Court File and Parties

Court File No.: CV-17-00578412 Date: 2018-07-05 Ontario Superior Court of Justice

Between: Bank of Montreal, Applicant – and – Asia Pacific International Inc. and The Toronto-Dominion Bank, Respondents

Counsel: Graeme Hamilton and Maureen Doherty, for the Applicant Daniel Chitiz and Bettine Xue Griffin, for the Respondent, Asia Pacific International Inc. No one appearing for the Respondent, the Toronto-Dominion Bank

Heard: April 3-5, 2018

Reasons for Judgment Nishikawa J.

Overview

[1] The issue in this Application is, as between the Applicant and the Respondent, who should bear the loss resulting from a fraud committed by a third party.

[2] The Applicant, Bank of Montreal (“BMO”), seeks the return of $428,000, which it paid by wire transfer at the request of a client. BMO later discovered that the individual who requested the wire transfer was not the client, but an imposter. The Respondent, Asia Pacific International Inc. (“API”), completed a transaction for the sale of gold that was to be paid for by the wire transfer. API claims that it is entitled to the funds.

Factual Background

The Parties

[3] The Applicant, BMO, is a chartered bank incorporated pursuant to the Bank Act, S.C. 1991, c. 46, and carries on business in the province of Ontario and throughout Canada.

[4] The Respondent, API, is a corporation incorporated pursuant to the laws of Ontario. API operates as “Bullion Mart” and is a retailer of precious metals, including gold, silver and platinum bullion bars and coins. API is an authorized distributor of the Royal Canadian Mint. Moniruz Zaman is the Chief Executive Officer and Executive Director. His spouse, Shahanima Zaman, owns 100 percent of the shares in API. Mr. and Mrs. Zaman are the only directors of API.

[5] As a dealer in precious metals and stones (“DPMS”), API is subject to obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, S.C. 2000, c. 17 (the “Proceeds of Crime Act”) and the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulation, SOR/2002-184 (the “Proceeds of Crime Regulation”), including ascertaining the identity of its customers, and submitting “large cash transaction” reports and “suspicious transaction” reports. As a financial institution, BMO is also subject to obligations under the Proceeds of Crime Act and the Proceeds of Crime Regulation.

[6] The Respondent, the Toronto-Dominion Bank (“TD Bank”), is a chartered bank incorporated pursuant to the provisions of the Bank Act. The funds at issue were transferred from BMO to a TD Bank account held by API, but were not released to API once BMO advised that the wire transfer was fraudulently obtained. TD Bank has paid the funds into court and took no part in this proceeding.

Wire Transfer Obtained by Imposter

[7] On June 27, 2017, an individual purporting to be BMO customer, Ms. Haiyan Lin (the “Imposter”), attended at a BMO branch at 900 Dufferin Street in Toronto. The Imposter was served by BMO customer service representative, Carlos Figueiredo.

[8] The Imposter did not have a debit card, which is requested when a customer wishes to make a transaction at a branch. Since she did not have her debit card, Mr. Figueiredo took further steps to verify the individual’s identity, as required by BMO’s protocol. The Imposter was able to provide the following information: the correct telephone number, address and postal code for the account; and identification documents, in this case, a Social Insurance Number card and an Ontario driver’s licence in the name of Haiyan Lin.

[9] The Imposter stated that she wished to make a wire transfer. Mr. Figueiredo advised her that he would need to ask further security questions to verify her identity. In response to Mr. Figueiredo’s inquiries, the Imposter was able to provide the following information: that she had Canadian and United States dollar Investorline accounts, the correct balances in her savings and chequing accounts, and details about recent transactions in those accounts.

[10] Based on the Imposter’s responses, and her manner in responding to them, Mr. Figueiredo proceeded to ask the Imposter for information about the requested wire transfer. The Imposter provided him with a handwritten sheet of paper which included the account information for the beneficiary’s branch. She advised Mr. Figueiredo that she wished to transfer $214,000.

[11] The amount requested was in excess of the Canadian funds available in Ms. Lin’s account. Mr. Figueiredo looked into the exchange rate to convert U.S. funds from Ms. Lin’s U.S. dollar account into Canadian funds. The Imposter then advised Mr. Figueiredo that she wished to increase the transfer to $428,000. When Mr. Figueiredo inquired why she wanted to transfer more money, the Imposter indicated that she was purchasing gold and “could get more with Canadian funds.” Mr. Figueiredo made further inquiries about the exchange rate.

[12] Mr. Figueiredo printed the wire transfer forms and showed them to Michael Mendes, the Assistant Branch Manager, for review. Mr. Mendes went to Mr. Figueiredo’s wicket and asked the Imposter her occupation. The Imposter responded that she was an investor and was purchasing gold. Although Mr. Mendes viewed the customer profile, he did not verify the response against the employment information on the profile. A printed copy of the customer profile that was available online shows Ms. Lin as “unemployed.” Mr. Mendes examined the Imposter’s driver’s licence.

[13] Mr. Mendes was satisfied that the Imposter’s identification was verified, and proceeded to enter an authorization code for the wire transfer. The authorization code did not work, and Mr. Mendes went back to his office to seek assistance. During this time, Mr. Figuereido spoke further with the Imposter. When he asked what she was going to do with the gold, she stated that she found it at a good rate and wanted to purchase it. During the entire transaction, Mr. Figuereido found the Imposter to be calm and confident.

[14] After approximately ten minutes, Mr. Mendes returned and successfully inputted the authorization code. The wire transfer was sent. The wire transfer requisition form included the following information:

• The ordering customer was Haiyan Lin;
• The beneficiary of the wire transfer was Asia Pacific International Inc.;
• The beneficiary’s bank was TD Canada Trust;
• The account number to be credited; and
• The wire transfer was made for a purchase of gold.

Purchases of Gold by Filali

Aborted Transaction

[15] On May 12, 2017, Omar Filali attended at API’s retail office and made a small purchase of Royal Canadian Mint gold coins, for a value of $3,516. The gold coins were sold to Filali over the counter.

[16] Later the same day, Filali sent an email to API for a quote for 30 kilograms of Royal Canadian Mint gold bars. Mr. Zaman provided him with information, including options for making payment, and an account opening form.

[17] On May 23, 2017, an API sales representative, Yusuf Molakandov, provided Filali with a quote of $1,653,174 for 30 kilograms of gold bars. Filali responded “lets lock in this price” by email and said he would indicate the method of payment.

[18] On the same day, Filali sent a completed “corporate application” form, which was received and reviewed by Mr. Molakandov. Filali had checked the box for an “individual” as opposed to a “business” application. However, he also provided some corporate information. He named his spouse “Iman Filali” as owning 100 percent of the corporation. Filali left blank the section regarding “nature of business.” He gave the address on his driver’s licence as his address. In the “Banking Information” section, he provided account information for a CIBC account. Mr. Molakandov conducted a Google search of Omar Filali but found nothing that raised any suspicions.

[19] The following day, Mr. Molakandov followed up with Filali and sent him an invoice for the gold purchase, but Filali replied that he was “still shopping around.”

[20] On May 25, 2017, after further inquiry from API, Filali advised by email that he had purchased the gold at a better price from a competitor. Mr. Molakandov responded by saying that in the future, he would be expected to complete the transaction after confirming a quantity and price, because of charges incurred at the seller’s end.

[21] Filali did not contact API again until June 26, 2017. On that day, Filali sent an email to Mr. Zaman to inquire about the price of ten kilograms of Royal Canadian Mint gold bars. Filali also stated that he needed to pick up the order the following day. API quoted a price of $53,500 per kilogram to Filali.

The June 2017 Gold Purchase

[22] On June 27, 2017 Filali sent an email to Mr. Zaman to inform him that $428,000 was wire transferred to API’s TD account to purchase eight kilograms of Royal Canadian Mint gold bars. Later that afternoon, Filali attended API’s retail office.

[23] An API employee, Vinod Patel, verified Filali’s identity by reviewing his driver’s licence and obtaining a copy. Based on a discussion with Mr. Zaman, Mr. Patel advised Filali that the wire transfer documents that he provided were insufficient and that he would have to return the next day with the original documents.

[24] In the meantime, Mr. Patel verified receipt of the wire transfer by contacting API’s account manager at TD Bank, who confirmed that $427,928.50 had been wired to API’s account. API’s accountant, Aftab Chaudhury also confirmed that a wire transfer for this amount had been received into API’s TD account on June 27 by reviewing API’s online statement. It was presumed that this amount was the $428,000 transfer minus a service charge.

[25] On June 28, 2017 Filali returned to the API retail office and provided Mr. Patel with what appeared to be the original wire requisition documents, which showed Filali to be the transferor of the wired funds.

[26] Filali had wanted to pick up the gold at API, but API did not have sufficient gold on site to fulfil the order. Mr. Patel advised Filali that he would have to wait until the following day when the gold was delivered by Brinks Canada Ltd. (“Brinks”), API’s storage provider. Filali then inquired about picking up the gold from Brinks.

[27] On June 28, 2017 API instructed Brinks to release the gold bars to Filali, and advised that the customer would be there at 11:45 a.m. Brinks responded that because they were conducting an audit, the gold could not be released until 1:00 p.m. at the earliest. At approximately 1:00 p.m., Filali attended Brinks’ Etobicoke location to receive the gold bars. The Brinks’ driver verified Filali’s driver’s licence with the copy that had been sent by API, and released the gold bars.

Discovery of the Fraud

[28] On June 29, 2017 Ms. Haiyan Lin attended at the Leslie Street branch of BMO. She requested four U.S. dollar bank drafts for a total of $10,000 to make charitable donations. Ms. Lin had been a customer of BMO since April 2001, and her accounts were held at the Leslie Street branch, where she did most of her banking.

[29] Ms. Lin was advised that she did not have sufficient funds in her U.S. dollar account to purchase the drafts. This came as a surprise to her, since she expected to have significantly more money in the account. She requested a print-out of her account activity and took it home to review. When Ms. Lin tried to log into the online banking system from home, she received an error message.

[30] Ms. Lin returned to the Leslie Street branch to speak with the Branch manager, Lilia Uzunovic. It was then that Ms. Lin discovered that a wire transfer for $428,000 had been made two days earlier. Ms. Lin was surprised by this information because she did not initiate the wire transfer and had not authorized anyone to initiate a wire transfer from her accounts.

[31] On the same day, a BMO investigator, Philip Emery, initiated an investigation of the fraudulent wire transfer. Mr. Emery viewed the digital video of the Imposter who requested the wire transfer and compared this with images of Ms. Lin, and confirmed that they were not the same person. Mr. Emery contacted the investigations team at TD Bank, which placed a partial hold on the API account.

[32] On June 30, 2017 TD advised API that a hold had been placed on API’s account due to a suspected fraudulent transaction involving the wire transfer. API immediately reported the suspected fraud to the Toronto Police Service. The police have been unable to find Filali or the gold bars.

[33] BMO subsequently restored the full amount of the wire transfer to Ms. Lin’s account on the basis that the transaction had not been authorized by her.

Analysis

The Parties’ Positions

[34] The Applicant, BMO, seeks a declaration that the funds were paid under a mistake of fact and should be returned to BMO. BMO argues that API ought to have known that the gold purchase by Filali was a fraudulent transaction because of numerous suspicious features, as further detailed below.

[35] BMO further argues that API cannot rely upon the defence of change of position because it was in breach of its obligations under the Proceeds of Crime Act and Proceeds of Crime Regulation by failing to obtain necessary information or by failing to report the transaction as suspicious.

[36] API disputes the application of the mistake of fact doctrine and argues that BMO must bear the loss because it was in a better position to prevent the fraud. API’s position is that in proceeding with the wire transfer without sufficiently verifying the identity of the individual requesting it, BMO failed to exercise due diligence and enabled the fraudulent transaction to take place.

What is the Appropriate Framework?

[37] There are two lines of jurisprudence that have emerged from circumstances similar to the facts of this case. Both originate from the doctrine of unjust enrichment, and involve courts applying principles of restitution to determine which party should bear the loss. API argues that the appropriate framework is the analysis applied when there are two innocent victims of a fraud. BMO argues in favour of the application of the doctrine of money paid in mistake of fact. For the reasons further detailed below, I find that the more appropriate framework in the circumstances of this case is the analysis applied to two innocent victims of a fraud. Regardless of which analysis is applied, however, my conclusion is that BMO is not entitled to the return of the funds.

Two Innocent Victims of a Fraud

[38] In Rogers v. Priyance Hospitality Inc., 2016 ONSC 7851, the court had to determine which of two innocent victims to a fraud should bear the loss. A law firm received bank drafts from a client, and issued a cheque from its trust account on the client’s behalf before verifying whether the funds had cleared. It later discovered that the bank drafts were fraudulent. Mesbur J. dismissed the law firm’s request for the return of the funds. In doing so, Mesbur J. relied upon the Supreme Court of Canada’s decision in Marvco Colour Research Ltd. v. Harris, [1982] 2 S.C.R. 774 at para. 24, for the following two principles: (1) that as between two innocent parties, justice requires that the party who was in a position to prevent the loss should bear it; and (ii) a person who takes money obtained by fraud, but takes it in satisfaction of a bona fide debt, is entitled to retain it.

[39] Mesbur J. found that the law firm could not rely upon the doctrine of mistake of fact because the law firm had the ability to determine whether the bank drafts were fraudulent, and was careless in failing to do so. By contrast, the recipient, who was owed significant amounts by the law firm’s client, was not in a position to prevent or discover the fraud.

[40] In Marvco Colour at para. 24, the Supreme Court stated:

The two parties are innocent in the sense that they were not guilty of wrongdoing as against any other person, but as between the two innocent parties there remains a distinction significant in the law, namely that the respondents, by their carelessness, have exposed the innocent appellant to risk of loss, and even though no duty in law was owed by the respondents to the appellant to safeguard the appellant from such a loss, nonetheless the law must take this discarded opportunity into account.

[41] In this case, as between BMO and API, BMO was in a better position to prevent the fraud. Had BMO staff exercised greater diligence in dealing with the Imposter, the wire transfer would not have been made, and the fraud could not have been completed. BMO staff proceeded with the wire transfer, notwithstanding the following circumstances, which, taken together, should have raised significant concerns about the transaction:

• The Imposter did not have a debit card;
• The Imposter attended at a branch different from the customer’s usual BMO branch;
• The Imposter requested a wire transfer for an amount in excess of what was available in Canadian dollars in Ms. Lin’s accounts;
• During the course of the transaction, the Imposter doubled the amount of the wire transfer;
• The signature of the Imposter did not match Ms. Lin’s signature, which was on file and was available electronically;
• The Imposter said she was an investor, while Ms. Lin’s customer profile described her as unemployed;
• The Imposter was withdrawing almost all of the money in Ms. Lin’s accounts to purchase gold;
• None of the Imposter’s answers were responsive to the questions that BMO staff were asking, yet, they accepted them and made no further inquiries. Specifically, she did not explain why she was buying gold or why she increased the amount of the transfer.
• The Imposter did not appear to be Ms. Lin’s age, which would have been evident from the date of birth on her customer profile; and
• BMO staff paid no attention to the fact that one or more of the accounts was jointly held by Ms. Lin and her spouse.

[42] BMO’s own policy on “Wire Payments Procedures and Processes” states that it is “the employee’s responsibility to ensure that the individual requesting the wire transfer is authorized to perform the transaction and authenticate that the request is from the BMO customer and not an impersonator.” BMO staff remained satisfied with the initial responses to the authentication questions, even though the wire transfer was for a significant amount of money. This was not consistent with BMO’s policy requiring heightened authentication efforts where a higher sum is at issue. Moreover, Mr. Figueiredo admitted that when he asked the authentication questions, he did not look at BMO’s guide on sample questions to establish identity.

[43] When the Imposter presented the note requesting a wire transfer for $214,000, there was only $40,000 in the account from which she sought to withdraw funds. Mr. Figueiredo then advised that she had sufficient funds in the U.S. dollar account. The information that the Imposter was able to provide for identification purposes related only to two accounts, meaning that she did not in fact know how much was in the other accounts until BMO staff told her. The Imposter then sought a wire transfer for double the original amount, based on additional information about the amounts in other accounts provided BMO staff. In other words, BMO staff enabled the Imposter to take a significantly larger sum from Ms. Lin’s accounts. The sudden doubling of the amount of the wire transfer should have been a red flag. Not only did BMO staff not only fail to see this, but they facilitated the wire transfer of $428,000, which could not have been completed without pooling money from other accounts held by Ms. Lin.

[44] At no point did it appear to concern BMO staff that at least one of the accounts was jointly held with Ms. Lin’s spouse, and that they were being substantially depleted. After the funds were transferred to make up the total for the wire transfer, there was only $327 left in the Canadian account and a shortfall of over $9,000 in the U.S. dollar account.

[45] Despite these flags, Mr. Figueiredo maintained on cross-examination that he did not see any need for further authentication because the Imposter had answered the initial questions correctly. He also maintained that he did not find the request for a wire transfer of $428,000 extraordinary, even though it was unlike any other transactions in Ms. Lin’s accounts. Certain basic verification steps that could have been taken were not. The signature on the wire transfer request was not verified against Ms. Lin’s signature, which was available online. A phone call to Ms. Lin’s branch, which could have been made while waiting for the issue with the authorization code to be resolved, was not made. If BMO staff had contacted Ms. Lin’s branch, where she was well-known, they would have been advised that Ms. Lin generally conducted her banking from her branch, and a physical description of Ms. Lin would not have matched that of the Imposter.

[46] Once the wire transfer was authorized by BMO and the funds were transferred to TD Bank, API was entitled to rely upon the transfer as properly authorized. API had no means of knowing anything about the circumstances surrounding the wire transfer. In fact, API required that Filali provide the original wire transfer documents, which falsely showed his name as the transferor.

[47] This is not to say that API on its end was not required to exercise greater diligence. API’s dealings with Filali were also less than prudent. API too failed to be alert to certain warning signs, as will be further detailed below. I nonetheless find that applying the principles that courts have developed to determine which party should bear the loss of a fraud by a third party, BMO, through its careless conduct, exposed API to the risk of loss, and is thus not entitled to recover the $428,000.

The Doctrine of Mistake of Fact

[48] BMO relies upon the test set out by the Supreme Court of Canada for recovering money paid under mistake of fact in B.M.P. Global v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504. In B.M.P. Global, at para. 22, the Supreme Court adopted the test articulated in Barclays Bank Ltd. v. W.J. Simms Son & Cooke (Southern) Ltd., [1979] 3 All E.R. 522 (Q.B.):

1. If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact.
2. His claim may however fail if: (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorized to receive the payment) by the payer or by a third party by whom he is authorized to discharge the debt; (c) the payee has changed his position in good faith, or is deemed in law to have done so.

[49] In B.M.P. Global, the payee received an unsolicited cheque for over $900,000 and deposited it into its account. When the bank discovered that the cheque was forged, it sought the return of the funds. B.M.P. had disbursed some of the monies, and insisted on keeping the balance. The Supreme Court held that the bank was entitled to the return of the funds.

[50] The circumstances of the present case differ from B.M.P. Global and cases where, for example, money is paid on a forged cheque, or to the wrong party, or a gratuitous payment is made in error. The factual circumstances of this case raise a question as to whether a payor can rely upon the doctrine of mistake of fact when it could have, through the exercise of reasonable diligence, discovered the mistake. In Rogers v. Priyance Hospitality, Mesbur J. found that because it was within the law firm’s ability to determine that the bank drafts were fraudulent, the law firm’s error could not constitute a mistake of fact at law.

[51] Similarly, in this case, I have difficulty accepting that BMO’s payment of the wire transfer could constitute a mistake of fact, where BMO was fully capable of discovering that the Imposter was not their customer before proceeding with the wire transfer. For this reason, I find that the Marvco analysis, as applied in Rogers v. Priyance Hospitality, more appropriate. However, in the event that I am mistaken, and BMO’s error could constitute a mistake of fact, I would nonetheless find that BMO is not entitled to recovery because API can rely on the defence of change of position.

Can API Rely Upon the Defence of Change of Position?

[52] In B.M.P. Global, at para. 63 Deschamps J. stated that the change of position inquiry involves determining whether the payee departed with the funds. B.M.P. Global was unusual in that the payee neither paid good consideration nor changed its position. The payee had no entitlement to the funds and knew this to be the case. The bank was thus entitled to recover the funds that were paid in mistake of fact.

[53] In my view, in the event that BMO paid the funds under a mistake of fact, API would be entitled to rely upon the doctrine of change of position. Once API knew that the wired funds were in its account, and verified the original wire transfer documents, API released the gold bars to Filali. API thus changed its position in reliance on the wire transfer having been duly authorized. Had API known that the wire transfer was fraudulent, it would not have released the gold. API is in the position of having released the gold without having received payment for them.

[54] The question that remains is whether API’s change of position was in good faith, or whether API engaged in wrongful conduct that would preclude its recovery of the funds. The change of position defence is not be available to a wrongdoer, as determined by the Supreme Court in Garland v. Consumers’ Gas Co., 2004 SCC 25, [2004] 1 S.C.R. 629. BMO argues that API’s release of the gold bars cannot constitute a bona fide change of position because API failed to comply with its obligations under the Proceeds of Crime Act and the Proceeds of Crime Regulation.

[55] In Garland v. Consumers’ Gas, the Supreme Court held that a defendant who committed an offence by demanding payment could not rely on the defence of change of position. In that case, the defendant regulated entity charged late payment penalties to its customers. It later became an offence to charge a criminal rate of interest, and customers commenced a proceeding to recover late payment penalties paid after the provision came into force. The Supreme Court held that the defendant was not entitled to keep the penalties paid after it was on notice that they were unlawful, or when the proceeding was commenced: Garland v. Consumers’ Gas, at para. 59.

Was API Required to Report the Transactions as Suspicious?

[56] The Proceeds of Crime Act requires certain parties, including financial institutions and DPMSs, to be alive to suspicious transactions. Section 7 requires certain entities to report to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) every financial transaction that occurs or that is attempted in the course of their activities and in respect of which there are reasonable grounds to suspect that:

(a) the transaction is related to the commission or the attempted commission of a money laundering offense; or (b) the transaction is related to the commission or the attempted commission of a terrorist activity financing offence.

See also: Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations, SOR/2001-317.

[57] In this case, there is no information or allegation that the transactions in question were related to a terrorist financing offence. The question is therefore whether there were reasonable grounds to suspect that the transaction related to the commission of a money laundering offence. The offence of money laundering is found in s. 462.31 of the Criminal Code, R.S.C. 1985, c. C-46, which states:

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.

[58] In the regulatory context, courts have interpreted “reasonable grounds” to suspect as requiring something more than a mere suspicion, but less than the standard applicable in civil matters of proof on the balance of probabilities. Reasonable grounds will exist where there is “an objective basis for the belief which is based on compelling and credible information.” Ontario (Alcohol and Gaming Commission of Ontario) v. 751809 Ontario Inc. (Famous Flesh Gordon's), 2013 ONCA 157.

[59] BMO maintains that all three of API’s transactions with Filali, the first small purchase of gold, the aborted purchase of eight kilograms of gold in May 2017, and the June 27, 2017 purchase, should have been reported to FINTRAC as suspicious. The features of the transactions that BMO points to as suspicious include:

• Filali’s execution of a small cash transaction before attempting a transaction of significantly greater value;
• Filali aborted a large transaction in May 2017 without providing a legitimate explanation for doing so;
• The driver’s licence provided by Filali lacked the holographic photo in the corner and was a fake;
• Significant gaps in the information provided by Filali on the customer application form;
• Inconsistencies in the information provided on the form, including an email address which did not match Filali’s name;
• The funds for the purchase of gold bars came an account at TD Canada Trust, rather than the CIBC account that Filali had identified on his application form; and
• Filali was in a rush to take delivery of the gold.

[60] BMO argues that the aborted transaction was suspicious because it was unlikely that Filali found a better price for the gold, since the “spot price” of gold actually increased between May 23 and 25, 2017. In this context, BMO requests that this court take judicial notice of the “spot price” of gold on the dates of the aborted transaction with Filali. BMO relies upon the price increase to argue that the aborted transaction should have raised flags and been reported by API as suspicious.

[61] I find it unnecessary to determine whether judicial notice of the spot price of gold should be taken, as this would not further the analysis. Even if the spot price of gold did increase over the relevant time period, this would not necessarily render the aborted transaction suspicious. There may be many reasons why someone would decide not to complete a transaction, including obtaining better terms or not having the funds. While Filali turned out to be a fraudster, the fact of the transaction having been aborted on its own was not, in May 2017, sufficient to make it suspicious.

[62] In respect of Filali’s first purchase of gold over the counter and the aborted purchase in May 2017, there was very little reason for API to suspect that the transactions related to the commission of a money laundering offence. The first purchase was for a small quantity of gold coins, and would have been routine to API, who is in the business of selling gold. There was also little objective basis for API to suspect that there was anything more to Filali’s failure to proceed with the aborted transaction than the reason he gave. Both transactions only now appear suspicious with the benefit of hindsight. At the time, the transactions, whether on their own or taken together, would not have given rise to reasonable grounds to suspect that they were related to a money laundering offence, resulting in an obligation to report them.

[63] As noted above, the issue is not whether the surrounding circumstances were suspicious, but whether API had reasonable grounds to suspect that the gold purchase related to the commission of a money laundering offence. Money laundering is “achieved by the injection of cash generated through criminal activity into the legitimate, commercial mainstream through the deposit of that cash with a reputable deposit-taking institution”: R. v. Trac, 2013 ONCA 246, 115 O.R. (3d) 424, at para. 84. API verified what it believed was the original wire transfer document, and reasonably relied upon the source of the funds as legitimate. In the absence of any compelling or credible information that there was an illicit source for the funds, it is difficult to see how API would have had reasonable grounds to suspect that the transaction related to a money laundering offence. While there were some irregularities in the circumstances, they do not constitute compelling and credible information that would give rise to an objective belief that the transaction related to money laundering. The individuals who verified the wire transfer, Mr. Patel and Mr. Chaudhury, were different from the employee, Mr. Molakandov, who reviewed Filali’s application and had previously dealt with Filali, and may not have known that he provided a CIBC account on the form. Also, once Filali paid for the gold, it was not unreasonable that he expected delivery as soon as possible. It appears that the Brinks driver who verified Filali’s driver’s licence before transferring the gold to him also believed it was genuine.

[64] I find that, based on the totality of the circumstances surrounding the transactions, API did not have reasonable grounds to suspect that the transactions were related to the commission of a money laundering offence. As a result, API’s failure to report the transactions did not amount to wrongful or illegal conduct that would disentitle API from relying upon the change of position defence. For clarity, I make this finding solely for the purposes of determining whether API can avail itself of the defence of change of position, and make no broader conclusions as to when a DPMS is required to report a transaction as suspicious under the Proceeds of Crime Act.

Did API Fail to Obtain Information Required under the Proceeds of Crime Regulation?

[65] BMO argues that API failed to obtain complete information from Filali, as required under the Proceeds of Crime Act and regulations. Specifically, the application form completed by Filali contained significant gaps, including the “nature of business” information that is required under the Proceeds of Crime Regulation.

[66] Section 52.1 of the Proceeds of Crime Regulation requires API to keep a record that sets out “the purpose and intended nature of business relationship” with every person or entity with which it enters into a “business relationship” as that term is defined in the Regulation, s. 52.1. For customers who do not hold an account, a business relationship exists when a DPMS conducts two or more transactions with a customer for which identity must be verified: s. 1(2) “business relationship.” Identity must be verified in the event of a large cash transaction, which is a transaction that exceeds $10,000: s. 53 or a “suspicious transaction”: s. 53.1(1).

[67] Therefore, API would not be in breach of the Proceeds of Crime Regulation by failing to record the nature and purpose of Filali’s business unless API conducted two transactions with Filali for which identity had to be verified, or in other words, suspicious or large cash transactions. This interpretation is in line with the FINTRAC Policy Interpretation PI-6131, dated April 4, 2014, and is reflected in API’s Compliance Manual.

[68] It is for this reason that the aborted transaction is significant, because API’s obligation to obtain information would have been enhanced if it entered into a “business relationship” with Filali, which occurred if they executed two or more transactions for which identification was required.

[69] Since I have concluded that API was not required to report the transactions as suspicious pursuant to s. 7 of the Proceeds of Crime Act, it follows that API did not conduct two transactions with Filali requiring proof of identity, and therefore did not enter a business relationship. Consequently, I find that API was not required to record the nature and purpose of Filali’s business.

[70] Clearly, API could have, and should have, exercised greater diligence in its dealings with Filali. The Corporate Application Form was the only form that API had, but applied to both business and individuals. Filali appears to have completed the form as an individual, but included some corporate information. API employees did not clarify this discrepancy or follow-up on any of the information provided. Information regarding the nature of the business was simply not provided.

[71] Although API had a Compliance Manual, Mr. Molakandov, who dealt with Filali, was not aware of the Manual and had not been trained about API’s obligations under the Proceeds of Crime Act. Both Mr. Molakandov and Mr. Patel saw Filali’s driver’s licence, but neither noticed that it lacked the holograph photograph in the corner, and therefore had to be fake. Mr. Molakandov claims to have made a Google search of Filali, as well as an Office of Foreign Assets Control search, but did not print or keep any results.

[72] On cross-examination, Mr. Zaman did not fully acknowledge the information that a client was required to provide under the Proceeds of Crime Act or Regulation. Despite API’s obligations under the Act, the completion of the customer information form appeared to be a pro forma exercise. Little attention was paid to the distinction between individual and corporate customers. Mr. Zaman referred to the form as “internal” and suggested that they would obtain information regarding the nature of the client’s business from their website. Mr. Zaman admitted that no information was recorded on the form as to the nature or intended purpose of Filali’s business, but claims that Filali was asked.

[73] As for whether API’s failure to obtain complete information should disentitle it from relying upon the change of position defence, I find that the API’s failure to obtain information does not constitute wrongdoing such that API can not avail itself of the defence. Moreover, API’s evidence is that it would have earned a margin of $1,285 on the sale of gold to Filali. This margin is not so significant that there would have been an incentive for API to turn a blind eye to the suspicious aspects of the transaction. I find that API’s conduct, while lacking in diligence, was not wrongful or illegal, and does not constitute bad faith.

[74] API is therefore entitled to rely upon the defence of good faith change of position because it released the gold to Filali, in reliance on the wire transfer: Arrow ECS Norway AS v. John Doe, 2017 ONCA 664, at para. 25. There is insufficient evidence of wrongdoing on API’s part, such that it would not be entitled to rely upon the defence.

[75] The fact remains that had the fraudulent wire transfer not been authorized by BMO, API would not have found itself the target of Filali’s fraudulent purchase. In Clark v. Eckroyd (1886), 12 O.A.R. 425, the Court of Appeal for Ontario found that the payor was entitled to recover because the careless conduct of the recipient in releasing goods that had not been paid for commenced the chain of events leading to the loss. Similarly, in this case, it was the careless conduct of BMO that initiated the chain of events leading to the loss.

Conclusion

[76] In light of the foregoing, I dismiss BMO’s application for declaratory relief in relation to the funds. I order that the funds that have been paid into court be released to the Respondent, API.

[77] The parties are encouraged to agree on the quantum of costs. If no agreement is reached, API’s counsel shall make cost submissions within ten days of the release of this decision. Responding submissions on costs by BMO’s counsel shall be made within ten days of receiving the Plaintiff’s cost submissions. All cost submissions must not exceed five pages in length.

Nishikawa J. Released: July 5, 2018