Operating a Money Services Business (MSB) in Canada comes with significant regulatory obligations. Compliance with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) regulations is mandatory, and non-compliance can lead to severe penalties.
This blog explores the various criminal and administrative FINTRAC fines & penalties associated with MSB non-compliance in Canada.
Our Fintech lawyers also dive into the broader implications of non-compliance and provide practical strategies for MSBs to ensure they meet all regulatory requirements.
Top 5 Criminal FINTRAC Penalties for Non-Compliance
Non-compliance with FINTRAC regulations can lead to criminal charges, including substantial fines and imprisonment.
Here are some of the key criminal FINTRAC penalties for non-compliance:
1. Failure to Report Suspicious Transactions
Penalty: Up to $2 million and/or 5 years imprisonment.
MSBs must report any transactions that they suspect may be related to money laundering or terrorist financing. Failure to do so is considered a serious offence, reflecting the importance of detecting and deterring illicit activities.
For example, if your MSB notices a pattern of large transactions with no clear business purpose, then you are obligated to file a suspicious transaction report (STR) with FINTRAC.
If you ignore or overlook this obligation, then it can lead to significant FINTRAC penalties as it undermines the entire anti-money laundering (AML) regime in place to safeguard the financial system.
2. Failure to Report a Large Cash Transaction or an Electronic Funds Transfer (EFT)
First Offence Penalty: Up to $500,000.
Subsequent Offences Penalty: Up to $1 million.
Large cash transactions (over $10,000 CAD) and EFTs must be reported to FINTRAC. These reports are crucial for tracking significant movements of money that could be associated with criminal activities.
For example, if an individual attempts to deposit $15,000 in cash without a clear source of funds, then as an MSB, you are required to report this to FINTRAC.
If you repeatedly fail to report such transactions, then it indicates a systematic issue within the business’s compliance protocols, warranting harsher FINTRAC fines and penalties.
Our Fintech lawyers and compliance officers cannot stress the significance of reporting large cash transactions more. These reports help authorities trace large sums of money that might be used for illegal activities such as drug trafficking, human trafficking, or terrorist financing.
A consistent failure to report these transactions not only attracts penalties but also exposes the financial system to significant risks. Your MSB must have robust systems in place to capture and report these transactions accurately and timely.
3. Failure to Meet Record-Keeping Requirements
Penalty: Up to $500,000 and/or 5 years imprisonment.
Sound record-keeping is essential for MSB compliance and for providing evidence in case of investigations. As an MSB, you are required to maintain accurate and comprehensive records of all transactions, including customer identification information, transaction details, and any other relevant data.
For instance, if any MSB is unable to produce records of a series of high-value transactions during an audit, it can be deemed as a failure to maintain adequate records, leading to significant FINTRAC fines and penalties.
Effective record-keeping serves multiple purposes:
● It aids in tracking the flow of funds;
● Helps in conducting audits; and
● Ensures transparency in financial transactions.
A lapse in maintaining these records can obstruct investigations and hinder regulatory oversight. Therefore, you must invest in reliable record-keeping systems and regularly audit your records to avoid non-compliance.
4. Failure to Provide Assistance or Information During Compliance Examination
Penalty: Up to $500,000 and/or 5 years imprisonment.
During a compliance examination, your MSB must cooperate fully with FINTRAC officials. This includes providing all requested information and assistance.
An example of non-compliance could be an MSB obstructing a FINTRAC investigation by withholding requested documents or providing false information, which severely hampers regulatory oversight and enforcement actions.
Cooperation during compliance examinations is crucial. These examinations are designed to ensure that MSBs adhere to regulatory requirements and maintain the integrity of the financial system. Any form of obstruction or uncooperation can be seen as a deliberate attempt to hide non-compliance, resulting in severe FINTRAC penalties.
If you want to ensure complete compliance during such an examination, you can outsource this task to our Fintech lawyers and compliance officers to avoid any issues.
5. Disclosing the Fact or Contents of a Suspicious Transaction Report
Penalty: Up to 2 years imprisonment.
It is illegal to disclose that a suspicious transaction report has been made or to reveal its contents, especially if disclosure is done with the intent to prejudice a criminal investigation.
For example, if an employee from your MSB informs a customer that their transaction has been reported as suspicious, this could alert the individual and potentially disrupt an ongoing investigation into illicit activities.
The confidentiality of suspicious transaction reports is a critical component of the AML framework. Disclosure of such information can compromise investigations and alert suspects, giving them the opportunity to alter their behaviour or destroy evidence.
You must enforce strict confidentiality protocols and ensure that your employees are aware of the legal implications of disclosing STRs.
Administrative Monetary Penalties for Non-Compliance
In addition to criminal penalties, non-compliance with FINTRAC regulations can result in administrative monetary penalties (AMPs).
FINTRAC AMPs vary depending on the severity of the violation:
1. Minor Violations
Penalty: $1 to $1,000 per violation.
Minor violations are typically less severe and may include minor lapses in reporting or record-keeping. For instance, an isolated incident where a small transaction report is filed late due to a clerical error may be considered a minor violation.
While minor violations may seem insignificant, they still reflect non-compliance. Repeated minor violations can indicate underlying issues within an MSB’s compliance framework.
Addressing these issues promptly can prevent minor violations from escalating into more severe violations.
2. Serious Violations
Penalty: $1 to $100,000 per violation.
Serious violations involve more significant breaches of compliance, such as repeated failure to report transactions or maintain records. An example could be if your MSB consistently fails to report large cash transactions over several months.
Serious violations pose a substantial risk to the financial system. They reflect a disregard for regulatory requirements and can significantly undermine efforts to combat financial crimes.
MSBs facing serious violations must undertake comprehensive reviews of their compliance programs and implement corrective measures to address deficiencies.
3. Very Serious Violations
Individual Penalty: $1 to $100,000 per violation.
Entity Penalty: $1 to $500,000 per violation.
Very serious violations are the most severe and can include systemic failures in compliance procedures. For example, an MSB with inadequate AML controls that allows multiple large transactions to go unreported over an extended period may face the highest level of FINTRAC fines and penalties.
Very serious violations indicate systemic issues within business operations. These violations not only attract substantial penalties but also damage the reputation of your MSB.
Regulatory authorities may impose additional oversight and require significant changes to your MSB compliance framework to prevent future violations.
Dual Penalties: A Brief Overview
It's important to note that FINTRAC cannot issue both criminal charges and AMPs for the same instance of non-compliance. They must choose either a civil penalty or refer the case for criminal prosecution.
This ensures that entities are not punished twice for the same offence, aligning with principles of fairness in regulatory enforcement.
Issuance of Administrative Monetary Penalties
FINTRAC has held the authority to issue AMPs since December 30, 2008. All persons and entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) are subject to AMPs if found non-compliant.
However, an AMP is not an automatic response to non-compliance. Typically, FINTRAC provides an opportunity to correct non-compliant behaviour before issuing an AMP.
For example, if your MSB is found to have minor deficiencies during a routine inspection, FINTRAC may issue a warning and provide a timeline for rectification before imposing any penalties.
Criteria for Determining AMP Amount
When determining the amount for an AMP, three key criteria are considered:
Criteria 1: Purpose of AMPs
AMPs are designed to encourage compliance, not to punish. The primary goal is to motivate MSBs to adhere to regulations and rectify non-compliant behaviour.
For instance, the imposition of a modest fine for a minor first-time offence aims to prompt immediate corrective action without unduly burdening the business.
Criteria 2: Harm Done by the Violation
The severity and impact of the non-compliance on the objectives of the PCMLTFA are crucial. Violations that pose a greater risk to the financial system or public safety result in higher FINTRAC penalties.
For example, failing to report a large transaction linked to organized crime can significantly undermine efforts to combat money laundering, justifying a higher penalty.
Criteria 3: History of Compliance
The reporting entity’s history of compliance with the regulations is also considered. Entities with a track record of non-compliance are likely to face stiffer penalties.
For instance, if your MSB has a history of repeated violations, then your business will face higher FINTRAC fines and penalties compared to a first-time offender.
Compliance Program Violations: The Levels of Harm and Penalty Amounts
FINTRAC classifies compliance program violations into four levels of harm, each with corresponding penalties:
1. Highest Harm
Penalty: $100,000.
This level includes violations that significantly undermine the objectives of the PCMLTFA and pose the highest risk to the financial system. For example, systemic failures in reporting large transactions and suspicious activities can severely disrupt efforts to track and prevent money laundering.
2. High Harm
Penalty: $75,000.
High harm violations still pose a significant risk but are less severe than those in the highest harm category. An example could be consistent delays in reporting transactions, which, while not as severe as non-reporting, still hinder the regulatory oversight process.
3. Moderate Harm
Penalty: $50,000.
Moderate harm violations are serious but do not pose as immediate a risk as higher-level violations. For example, sporadic lapses in record-keeping, while not as critical as reporting failures, still present challenges in ensuring full compliance.
4. Low Harm
Penalty: $25,000.
Low harm violations are less severe and may include isolated incidents of non-compliance that do not indicate systemic issues. For example, a one-time failure to report a small transaction might fall into this category.
6 Practical Strategies for MSBs to Enhance Compliance & Avoid Penalties
To avoid FINTRAC fines and penalties, MSBs should adopt robust compliance programs.
Here are some strategies our Fintech lawyers and compliance officers urge you to practice to ensure compliance:
Strategy 1: Provide Regular Compliance Training to Employees
Regular training for employees on compliance requirements is essential. You must ensure that your staff is up-to-date with the latest regulations and best practices.
This can include:
● Workshops;
● Online courses; and
● Periodic assessments.
Training should cover key areas such as identifying suspicious transactions, understanding reporting requirements, and the importance of maintaining accurate records.
Strategy 2: Create a Comprehensive Compliance Framework
A comprehensive compliance framework should include clear policies and procedures for reporting suspicious transactions, maintaining accurate records, and cooperating with regulatory examinations.
Your MSB should conduct regular internal audits to identify and address any gaps in your compliance processes. A well-documented compliance program serves as a blueprint for the organization’s AML efforts and provides a reference for employees to follow.
Compliance officers are crucial for MSBs to create a strategic and comprehensive compliance framework for business needs.
Strategy 3: Use the Power of Technology
Leveraging technology can enhance compliance efforts. Automated systems for transaction monitoring and reporting can help ensure that all regulatory requirements are met consistently.
For example, software that flags transactions above the reporting threshold can reduce the risk of human error and ensure timely compliance. Advanced analytics and machine learning algorithms can also help identify patterns and anomalies that might indicate suspicious activities.
Strategy 4: Collaborate with Regulatory Bodies
Maintaining open lines of communication with FINTRAC and other regulatory bodies can help MSBs stay informed about changes in regulations and expectations.
Proactive engagement with regulators can also demonstrate a commitment to compliance and help mitigate potential issues before they escalate to FINTRAC fines and penalties.
Regular updates from regulators can provide valuable insights into emerging risks and best practices for managing compliance.
Strategy 5: Build a Culture of Compliance
Building a culture of compliance within the organization is crucial. This involves fostering an environment where compliance is viewed as a collective responsibility rather than a regulatory burden.
Leadership should set the tone by emphasizing the importance of compliance and ensuring that adequate resources are allocated to compliance functions.
Encouraging employees to report any suspicious activities and providing mechanisms for anonymous reporting can also strengthen the compliance culture.
Strategy 6: Continuously Improve and Adapt
The regulatory landscape is constantly evolving, and MSBs must adapt to these changes. Regularly reviewing and updating compliance programs to reflect new regulations and emerging risks is essential.
This includes staying informed about global trends in money laundering and terrorist financing and adjusting internal policies and procedures accordingly.
Continuous improvement ensures that your business remains compliant and resilient in the face of changing regulatory requirements.
Practical Implications of Non-Compliance: 3 Examples to Learn From
Understanding the real-world implications of non-compliance can help highlight the importance of adhering to regulatory requirements.
Here are a few case studies our Fintech lawyers have created for you that illustrate the practical consequences of MSB non-compliance:
Example 1: FINTRAC Fines for Systemic Non-Compliance
● Scenario: A large MSB consistently failed to report suspicious transactions and large cash transactions over several years. An investigation revealed systemic deficiencies in its AML program, including inadequate staff training and lack of automated reporting systems.
● Outcome: The MSB was fined $5 million in administrative penalties and faced additional scrutiny from regulators. The penalties and increased oversight significantly impacted the MSB's operations and reputation.
● Key Takeaway: This case highlights the importance of investing in robust compliance systems and regular training to ensure adherence to regulatory requirements.
Example 2: Criminal Charges for Non-Reporting
● Scenario: A small MSB failed to report multiple large cash transactions linked to a known criminal organization. The MSB's owner was found to have deliberately ignored reporting requirements to retain high-value customers.
● Outcome: The MSB's owner faced criminal charges, including a substantial fine and imprisonment. The business was also shut down, and its assets were seized.
● Key Takeaway: Deliberate non-compliance, especially when linked to criminal activities, attracts severe penalties and legal consequences. Ensuring compliance is crucial for MSBs’ survival and reputation.
Example 3: MSB Rectifies Non-Compliance After Regulatory Warning
● Scenario: During a routine compliance examination, regulators identified minor deficiencies in an MSB's record-keeping and reporting practices. The MSB was issued a warning and given a timeline to rectify the issues.
● Outcome: The MSB promptly addressed the deficiencies, updated its compliance program, and conducted additional staff training. The regulators were satisfied with the corrective actions, and no penalties were imposed.
● Key Takeaway: Proactive engagement with regulators and prompt corrective actions can help avoid penalties and demonstrate a commitment to compliance.
Contact Renno & Co. Fintech to Avoid FINTRAC Penalties for Non-Compliance
The penalties for MSB non-compliance in Canada are stringent, reflecting the importance of adhering to FINTRAC regulations. Both criminal and administrative penalties serve to enforce compliance, protect the financial system, and prevent money laundering and terrorist financing activities.
If you want to avoid FINTRAC fines and penalties, you can get in touch with Renno & Co.’s Fintech experts. Schedule a free consultation with us to learn more about how we can help ensure compliance for the long-run.
