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From the FATF to Canada:
Recommendation 35 (Sanctions) and its Application in Canada
Obrad Grkovic
March 21, 2016
Introduction
Twenty five years ago the newly formed Financial Actions Task Force
(hereafter FATF) has launched its first version of the now renowned 40
Recommendations that outline the international standards on combating money
laundering and the financing of terrorism (FATF on Money Laundering Report,
1990). A quarter of a century later, the FATF Recommendations have developed
extensively with the emerging relevance and importance of both Anti-Money
Laundering (AML) and Counter-Terrorist Financing (CTF) practices globally.
One of the noticeable developments relates to a state’s role in sanctioning,
punishing and penalizing non-compliant financial institutions and designated
non-financial businesses and professionals (DNFBP) that violate AML/CTF
regulations. Namely, in the first FATF 40 Recommendations Report, there are no
clear mentions that state authorities should sanction, punish or penalize financial
institutions and DNFBPs for non-compliance with local AML/CTF regulations.
Instead, the FATF highlighted that competent state authorities are to act as
mentors to financial institutions and DNFBPs and supply them with necessary
guidelines to tackle suspicious activities (FATF on Money Laundering Report,
1990, p.33). Without comprehensive and robust measures to mitigate non-
compliance, financial institutions and DNFBPs would not have reasons to report
suspicious activities to authorities and would not get punished or penalized for it,
which would result increased money laundering activity. This is precisely why the
FATF introduced a specific recommendation addressing this issue.
FATF’s Recommendation 35
In order to more effectively intercept money laundering practices, the FATF
created a recommendation encouraging competent state authorities to sanction,
punish and penalize financial institutions and DNFBPs that do not comply with
local AML regulations (The FATF Recommendations, 2012). The
recommendation reads:
“Countries should ensure that there is a range of effective, proportionate and
dissuasive sanctions, whether criminal, civil or administrative, available to deal
with natural or legal persons covered by Recommendations 6, and 8 to 23, that
fail to comply with AML/CFT requirements. Sanctions should be applicable not
only to financial institutions and DNFBPs, but also to their directors and senior
management.” (The FATF Recommendations, 2012, p.26)
From the above, it is clear that non-compliance of reporting entities, as well
as their directors and senior management, should not be tolerated. This
intolerance should be manifested through a range of mechanisms that do not

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only include administrative penalties such as financial retributions, but also
criminal sanctions.
Recommendation 27 ties into this point and adds that there should be
“disciplinary…sanctions, including the power to withdraw, restrict or suspend the
financial institution’s license, where applicable” (The FATF Recommendations,
2012, p.23). The power to restrict or suspend the work of financial institutions or
DNFBPs gives competent authorities and the policies they enforce teeth. Having
criminal, civil and administrative sanctions in place, reporting entities will make
an extra effort to maintain all their clients’ records, monitor their transactions
and file suspicious activity reports to authorities, among other things. In order to
put sanctions on a reporting entity, there has to be reasonable grounds for
competent authorities to believe that violations are being made. To do so,
recommendation 27 also suggests authorities to make policies that would give
them power to supervise, monitor, and conduct inspections on financials
institutions and DNFBGs in order to ensure that they all regularly meet the
compliance requirements. Even though states around the world apply the FATF
Recommendations to varying degrees, Canada has taken a serious step in
combatting non-compliance of local reporting entities through its Proceeds of
Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
Recommendation 35 and Canada
Canada has made significant strides in suppressing money laundering
activities through the PCMLTFA. In 2000, policymakers revised the act and
through it established the Financial Transactions and Reports Analysis Centre of
Canada (FINTRAC). FINTRAC is Canada’s Financial Intelligence Unit (FIU)
whose purpose is to “facilitate the detection, prevention and deterrence of money
laundering and the financing of terrorist activities” (FINTRAC website). Within
the 2006 amendments of the act, FINTRAC was granted the authority to
sanction, penalize and punish non-compliant reporting entities under Part 4.1
“Notices of Violation, Compliance Agreements and Penalties” and Part 5
“Offences and Punishment” (PCMLTFA, 2015). Both parts describe the
consequences of non-compliance and outline the punishment mechanisms. As
the FATF suggests, the PCMLTFA has put in place a range of criminal, civil and
administrative sanctions ranging from administrative monetary penalties (AMPs
from $100,000 -$2 million) to imprisonment. Classifying violations as minor
(summary conviction), serious (conviction on indictment) or very serious
(conviction of indictment) determines the severity of the sanctions imposed.
Furthermore, the nature of the violation, whether the reporting reporting entity
is an individual or a financial institution/DNFBG, and the compliance history
also impact the specifics of the punishment.
An interesting aspect of Part 4.1 is that instead of solely dissuasively
punishing violating reporting entities, it wants them to learn from their mistakes
in order to be better comply with regulations in the future. This can be seen in
paragraph 72.11 wherein “ […] penalties have as their purpose to encourage
compliance with this Act rather than to punish, the harm done by the violation
and any other criteria that may be prescribed by regulation” (PCMLTFA, 2015,
p.84). One such mechanism entails FINTRAC proposing to financial

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institutions/DNFBGs the opportunity to enter into a Compliance Agreement with
the purpose of “comply[ing] with the provision to which the violation relates
within the period, and be subject to the terms and conditions, specified in the
agreement” (PCMLTFA Paragraph 73.16 (1) (a), 2015, 86). By entering into such
an agreement, reporting entities not only learn from their mistakes and
incorporate a Risk Based Approach in their compliance framework, but also
receive the privilege to pay a “reduced penalty for the violation if the compliance
agreement is entered into” (PCMLTFA Paragraph 73.16 (1) (b), 2015, 86). Having
such a policy in place shows the commitment of competent authorities not only to
penalize and punish, but also to strengthen compliance measures within
reporting entity structures. Future revisions of the FATF Recommendations
should include this aspect so that reporting entities have the opportunity to learn
from their mistakes and improve their internal compliance policies.
In order to assess the effectiveness and application of Parts 4.1 and 5,
paragraph 73.22 highlights that FINTRAC has the right to publish all of the
information of a case once the proceedings of a violation have officially ended
(PCMLTFA, 2015, 88). Violations are made public on FINTRAC’s “Public notice
of administrative monetary penalties” webpage where descriptions of each case,
the perpetrators, the nature of the violation, and the amount of money paid are
presented. According to the statistics on the same webpage, 68 AMPs have been
imposed from 2008-2015 on non-compliant reporting entities, which resulted in
around $2.2 million of fines in total. FINTRAC’s 2015 Annual Report
alternatively published that it “has issued 73 notices of violation totalling
$5,117,710” (FINTRAC Annual Report 2015, p.10). In either case the numbers
may seem high, however when analyzing the statistics it is clear that each
reporting entity committed minor violations resulting in lower fines. Whether
these statistics indicate that Canadian reporting entities have generally been
complying with regulatory measures or not is still uncertain. Nevertheless,
according to the FATF’s latest Mutual Evaluation of Canada it has praised the
implementation of the AMPs and had no further recommendations or concerns
(FATF’s 6th Follow Up Report, Mutual Evaluation of Canada, 2014).
Gaps in Sanctioning Reporting Entities
Despite having a thorough framework on sanctioning, penalizing and
punishing non-compliant reporting entities, which is in full accordance with the
FATF’s Recommendations, the recent Vancouver real estate dilemma is raising a
lot of questions on the law’s effectiveness. Namely, as the Globe and Mail
reported “dozens of Vancouver-area real estate firms are failing to comply with
federal anti-money-laundering laws that require them to identify who their
clients are and where their money comes from” (18 March, 2016, online). Having
such a large amount of potentially non-compliant reporting entities in one
Canadian city begs the question: how many more potentially non-compliant
reporting entities are there in other Canadian cities? Even though laws against
non-compliance exist, if they are not enforced their purpose is useless. It is clear
that FINTRAC has to put significant resources into monitoring compliance and
sanctioning those that do not comply. Additionally, it has to invest more in
educating reporting entities seeing as many “don’t even understand the laws or

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what they are supposed to do” and how they can get punished (The Globe and
Mail, 18 March, 2016, online),
Overall, Canada has incorporated all aspects of FATF’s Recommendation
35. It has gone a step further with the Compliance Agreement option, which is
something the FATF ca suggest in future Recommendation updates. Nonetheless,
from the recent Globe and Mail story on the large amounts of non-compliant
reporting entities in Vancouver, it is clear that FINTRAC has to invest more in
monitoring and sanctioning practices so that violations do not go unpunished.
Works Cited
FATF. (2014, Feb.). 6th Follow-Up Report: Mutual Evaluation of Canada. Retrieved
from FATF’s website on 20 Mar. 2016: http://www.fatf-
gafi.org/media/fatf/documents/reports/mer/FUR-Canada-2014.pdf
FATF. (2012). INTERNATIONAL STANDARDS ON COMBATING MONEY
LAUNDERING AND THE FINANCING OF TERRORISM & PROLIFERATION:
The FATF Recommendations. Retrieved from FATF’s website on 20 Mar. 2016:
http://www.fatfgafi.org/media/fatf/documents/recommendations/pdfs/FATF_Reco
mmendations.pdf
FATF. (1990). Financial Action Task Force on Money Laundering: Report and Synopsis
of the Forty Recommendations. Retrieved from FATF’s website on 19 Mar. 2016:
http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF
%20Recommendations%201990.pdf
FINTAC. (2015). Combatting Money Laundering and Terrorist Financing: FINTRAC
Annual Report 2015. Retrieved from FINTRAC’s website on 18 Mar. 2016:
http:/www.fintrac.gc.ca/publications/ar/2015/1-eng.asp
Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Statues of Canada,
c.17. Canada. Department of Justice. 2000. Web. 18 Mar. 2016.
Tomlinson, Kathy. (2016, Mar. 18).Vancouver housing market ‘vulnerable’ to money
laundering. The Globe and Mail. Retrieved from:
http://www.theglobeandmail.com/news/national/vancouver-housing-market-
vulnerable-to-money-laundering/article29285770/