Do the right thing and be able to demonstrate that you did the right thing. Although closely related, these are different issues, and they are both vital to preventing adverse consequences premised on an alleged failure to comply with a regulatory obligation.
All complex compliance functions are necessarily risk based when done correctly. This ensures that the right resources are applied to the right risk, thereby maximising mitigation and addressing the problem, not perfectly, but all things considered, in the best way that can be realistically accomplished. To seek to address complex compliance issues without a risk based approach in 2019 is like pouring money into the purchase of lottery tickets, hoping there will be a (highly unlikely) good outcome. That is not compliance, and it is not good corporate governance.
The resources need to be targeted to be effective. Currently, it is still people (aided by teams, processes and technology) who make those decisions, using the best information they have at their disposal.
Part of the perennial problem from the perspective of a financial institution or other reporting entity is the fear that a regulator, a court or even a party to litigation, will disagree with your risk assessment. If they are right… and you are wrong… then your resources have been misapplied, resulting in a less than optimal approach. Sanctions, damage awards and other detrimental outcomes will often be the result. Not to mention the fact that criminals are more likely to reap the financial benefits of their crime due to a deficient risk based approach. This includes drug dealers, human traffickers and fraudsters. Not a desirable outcome, and hence the importance of an effective risk based approach.
Arguably, there is no perfect risk assessment. One can argue about whether a risk assessment is perfect as long as it is procedurally and conceptually correct, regardless of its effect. But for the purpose of this brief blog post, let’s approach risk assessment from the perspective that if it is reasonable it is sufficient. I am not oversimplifying, just analytically setting the groundwork for highlighting the defensibility risk and distinguishing it from the risk based approach.
Let's use anti-money laundering (AML) compliance for example. For AML work, there is a lot built up in the concept of reasonableness including but not limited to:
- the designation of a CAMLO;
- tone from the top (corporate buy-in);
- appropriate use of technology;
- training and education;
- lines of reporting;
- credible internal enforcement and sanctions for deficiencies or misconduct;
- relationship between the business line, compliance and audit.
So let’s assume all these things (and more) are in place and the risk assessment that has been put in place is reasonable.
The question that is not asked often enough, and when asked, is not addressed frankly and starkly is:
Is our AML program defensible?
This question is not as important to a regulator because regulators are concerned with whether you complied, not how well you defend your view that you are complying. If they form the opinion that a program is insufficient they seek to enforce. It is grist for the mill.
If the entity cannot defend its program (usually a specific allegation but the allegation may be broad and extend as far "breach of industry standards" or a "failure to comply with an institutional Global Code of Conduct"), various findings may occur. It may be found to be eligible for an administrative monetary penalty due to a deficiency or perhaps to have violated a law such as securities law, or to have behaved contrary to the public interest.
It may seem strange, but although a finding of deficiency, once appeal routes are exhausted, is legally determinative, the finding doesn’t necessarily mean your program was or is substantively deficient. If your program was substantively sufficient, the negative outcome means you didn't have (and perhaps still don't collect) the evidence to defend it.
For the purpose of this blog post, let’s leave aside criminal or quasi-criminal offences which are determined on the standard of beyond a reasonable doubt and also the issue of settlement (based on its own sort of risk assessment). In standard regulatory litigation, a finding of deficiency occurs when a tribunal or court finds that the allegations are probably true. This may sound foreign to some readers who are not experienced in litigation, but essentially if a tribunal or court finds, after considering all the evidence, that an entity is 49% likely to be compliant then they must find the entity to be non-compliant.
Certainly, some deficiencies are clear, such as failing to file a report. In that case, the deficiency that is found overlaps with and maps perfectly onto the actual deficiency.
But what about situations where a program is in theory sufficient, but is not demonstrably so? This problem arises out of a lack of evidence - a failure of defensibility. It can to any poorly documented aspect of a compliance program. How would your senior compliance management team answer the question: How was your electronic monitoring tool calibrated, what types of inputs and transactional information was it capable of ingesting, and what factors were in place to generate a compliance “hit” in February 2016? (I know, it is more than one question but I hope you get the point). How about the follow up questions? (and keep in mind that all these questions may relate to a specific point in time):
- Who reviewed hits? Did they review all the hits and if not how were they selected?
- Was this system “out of the box” from the vendor or was it specifically tuned?
- Did you ever modify the tool to reduce positive hits? When, how and why?
- What qualifications and training did the reviewers have?
- How were concerns escalated from the initial reviewers?
- Did the compliance personnel in the second line of defence understand the subject matter of the “hit” or did they need to resort to asking the business line questions about the “hit”?
These are just a few questions on a specific topic related to electronic monitoring. There may be hundreds of questions that could be asked about this very specific issue for a very specific time. And there are obviously many other issues that may generate questions. Again, using AML as an example, topics may include the substantive issue of whether your human beings and/or electronic tools understood (for example) money-laundering typologies.
I have written about this elsewhere but since June 2019, the ability of staff and electronic tools to recognize indicia of money-laundering is very much in question. The substantive offence changed significantly to include the mental element of “recklessness”.
All that being said, the defensibility problem seems to me to be most likely to occur in a serious way when the human experience and judgment involved in risk assessment is not adequately documented. The activity of risk assessment, whether it is performed by an individual decision-maker in a small entity or a team project with numerous departments and data sources providing input to a risk committee, is the foundation of the risk based approach.
As long as best practices are in place and experienced, credible decision-makers are in the appropriate roles armed with the right information, their risk assessment should be defensible. Day to day, entities are focused not on defensibility but on effectiveness of their compliance program. Defensibility is a disturbing notion to some because it may seem like CYA (“cover your ass”) for a deficient program.
It is not that at all. Appropriate corporate governance not only entitles but arguably requires senior management to protect the organization by ensuring that the entity is in a position to rebut false claims by third parties that they are failing, whether it is in the regulatory or any other area of operation.
Spend time thinking about evidence and put your organization in the best position to show that you are doing the right thing. When responding to an allegation that you have failed, being able to demonstrate compliance may be just as important as actually having been compliant.
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
462.31 (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
462.31 (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.
Reasonable Limits on Investigations and Warrants under the Occupational Health and Safety Act, R.S.O. 1990.
*This paper is not legal advice.
Regulators have a lot of power when acting within the scope of their jurisdiction. The power comes along with the mandate to act for a specified purpose which often includes the “public interest” or some other identified valuable goal. Ontario’s Occupational Health and Safety Act, R.S.O. 1990, c. O.1 ( both the Act and its Regulations are herein referred to collectively herein as “OHSA” or “Act”) is no different, either in its aspirations or in the broad scope of the powers it provides to the people who are tasked with ensuring its application. The OHSA sets out its underlying purposes as powers and duties of the Minister of Labour in Section 4.1 of the OHSA as:
- To promote occupational health and safety and to promote the prevention of workplace injuries and occupational diseases.
- To promote public awareness of occupational health and safety.
- To educate employers, workers and other persons about occupational health and safety.
- To foster a commitment to occupational health and safety among employers, workers and others.
- To make grants, in such amounts and on such terms as the Minister considers advisable, to support occupational health and safety.
The OHSA is remedial legislation. It is primarily protective and preventive, rather than punitive. This is apparent in that its goals include health promotion, injury prevention, education and the provision of financial support for initiatives in furtherance of the Act. There is nothing specific about denunciation in the Act, for example. There are non-punitive compensatory provisions such as Section 30 which prescribes circumstances under which owners or constructors are liable for losses and damages if they fail to comply with their duty to prepare a list of designated substances at a work site.
In the OHSA “prevention” is sought through effective administration of the Act. This includes mandatory reporting obligations, codes of practice, protection of whistleblowers, health and safety committees, and the right to refuse to work. These, along with inspection and enforcement have a deterrent effect on those who would intentionally or unintentionally fail to comply with the Act. As with other regulatory regimes, there are carrots and sticks built into the OHSA, which include:
This brief article focuses on the enforcement element of the OHSA, and in particular an examination of the search warrant provisions. There are elements within these powerful search warrant provisions that are problematic. This may open investigations to challenge and expose enforcement proceedings to a successful application seeking the exclusion of evidence as having been obtained in violation of the Charteror even a stay of proceedings in some circumstances.
It is clear that a person who is designated under S. 6 of the OHSA as an inspector (“Inspector”) has expansive powers. Many of these are outlined in S. 54, including the authority to “remove… record(s)”, “conduct or take tests” and “make inquiries” and require the production of “records or information” Notably for the purpose of this article, the Inspector may also “enter in or upon any workplace at any time without warrant or notice.
Workplace is broadly defined in the OHSA as “any land, premises, location or thing at, upon, in or near which a worker works.” The power to “enter” in S. 54 is limited to exclude a person’s dwelling. It offers two alternate routes to entry, namely “consent of the occupier” or “the authority of a warrant”. Warrants can be issued under the OHSA or the Provincial Offences Act, 2001, c. 26, s.1 (POA).
This article focuses on the OHSA and is intended to address situations in which an Inspector utilizes an OHSA or POA warrant to enter a workplace or a dwelling for the purpose of search and seizure. This is related but separate from the topic of arrest warrants which are not addressed in this article.
In some circumstances a workplace and a dwelling may be the same location if, for example, employees work out of the business owner’s home. There is, however, a meaningful and important distinction between workplace and dwelling for search and seizure law. For example, the two concepts do not overlap where a search warrant is obtained for a home office which was used for some purpose related to the business but which does not qualify as a “workplace” within the meaning of the Act.
This investigative power is set out in Sections 158 to 160 of the POA. Section 158 sets out the test for issuance of a search warrant as follows:
158 (1) A justice may at any time issue a warrant under his or her hand if the justice is satisfied by information upon oath that there are reasonable grounds to believe that there is in any place,
(a) anything on or in respect of which an offence has been or is suspected to have been committed; or
(b) anything that there are reasonable grounds to believe will afford evidence as to the commission of an offence.
The POA includes a number of restrictions on search warrants such as a requirement that it must specify time window for execution that cannot be longer than 15 days and that it must be executed between 9 a.m. and 6 p.m. unless the issuing justice “otherwise authorizes”. Additionally, it contains provisions to deal with the manner of execution and post-execution issues such as how seized property is to be dealt with and to address situations where solicitor-client privilege is claimed.
The search warrant powers under the OHSA are understood through a reading of a number of areas of the Act. For example, an OHSA search warrant is always assessed against the backdrop the numerous and broad investigatory powers that are already accorded to S. 6 “appointed” Inspectors under S. 54 of the Act “for the purposes of carrying out his or her duties and powers under this Act and the regulations…”
It is in the context of exercising those “duties” and “powers” where an Inspector seeks to enter a dwelling house that a specific warrant requirement is imposed:
S. 54(2) An inspector may only enter a dwelling or that part of a dwelling actually being used as a workplace with the consent of the occupier or under the authority of a warrant issued under this Act or the Provincial Offences Act.
The authority for “a warrant issued under this Act” is found in Section 56 as follows:
56 (1) On application without notice, a justice of the peace or a provincial judge may issue a warrant authorizing an inspector, subject to this section, to use any investigative technique or procedure or to do any thing described in the warrant if the justice of the peace or provincial judge, as the case may be, is satisfied by information under oath that there are reasonable grounds to believe that an offence against this Act or the regulations has been or is being committed and that information and other evidence concerning the offence will be obtained through the use of the technique or procedure or the doing of the thing.
The Inspector may be authorized in the warrant to be assisted by one or more persons who have “special, expert or professional knowledge”.
The OHSA also specifies what it describes as “Terms and Conditions of Warrant” in S. 56 (1.2) as:
(1.2) The warrant shall authorize the inspector to enter and search the place for which the warrant was issued and, without limiting the powers of the justice of the peace or the provincial judge under subsection (1), the warrant may, in respect of the alleged offence, authorize the inspector to,
(a) seize or examine and copy any drawings, specifications, licence, document, record or report;
(b) seize or examine any equipment, machine, device, article, thing, material or biological, chemical or physical agent;
(c) require a person to produce any item described in clause (a) or (b);
(d) conduct or take tests of any equipment, machine, device, article, thing, material or biological, chemical or physical agent, and take and carry away samples from the testing;
(e) take measurements of and record by any means the physical circumstances of the workplace; and
(f) make inquiries of any person either separate and apart from another person or in the presence of any other person.
A warrant issued pursuant to the OHSA “is valid for 30 days or such shorter period as may be specified in it.” Notably and importantly, the Act also provides that “the warrant may contain terms and conditions in addition to those (statutorily) provided for … as the justice of the peace or provincial judge… considers advisable in the circumstances”and that nothing in Section 56 “restricts any power or duty of an Inspector under this Act or the regulations…” This is a critically important feature of the entire OHSA investigatory regime. The Inspector does not need a search warrant to carry out any of the his or her non-warrant investigatory steps or techniques if it is authorized under the Act or regulations. This aspect of the regime will appear straightforward at first but with closer thought it is clear that there fact that the powers and duties referred to have to be “under” the Act or regulations arguably has some significant implications.
The most important of those is that the powers are subject to law, and they are also subject to the Charter. The search warrant provisions are in addition to and complementary to the standard OHSA Inspectorial powers.
At the outset, it is important to compare the differences between the two available warrant regimes, OHSA and POA. I is worth mentioning that there may be other applicable regulatory regimes including the Criminal Code and its offences, and that investigations may in some cases overlap in this additional sense. Where police are involved in a related or even an unrelated investigation arising out of a workplace incident, the complexity of the issues, the nature of the potential penal consequences and the investigative tools available will vary. This article addresses primarily only the OHSA and touches upon the POA because of the specific inclusion of POA warrants in the OHSA.
The major statutory differences are set out in the following table:...