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AML and Recklessness

hand holding bag of money

You've Probably Been Doing AML "Wrong" Since June 2019.

In June 2019 the Criminal Code of Canada was revised.  Among many recent changes to the Code, the substantive offence of money-laundering was amended to add the mental element of recklessness.

Section 462.31 of the Code used to read:

Laundering proceeds of crime

 (1) Every one commits an offence who uses, transfers the possession of, sends or delivers to any person or place, transports, transmits, alters, disposes of or otherwise deals with, in any manner and by any means, any property or any proceeds of any property with intent to conceal or convert that property or those proceeds, knowing or believing that all or a part of that property or of those proceeds was obtained or derived directly or indirectly as a result of

(a) the commission in Canada of a designated offence; or

(b) an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence.

The section now reads:

Laundering proceeds of crime

 (1) Every one commits an offence who uses, transfers the possession of, sends or delivers to any person or place, transports, transmits, alters, disposes of or otherwise deals with, in any manner and by any means, any property or any proceeds of any property with intent to conceal or convert that property or those proceeds, knowing or believing that, or being reckless as to whether, all or a part of that property or of those proceeds was obtained or derived directly or indirectly as a result of

(a) the commission in Canada of a designated offence; or

(b) an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence.

This section is the bedrock of all AML work in Canada.  It is the core measure against which suspicious transactions are measured. Of course, evidence of other offences should generate an STR too, but any transaction involving, for example, fraud, would also generate a money laundering concern. It is difficult to imagine a distinct substantive crime such as fraud which would not generate at least a suspicion that the party is dealing with in any manner or means, any property or any proceeds of any property with the requisite mental element of knowledge or belief.  All financial crime is suspicious and at the same time all or nearly all transactions involving proceeds of financial crime are potentially money laundering.

The former pre-June 2019 AML offence, without the expanded mental element of recklessness has been the focus of AML monitoring, reporting, and training programs in Canada.  This is no longer sufficient.  In addition to the wide variety of recent changes coming to the FINTRAC regime and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations, organizations must grapple with a broader money laundering offence.

It is generally accepted that mere negligence is not recklessness.  Something more is required.  It has been described by the Supreme Court of Canada in R. v. Theroux as:

"Recklessness presupposes knowledge of the likelihood of the prohibited consequences.  It is established when it is shown that the accused, with such knowledge, commits acts which may bring about these prohibited consequences, while being reckless as to whether or not they ensue."

Consider the example of a lawyer who regularly deposits money received from her client into her trust account.  Under the prior money laundering offence, if the lawyer has no knowledge about an illicit source of the funds and has no reason to believe that the funds are proceeds of crime then the lawyer is not committing the crime of money laundering.  It remains to be seen how investigations, prosecutorial discretion and the courts will treat the new offence but on its face, the lawyer could now be money laundering without knowing or believing the funds are proceeds of crime if the lawyer is only reckless about whether the funds are proceeds of crime. This could involve knowledge about the source of funds that make it appear likely that they are proceeds of crime, without the need to actually know or have come to believe it to be so.

The effect of this is that a financial services business must be looking for reckless transactors, not only transactors who appear to know or believe that transactional funds are proceeds of crime.  This necessarily involves second-guessing the processes of clients.  These individuals and businesses may, in the face of "clues" that they are dealing with proceeds of crime, nevertheless not believe them to be so.  This could amount to recklessness.

It has always been an offence to believe one is laundering proceeds of crime even if the money in question is in fact completely legitimate. This may seem overly broad, but the policy choice made by Parliament was to criminalize those who were subjectively at fault because they believed they dealing with property obtained by crime or the proceeds of such property.

In application, the former offence, requiring knowledge or belief, has proven to be a difficult and expensive compliance problem for financial institutions. Money launderers modify their behaviour and develop innovative ways to carry out their transactions in order to extract the financial benefit of criminal activity and integrate their wealth back into circulation.  This has pushed the financial industry into the role of being both reactive, updating and modifying AML programs, but also proactive, developing monitoring tools and sharing typologies in order to anticipate new ML tactics.

The new section 462.31, introduced without much fanfare, raises the bar for reporting entities and indeed any party to financial activity in the most broad sense.  For first party transactors, there is now a specific obligation to rise above the level of recklessness in dealing with others. For businesses that provide financial services, in addition to the risk of becoming ensnared in a money laundering allegation through reckless behaviour, there is a new and significant obligation to ensure that their anti-money laundering program is set up to catch reckless parties to transactions. 

Reduced to its essential core, the new substantive offence means that an entity commits money laundering if it is reckless about money laundering.

This is not an additional or separate offence.  This is not just a FINTRAC issue. The actual criminal offence of money laundering can now be committed through recklessness without any additional subjective fault.

Among other things, the issue is no longer just what the party knows or believes.  The suspicious transaction evaluation now must ask whether the party has done enough of its own evaluation to rise above recklessness, given the risk profile of the financial activity.  Ultimately, this appears to involve a risk based assessment of the client's business activities to determine whether the client, given the risk profile its activity, has taken sufficient steps to prevent money laundering.

It is usually quite difficult to prove that a person knows something or holds a particular belief.  It can certainly be done but given that admissions of wrongdoers are rare, the proof relies on circumstancial evidence that requires extensive resources and plenty of motivation.  With the modification of the money laundering offence to include recklessness, the evidence can be much more objective in that a person, a company, and by extension, senior management may be guilty of money laundering in Canada now because they have not paid due regard to the risks associated with their transactions.

If this new reality has not been addressed yet within your organization, it is time to consider whether your AML program is now considering reckless behaviour.  This will have an impact on all three lines of defence.  This applies to policies and procedures, the training of staff, the monitoring tools implemented,  practices around recording and reporting and internal audit and evaluation. In short, the overall program must address the criminal law concept of recklessness as established in Canada.

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