Sarah Paquet, director and chief executive officer of FINTRAC, Canada's financial intelligence unit, in the Ottawa office on Feb. 8.Ashley Fraser/Globe and Mail
This country’s financial-crime watchdog is finally baring its teeth.
The Financial Transactions and Reports Analysis Centre of Canada is sending a clear message that it will no longer give big banks the kid-glove treatment when they cut corners on compliance.
FinTRAC delivered a one-two punch this month when it disclosed financial penalties that were levelled against Royal Bank of Canada and Canadian Imperial Bank of Commerce for failing to flag suspicious transactions that were related to money laundering and for other “administrative violations.”
Those announcements caused jaws to drop across the industry, including at banks in the United States, because they were the first instances of FinTRAC openly censuring any of the Big Six Canadian lenders.
FinTRAC then followed up by announcing it was breaking with past practice and would provide the public with more details about violations that result in financial penalties henceforth – a signal that its compliance crackdown will ramp up in the new year.
The regulator’s new posture is ruffling feathers in the banking industry, with some executives privately attributing the shift to Canada’s coming evaluation by the Financial Action Task Force, an intergovernmental body that sets standards to combat financial crime.
Sure, that FATF review is a consideration. Showing leadership is also a priority because Canada is currently serving a two-year term as vice-president of the organization and is also co-chair of a related body known as the Asia-Pacific Group on Money Laundering.
But FinTRAC’s new tact also follows years of criticism that it long gave the Big Six special treatment by shielding them from public scrutiny if they fell short of their compliance obligations.
Frankly, it’s surprising that a major lender hasn’t faced a financial penalty before now. After all, the federal government’s last two threat assessments, published in 2015 and 2023, gave domestic banks a “very high vulnerability rating” for both money laundering and terrorist financing.
The government’s most recent threat assessment also stressed that organized crime groups involved in mortgage fraud appear to launder funds through banks and other businesses.
As a point of comparison, credit unions and foreign bank branches and subsidiaries were only given a “high vulnerability rating” this year. But FinTRAC has already taken action against these and other businesses, according to its website.
In my many years of reporting on money laundering, numerous sources have recounted how major banks push back against regulatory enforcement behind closed doors including through the use of lawyers and government-relations representatives. (The Globe and Mail is not identifying these individuals because they were not authorized to speak to the media about regulatory matters.)
Times have changed, and those tactics will no longer fly with FinTRAC.
Chief executive officers and corporate directors at major banks must read the tea leaves and become directly engaged with anti-money laundering and anti-terrorist financing efforts. Compliance cannot exist in a bubble.
Here’s why.
Ottawa is mulling amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, including those that would give FinTRAC the ability to provide additional transparency about violations and penalties.
A recent government consultation document specifically notes that FinTRAC provides “limited information” in its public notices compared with its Australian and American counterparts.
Beefing up FinTRAC’s disclosures would improve deterrence because banks and other businesses would be more motivated to mitigate reputational risks.
The tone from the top of FinTRAC has also changed. CEO Sarah Paquet has been blunt in recent months that she will not tolerate lax compliance from any business. She is even offering to personally speak with CEOs about the risks.
“If we still see deficiencies, it’s time to take action,” Ms. Paquet said in an interview with The Globe last month.
Businesses, she added, have “a social and moral imperative” to meet their compliance obligations.
“This is not a cost centre. This is something you must do because you need to be with us to protect the financial system, to protect Canadians.”
She also made another observation: Too many businesses are looking at risks in silos. As she pointed out, operational risk, fraud risk and cyber risk are often intertwined with financial crime such as money laundering and human trafficking.
“So, you cannot think that meeting your compliance obligation is just ticking the boxes. It is really looking at it as an umbrella to all of your activities.”
The notion that FinTRAC is being heavy-handed with big banks is absurd. This month’s enforcement actions should serve as a wake-up call for Bay Street. The watchdog is just getting started.