes that there are reasonable grounds to suspect that the entity has violated its legal obligations, the Act enables FINTRAC to issue a notice of violation identifying the violation(s) that the entity examined is accused of and the penalty that FINTRAC intends to impose (see subsection 73.13(2) and section 73.14 of the Act). The notice of violation also specifies the right of the entity to make representations to the director of FINTRAC (subsection 73.13(1)).
[6] If the entity makes representations, the director of FINTRAC shall decide, on a balance of probabilities, whether the Act was violated and, if so, the amount of the penalty to be imposed (subsection 73.15(2)). The amount of the penalty is determined taking into account that penalties have as their purpose to encourage compliance with the Act rather than to punish, the harm done by the violation and any other criteria prescribed by the Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations, S.O.R./2007-292 (the Regulations).
[7] As noted in Violator no 10, FINTRAC is responsible for ensuring that businesses required to report certain transactions [reporting entities], such as MJI, comply with the Act. If FINTRAC believes that a reporting entity has violated its legal obligations under the Act, FINTRAC may issue a NOV to a reporting entity and impose penalties.
[8] The relevant provisions of the Act and the General Regulations are set out in Annex A.
[9] The regulations that are applicable to the issues that arise in this appeal are:
Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, SOR/2002-184 (in force from June 17, 2017-June 24, 2019) [General Regulations];
Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations, SOR/2001-317 (in force from June 17, 2017-May 31, 2020) [STR Regulations]; and
Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulation, SOR/2007-292 (in force from June 17, 2017-May 31, 2020) [AMP Regulations].
[10] This appeal focuses on the Director’s findings regarding the alleged failure of MJI to fulfill its obligations under section 7 (the obligation to report suspicious transactions) and subsection 9.6(1) (the obligation to establish and implement a compliance program) of the Act, and the related obligations under the General Regulations.
III. Background [11] FINTRAC previously examined MJI in 2013 and 2015 and found that MJI had violated certain provisions of the Act; however, FINTRAC exercised its discretion and did not impose any penalties at those times.
[12] On September 3, 2019, FINTRAC notified MJI by letter that FINTRAC would examine MJI’s compliance with the Act for the specified Compliance Period. The letter noted that examinations are part of FINTRAC’s mandate to assess the effectiveness of compliance programs of reporting entities. The letter noted that the examination may include interviews with MJI’s key employees and added, “this examination also aims to assist your organization in meeting its legal obligations should we identify any issues”.
[13] On October 15, 2019, FINTRAC again notified MJI that it would visit MJI’s retail stores to conduct interviews to assess its compliance with Parts 1 and 1.1 of the Act and the regulations. The letter noted that interviews would be conducted to assess “your organization’s anti money laundering/counter terrorist financing training program that you have in place”. The letter also advised MJI to inform its employees of the upcoming interviews.
[14] On October 22 and 23, 2019, FINTRAC conducted the examination and interviewed some MJI employees.
[15] On June 22, 2020, FINTRAC sent its findings [examination findings] by letter to MJI, stating that FINTRAC identified four deficiencies and was considering imposing penalties. FINTRAC invited MJI to provide additional information or make submissions within 60 days.
[16] On August 20, 2020, FINTRAC granted MJI an extension until September 30, 2020 to reply to the examination findings. On September 30, 2020, MJI’s accountant responded to the examination findings and provided additional information to FINTRAC.
[17] On January 13, 2021, FINTRAC responded to MJI and confirmed its original findings of four deficiencies and advising that FINTRAC was still considering proposing an AMP.
[18] On October 15, 2021, FINTRAC issued the NOV to MJI identifying four violations (described in detail in Part IV below) that FINTRAC had reasonable grounds to believe MJI had committed. FINTRAC proposed a penalty of $222,750.
[19] Upon receipt of the NOV, MJI subsequently sought additional documents from FINTRAC directly and through an Access to Information and Privacy [ATIP] request. FINTRAC refused MJI’s request for an extension of time to make representations on the NOV pending receipt of the requested documents. FINTRAC did not reply to MJI’s request for additional documents. MJI requested that the Director of FINTRAC review the NOV and the proposed AMP and also alleged a breach of procedural fairness regarding FINTRAC’s non‑disclosure of documents.
[20] On February 17, 2022 – more than two years after FINTRAC had conducted the employee interviews – the Director of FINTRAC issued her decision, upholding the NOV and imposing the AMPs as proposed in the NOV.
[21] On March 15, 2022, MJI filed the appeal of the Director’s decision and sought additional disclosure of documents from FINTRAC pursuant to Rules 317-318 of the Federal Courts Rules, SOR/98-106.
[22] The Certified Tribunal Record [CTR] provided to MJI included several documents that were considered by the Director but had not previously been provided to MJI. In particular, the CTR included a summary of the interviews of employees during the examination period and a recommendation from FINTRAC’s Review and Appeals Unit [RAU] to the Director, dated February 15, 2022, suggesting a proposed AMP of a lesser amount ($198,000).
[23] On April 11, 2022, MJI again requested additional documents. In late April, FINTRAC disclosed some documents, including: an earlier recommendation from RAU to the Director to remove Violation #4, dated February 8, 2022; internal email correspondence; and, a legal opinion prepared for FINTRAC regarding its AMP regime.
[24] On June 17, 2022, MJI received additional documents in response to their ATIP request, including a copy of the redacted summary of the employee interviews. The Court subsequently granted MJI’s motion for production of the unredacted summary of the employee interviews.
[25] In October 2022, MJI amended their notice of appeal to address the additional documents it had received.
IV. The Decision under Appeal [26] On February 17, 2022 the Director issued her decision. The Director recounted the history of interactions between MJI and FINTRAC up until the point of her decision. The Director then addressed each violation set out in the NOV, summarized the evidence, and addressed MJI’s submissions and possible defences. The Director made findings for each violation. The Director then considered the penalty for each violation, taking into account the applicable range of penalties, guidelines and MJI’s submissions.
A. Violation #1 [27] The Director summarised Violation #1 as follows:
Failure of a person or entity to report financial transactions that occurred in the course of its activities and in respect of which there are reasonable grounds to suspect that the transactions are related to the commission of the attempted commission of a money laundering or terrorist financing offence that occurred during the period of October 1, 2018 to March 31, 2019, which is contrary to section 7 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, and subsection 9 (1) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations. [Emphasis added.]
[28] The Director noted that Violation #1 is based on MJI’s failure to report two suspicious purchases made by the same person. During the Compliance Period, Ms. Y bought a $16,000 necklace on October 28, 2018, and a $12,800 necklace on November 4, 2018. For both transactions, Ms. Y paid $9,500 in cash and the remainder on credit card. FINTRAC determined that this constituted “structuring” a transaction in a way to shield the cash portion of the transaction from the reporting requirements for transactions over $10,000.
[29] The Director noted that FINTRAC had conducted some further investigation, including an internet and telephone search of Ms. Y, and found that she was linked to human trafficking.
[30] The Director did not rely on the information gathered from FINTRAC’s internet or telephone search, but rather, considered the nature of the transactions, the similar purchases and payment structure, and other circumstances. The Director addressed MJI’s submissions in response to the NOV, including that MJI did not have reasonable grounds to suspect a money laundering offence, that Ms. Y described the second purchase as a gift, and that it was not unusual for MJI’s clientele to pay partly in cash with the balance on a credit card.
[31] The Director found that there were reasonable grounds to suspect that the transactions of Ms. Y were related to the commission of a money laundering offence and found that MJI did not report the transaction to FINTRAC.
B. Violation #2 [32] The Director summarized Violation #2 as:
Failure of a person or entity to develop and apply written compliance policies and procedures that are kept up to date and, in the case of an entity, are approved by a senior officer, that occurred during the period of October 1, 2018 to March 31, 2019, which is contrary to subsection 9.6(1) of the Act, and paragraph 71(1)(b) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the Regulations).
[33] The Director found that although MJI’s policies and procedures describe its obligation to identify the formation of business relationships and to conduct ongoing monitoring of any high-risk business relationships, the policies and procedures did not set out the process regarding how MJI employees would comply in practice with such obligations. The Director concluded that MJI’s policies and procedures did not comply with subsection 9.6(1) of the Act and paragraph 71(1)(b) of the General Regulations and found, on a balance of probabilities, that MJI had committed the violation.
C. Violation #3 [34] The Director summarised Violation #3 as:
Failure of a person or entity to assess and document the risk referred to in subsection 9.6(2) of the Act, taking into consideration prescribed factors, that occurred during the period of October 1, 2018 to March 31, 2019, which is contrary to subsection 9.6(1) of the Act, and paragraph 71(1)(c) of the Regulations.
[35] The Director noted that Violation #3 focuses on MJI’s inadequate assessment of its own risks. Initially, FINTRAC had found that MJI failed to account for three of the prescribed risk factors: (a) its products and delivery channels; (b) its geographic location; and (c) its clients and business relationships. The Director found that MJI had not adequately assessed and documented its risk based on MJI’s failure to account for two of the prescribed factors ((b) and (c)).
[36] The Director accepted MJI’s explanation for its characterisation of risks related to retail jewellery (i.e., (a) products and delivery channels). The Director noted that MJI’s consideration of this factor might have been based on now outdated information, but concluded that MJI did not fail to consider its products and delivery channels in assessing risk.
[37] However, with respect to its client and business relationships, the Director noted that FINTRAC had determined, as indicated in the NOV, that MJI failed to consider that two clients in particular are global buyers, who ship items to Hong Kong for resale in China. FINTRAC noted that Hong Kong is known to be a tax haven where trade-based money laundering is prevalent. FINTRAC had determined that based on the high-volume purchases of these two clients, MJI should have been prompted to reconsider MJI’s risk rating.
[38] The Director found that MJI’s description of its own customer base as “mobile” did not capture:
… the commercial nature of the purchases for the purpose of resale, the international shipment of the jewelry to a higher-risk jurisdiction, nor the very high frequency and total value of the purchases conducted by the two clients. Since, as a result of these factors, the risk associated with the two clients [the clients that shipped to Hong Kong] was higher than that described in MJI’s risk assessment, the conclusions in MJI’s assessment did not accurately reflect its actual clients.
[39] The Director further found that if the risk posed by these two clients was high, MJI would also have been required to develop and apply policies and procedures to take enhanced measures to mitigate the risk, which it did not do.
[40] With respect to the geographic location factor, the Director concluded that MJI’s global assessment of its geographic location failed to account for the specific characteristics, including crime trends and client bases, of its three retail premises.
[41] The Director acknowledged MJI’s submission that, based on its own assessment, its customer base was similar in all three locations and that crime in the area surrounding one of its locations did not create an increased risk; however, the Director found that MJI failed to document this in its risk assessment.
D. Violation #4 [42] The Director summarised Violation #4 as:
Failure of a person or entity that has employees, agents or mandataries or other persons authorized to act on their behalf to develop and maintain a written ongoing compliance training program for those employees, agents or persons, that occurred during the period October 1, 2018 to march 31, 2019, which is contrary to subsection 9.6(1) of the Act, and paragraph 71(1)(d) of the Regulations.
[43] The Director’s decision notes that FINTRAC interviewed 13 employees, ten of whom conducted sales transactions. FINTRAC initially determined that MJI’s compliance training program (consisting of the Training Manual, Policies and Procedures Manual and Training Manual, and “Training Program for Montecristo Jewellers”) did not comply with the Regulations with respect to STRs, the 24-hour rule and “structuring”.
[44] The Director noted that FINTRAC had identified the following problems:
1. Although MJI’s compliance training program stated that there was no minimum amount for submitting a STR, seven of 10 interviewees did not know this and four did not know the process to alert the compliance officer about a suspicious transaction;
2. Although MJIs compliance training program referred to the obligation to submit a large cash transaction report for two or more transactions by the same person made within 24 hours that total $10,000 or more, four of the ten interviewees were not aware of this obligation; and,
3. Although “structuring” was referred to in MJI’s compliance manual, the Manual did not adequately discuss structuring as an indication of a suspicious transaction. The NOV noted that only one of the 10 interviewees was familiar with the concept.
[45] The Director considered MJI’s submissions that its compliance training program included all the required elements, that it was written and ongoing and had been implemented through mandatory staff training. The Director also addressed MJI’s submissions that the violation was based on a lack of comprehension by employees, which is not a statutory requirement, and that FINTRAC’s assessment failed to consider that English was not the first language of some of MJI’s employees.
[46] The Director found that MJI’s compliance training program was not effective because “it resulted in a significant lack of employee understanding about several key areas of MJI’s obligations”. The Director noted the lack of employee understanding was related to, in particular, the STR requirements that apply to transactions of any value, the “24-hour” rule, and the potential for structured transactions to be suspicious. The Director found that the training program did not fulfill the purpose of ensuring compliance with subsection 9.6(1) of the Act.
[47] The Director relied on the interviews as an adequate assessment of the employees’ understanding of MJI’s obligations. The Director noted that FINTRAC had advised MJI that it would conduct interviews to assess the effectiveness of the training program and employees’ understanding of policies and procedures and their knowledge of money laundering activities as related to MJI’s business.
[48] The Director noted that MJI had raised a due diligence defence with respect to all four violations. However, the Director found that MJI had not taken all reasonable steps to avoid committing the violations, noting that MJI had failed to identify specific measures it had taken to prevent each violation from occurring.
[49] The Director concluded that MJI failed to develop and maintain a written, ongoing compliance training program, and that on a balance of probabilities, MJI committed Violation #4.
E. The Penalties Imposed [50] With respect to each violation, the Director addressed whether the proposed penalty, a lesser penalty, or no penalty at all should be imposed. For each violation, the Director noted the applicable range of the AMP for the type of violation, the base amount applied, the reduction applied, and the reason for the reduction.
(1) AMP imposed for Violation #1 [51] With respect to Violation #1, the Director confirmed the penalty proposed in the NOV of $165,000, which reflected the imposition of the base amount of $500,000 reduced to 33%. The NOV explained how the AMP Policy had been applied; noted that FINTRAC had not identified any mitigating factors that would reduce the harm; and, noted that FINTRAC reduced the proposed penalty to 33%, taking into account MJI’s compliance history and that this was MJI’s first such violation.
[52] The Director found that Violation #1 was very serious, with a prescribed range of penalties from $1-$500,000. The Director considered MJI’s submissions, including that MJI disputed the violation, arguing that MJI did not have reasonable grounds to suspect that the transactions were suspicious, that the amounts of the transactions were relatively small, and that FINTRAC had failed to articulate the harm resulting from MJI’s failure to report.
[53] The Director noted that the submission of a STR is a critical element of the regime; the failure to submit a STR deprives FINTRAC of financial intelligence related to a transaction.
[54] The Director found that the factors raised by MJI did not reduce the harm done nor indicate the penalty was punitive. The Director found that the reduction of the penalty to 33% adequately took into account MJI’s compliance history.
(2) AMP imposed for Violation #2 [55] With respect to Violation #2, the Director confirmed and imposed the penalty of $16,500 as proposed in the NOV.
[56] The Director noted that the NOV explained how FINTRAC arrived at the proposed penalty. FINTRAC assessed the harm arising from the violation as Level 3 (the second lowest level within the Guide on harm done assessment for compliance program violations), imposed a base level amount of $50,000, then reduced it to 33% to take into account that this was MJI’s first such violation, MJI’s compliance history, and non-punitive adjustments.
[57] The Director considered MJI’s submissions, which were similar to those for Violation #1.
[58] The Director noted that the deficiency in MJI’s policies and procedures related to business relationships and ongoing monitoring was not a documentation problem. The Director found that the deficiency affected MJI’s practical compliance because MJI did not have a method to track business relationships formed through submitted STRs.
[59] The Director concluded that the reduction of the base penalty to 33% adequately took into account MJI’s compliance history and the non-punitive nature of penalties. The Director added that FINTRAC had previously identified a similar deficiency by MJI in 2015 that did not result in a penalty.
(3) AMP imposed for Violation #3 [60] With respect to Violation 3, the Director confirmed the $16,500 penalty proposed in the NOV. The Director again noted that the NOV explained how the AMP was determined, including FINTRAC’s use of the “Guide on harm done Assessment for compliance regime violations” and the AMP Regulations. The Director noted that FINTRAC identified this as a serious violation with the range of penalties prescribed in the AMP Regulations of $1-$100,000 per violation. FINTRAC assessed the harm as Level 3 and imposed a base amount of $50,000, which was reduced to 33%, resulting in a proposed penalty of $16,500.
[61] The Director addressed the submissions of MJI, including that no penalty or a minor penalty should be imposed and Violation #3 could not have contributed to Violation #1 because Ms. Y was a different type of client and the risk factors associated with her client profile were considered by MJI in its risk assessment.
[62] The Director concluded that the description of harm in the NOV was accurate. The Director noted that MJI failed to consider its clients and business relationships, and geographic location due to the serious flaws in its risk assessments related to these factors. The Director found that Level 3 harm adequately captured this type of non-compliance.
[63] The Director agreed that, as set out in the NOV, MJI’s failure to accurately and practically consider that any of its individual clients may have posed a high risk hindered MJI in taking measures that could have led it to report the suspicious transaction of Ms. Y (i.e., Violation #1) . The Director found that the base penalty of $50,000 took into account the harm, and the reduction to 33% (resulting in the $16,500 penalty) took into account MJI’s history of compliance and the non-punitive nature of the penalty.
(4) AMP imposed for Violation #4 [64] With respect to Violation #4, the Director confirmed the penalty proposed in the NOV of $24,750. The Director noted that FINTRAC characterised this as a serious violation with a range of penalties of $1-$500,000.
[65] The Director noted that FINTRAC considered that Violation #4 (failure… to… maintain an ongoing compliance training program) may have contributed to Violation #1 (failure to submit a STR). The Director further noted that this led FINTRAC to assess the harm as Level 2 and impose the base amount of $75,000, then apply the reduction to 33%, resulting in a penalty of $24,750. The Director noted that the reduction took into account MJI’s compliance history and the non-punitive nature of penalties.
[66] The Director considered MJI’s submissions, including that no penalty or a minor penalty should be imposed to recognise that an employee’s retention of knowledge is not within MJI’s control. The Director found that the employees’ lack of understanding resulted from MJI’s failure to ensure that they understood their obligations, the indicators and the risk factors of money laundering or terrorist financing. The Director found that MJI’s training program was deficient, which may have contributed to Violation #1; Ms. Y’s transactions were structured and the type of transactions that the employees did not understand to be an indication of possibly suspicious behaviour.
[67] The Director agreed that the NOV captured the harm done by Violation 4 as Level 2.
[68] The Director concluded that the reduction of the base penalty to 33% adequately took into account MJI’s history of compliance and the non-punitive nature of the penalties.
V. The Issues [69] MJI argues that:
● The Director committed a palpable and overriding error in concluding that MJI committed all four violations of the Act and in assessing the AMPs;
● The Director failed to apply the correct legal test of “reasonable grounds to suspect” in finding that MJI should have reported a suspicious transaction (Violation #1), which is an extricable legal issue reviewable on the correctness standard;
● The Director fettered her discretion in assessing and imposing the AMPs by rigidly adhering to AMP policies and by failing to take into account the relevant considerations;
● FINTRAC and the Director breached the duty of procedural fairness owed to MJI by not disclosing the employee interview notes until ordered to do so and by relying on inadequate and inaccurate summaries of the interview notes;
● The Director exceeded her jurisdiction and erred in law in her interpretation of the Act and Regulations, which led the Director to erroneously find, based on employee comprehension, that MJI did not comply with the requirement to have a training program.
[70] MJI asks the Court to:
● Allow the appeal;
● Quash the Director’s decision;
● Declare that FINTRAC’s decision-making process that led to the decision breaches the principles of procedural fairness and the penalty-assessing process that led to the decision is unlawful;
● Declare that MJI did not commit any of Violations #1-4 or in the alternative, exercised due diligence;
● Further, or in the alternative, vacate the penalties or, in the further alternative, vary them to the statutory minimum; and,
● Award MJI its costs of this appeal.
VI. The Standard of Review [71] Section 73.21 of the Act provides for a statutory right of appeal, which triggers the appellate standard of review. The appellate standard of review for questions of fact and questions of mixed fact and law is palpable and overriding error (Re/MAX All-Stars Realty Inc v Financial Transactions and Reports Analysis Centre of Canada, 2022 FC 598 [Re/Max] at paras 49-51; Law Society of Saskatchewan v Abrametz, 2022 SCC 29 at para 29; Canada (Citizenship and Immigration) v Vavilov, 2019 SCC 65 at para 37; Housen v Nikolaisen, 2002 SCC 33 [Housen]). For questions of law and mixed questions of fact and law where a legal question is readily extricable, the standard of review is correctness (Re/Max at para 51; Housen at paras 8, 27-28).
[72] Whether an entity has committed a violation of the Act and what constitutes a reasonable AMP is reviewable on the palpable and overriding error standard (Re/Max at paras 51, 86).
[73] The palpable and overriding error standard was described by the Federal Court of Appeal in Canada v South Yukon Forest Corporation, 2012 FCA 165 at para 46::
[46] Palpable and overriding error is a highly deferential standard of review… “Palpable” means an error that is obvious. “Overriding” means an error that goes to the very core of the outcome of the case. When arguing palpable and overriding error, it is not enough to pull at leaves and branches and leave the tree standing. The entire tree must fall.
[74] Where issues of procedural fairness are raised, the Court’s review focuses on whether the procedure followed by the decision-maker was fair having regard to all of the circumstances; “[a] court … asks, with a sharp focus on the nature of the substantive rights involved and the consequences for an individual, whether a fair and just process was followed” Canadian Pacific Railway Company v Canada (Attorney General), 2018 FCA 69 at para 54.
[75] As noted more recently by the Federal Court of Appeal in Brown v Canada (Attorney General), 2022 FCA 104 at para 13:
[13] … On questions of procedural fairness and natural justice, the Court must assess the procedures and safeguards required, and if there is a breach, the Court must intervene (Canadian Pacific Railway Company v. Canada (Attorney General), 2018 FCA 69, [2019] 1 F.C.R. 121 at para. 54). For want of a better description, the approach is sometimes referred to as the “correctness standard”.
[76] The scope of the duty of procedural fairness owed in the circumstances is variable and informed by several factors (established in Baker v Canada (Minister of Citizenship and Immigration), [1999] 2 SCR 817 at para 21, 174 DLR (4th) 193 [Baker].
[77] MJI notes that the appellate standard of palpable and overriding error does not apply to extricable questions of law, which demand the correctness standard. MJI submits that several of the Director’s findings raise extricable questions of law.
[78] The Respondent submits that the appellate standard of review of palpable and overriding error applies to the Director’s findings that MJI committed four violations and to the Director’s assessment of the penalties. The Respondent acknowledges that the Director’s finding regarding Violation #4 also raises an issue of statutory interpretation. The Respondent agrees that the correctness standard applies to matters of statutory interpretation and any breach of procedural fairness, if established.
VII. The Appellant’s Submissions [79] MJI disputes all the Violations and argues that the Director committed palpable and overriding errors, exceeded her jurisdiction, and misinterpreted the statutory provisions. The specific arguments are set out with respect to each violation.
[80] MJI also argues that the Director erred by failing to consider MJI’s due diligence defence for Violations #2, 3, and 4. MJI submits that it acted on its reasonable belief and took reasonable steps to comply (citing Violator no 10 at para 59, citing R v Sault Ste Marie, 1978 CanLII 11 (SCC) at 1326).
[81] With respect to the penalties imposed, MJI generally argues that the Director fettered her discretion in assessing and imposing all the AMPs. MJI argues that the Director rigidly adhered to FINTRAC’s policies on AMPs, narrowed the definition of harm, and failed to apply the principle that penalties are meant to encourage compliance rather than punish.
[82] MJI submits that the total penalty should be set aside, or alternatively, reduced to the statutory minimum, which is $1.
A. Violation #1: Failure to submit a STR [83] MJI submits that the Director erred by finding that MJI failed to submit a STR regarding the two purchases made by Ms. Y.
[84] MJI submits that the STR requirement is triggered by “reasonable grounds to suspect” that the transaction at issue is related to the commission of a money laundering or terrorism offence. MJI argues that, although the Director cited the test as “reasonable grounds to suspect”, she did not apply the correct test. MJI argues that the alleged failure to apply the correct test is a question of law to be determined on the correctness standard. MJI relies on jurisprudence in criminal law matters, including R v Mackenzie, 2013 SCC 50 [Mackenzie].
[85] MJI argues that to trigger the STR requirements, the employee or the business must have the reasonable grounds to suspect that a transaction should be reported; a mere suspicion or hunch is not enough. MJI submits that their employee who sold the necklaces to Ms. Y had no such grounds.
[86] MJI notes that FINTRAC pointed to Ms. Y’s purchase as meeting two out of 98 of the “indicators” set out in MJI’s 2018 Policy and Procedures Manual to suggest the transactions were suspicious. MJI submits that the strict application of any particular indicator match does not trigger the STR obligation. MJI argues that the “reasonable grounds to suspect” test requires nuance and judgment of the employee.
[87] MJI submits that applying the two indicators to support reasonable grounds to suspect a money laundering offence would overlook that their South Asian clientele customarily pay partly in cash and partly on credit; this is a cultural norm and did not raise MJI’s employee’s suspicion.
[88] MJI argues that, contrary to FINTRAC’s finding that MJI’s employee should have had a “hunch”, a hunch is not equivalent to reasonable grounds to suspect. MJI also disputes FINTRAC’s suggestion that MJI should have done more to inquire about Ms. Y.
[89] MJI also disputes the Director’s finding that Ms. Y’s two purchases constituted a pattern of suspicious behavior, noting that Ms. Y made two purchases a week apart, which does not constitute a pattern.
[90] MJI also argues that FINTRAC’s withholding of the employee interview notes prior to the Director’s decision deprived MJI of the opportunity to make submissions to the Director on Violation #1, which amounts to a breach of procedural fairness.
[91] Regarding the AMP imposed for Violation #1, MJI submits that the Director fettered her discretion in several ways: by applying a rigid formula (contrary to Kabul Farms Inc v Canada, 2016 FCA 143 [Kabul Farms FCA], failing to consider the amount of the alleged suspicious transaction, and failing to consider the lack of harm and other mitigating factors.
[92] MJI elaborates that the Director fettered her discretion by applying the Guide on harm done to automatically assess the harm as Level 1 rather then Level 2, which has a base amount half of that of Level 1. MJI disputes that the violation resulted in a complete loss of financial intelligence, which is the criteria for Level 1 harm. MJI submits that Ms. Y’s two purchases were her only purchases and could not have resulted in further STRs. MJI submits that only Level 2 harm would be justified in the alleged circumstances – i.e., the loss of additional financial intelligence.
[93] MJI also argues that the penalty is punitive because it is at the highest end of the range. MJI notes that penalties are not designed to be punitive but are intended to encourage compliance. MJI submits that any penalty should be proportional to the alleged value of the violation.
B. Violation #2: Failure to develop and apply written compliance policies for tracking business relationships and ongoing monitoring [94] MJI argues that the Director exceeded her statutory authority by determining that MJI’s policies and procedures failed to “set out how it would in practice track the formation of business relationships in order to attain compliance with associated requirements” or “set out how it would conduct ongoing monitoring of high-risk business relationships”.
[95] MJI submits that the Act and regulations do not require that a reporting entity have a process for employees to follow to ensure compliance as the Director suggests. MJI submits that the Director failed to consider that tracking of business relationships is only required if applicable (subsection 71(1) of the General Regulations). MJI argues that it did not form any business relationships during the Compliance Period and, therefore, no recording was required.
[96] MJI further submits that its 2018 Policies and Procedures Manual fulfilled its statutory obligations. MJI states the Manual required it to track when it entered business relationships and keep a record of these relationships. The Manual noted the purpose of the record; provided examples of how staff could record business relationships and instructions for employees to seek further direction from the compliance officer; contained a summary of the compliance officer’s obligations; and, contained MJI’s policy for keeping records that may trigger the formation of a business relationship.
[97] Alternatively, MJI argues that the Director misinterpreted the requirements of the regulations and erred in finding that MJI committed Violation #2.
[98] MJI argues that the requirement regarding ongoing monitoring is only triggered if a reporting entity considers the risk of money laundering offences to be high in the course of its business. MJI submits that the Director erred by finding that it failed to meet this obligation, given that MJI does not consider itself to be at high risk of money laundering offences.
[99] MJI also disputes the AMP. MJI again submits that the Director fettered her discretion by applying a rigid formula and not taking into account other factors, or in the alternative, that she erred. MJI disputes that Violation #2 may have contributed to Violation #1 (the failure to file a STR). MJI argues that the necklace sales to Ms. Y did not constitute a business rel