Canada: OSFI Releases Instruction Guide on Listings and Sanctions Laws

Introduction

Federal, provincial and foreign insurance companies doing business in Canada are subject to obligations under what are commonly referred to as the "Listings and Sanctions Laws" relating to terrorists, terrorism financiers, and financiers of nuclear proliferation and weapons of mass destruction (the Listings and Sanctions Laws). These obligations are in addition to requirements designed to combat terrorist financing contained in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada).

In order to provide guidance to federally-regulated financial institutions, including insurance companies, in complying with the Listings and Sanctions Laws, Canada's federal financial institutions regulator, the Office of the Superintendent of Financial Institutions (OSFI), recently released an "Instruction Guide" that provides OSFI's interpretation of the relevant legal obligations. Specifically, the Instruction Guide addresses the legislative requirements relating to identifying designated persons, prohibited activity with respect to assets of designated persons and the reporting requirements pertaining to the assets of designated persons. The Instruction Guide reflected the results of a consultation with industry stakeholders following the release for comment of a draft version of the Guide in February 2010.

This Update provides a brief summary of obligations contained in the Listings and Sanctions Laws and which are the subject of the Instruction Guide.

Listings and Sanctions Laws

(A) Criminal Code, R.S.C. 1985, c. C-46.

Freezing property

Part II.1 of the Criminal Code (sections 83.01 to 83.33) contains various provisions respecting terrorism that apply to Canadian insurance companies. Section 83.05(1) of the Criminal Code provides a mechanism by which the Governor in Council may place an entity (defined as a person, group, trust, partnership or fund, or unincorporated association or organization) on a list of terrorist entities. Section 83.08(1) of the Criminal Code prohibits dealing directly or indirectly in any property that is owned or controlled by or on behalf of a terrorist group (the definition of "terrorist group" includes, but is not limited to, a listed entity), entering into or facilitating any transaction in such property or providing any financial or other related services in respect of such property to, for the benefit of, or at the direction of a terrorist group. A person that freezes property pursuant to section 83.08(1) will not be held liable in a civil action so long as the person "took all reasonable steps to satisfy themselves" that the property in question was owned or controlled by a terrorist group.

Disclosure

Under section 83.1(1) of the Criminal Code, every person in Canada and all Canadians outside Canada must disclose forthwith, to the Commissioner of the RCMP and the Director of CSIS, the existence of property in their possession or control that they know is owned or controlled by, or on behalf of, a terrorist group. Information about a transaction or proposed transaction in respect of such property must also be disclosed. Persons making such disclosure in good faith are immune from criminal and civil proceedings.

Audit

Section 83.11(1) of the Criminal Code requires insurance companies to determine on a continuing basis whether they are in possession or control of property owned or controlled by, or on behalf of, a listed entity. While it is unclear how often such a determination must be made in order to comply with the requirements, OSFI's Instruction Guide recommends downloading all applicable lists (including those applicable to the United Nations Regulations, below) on a weekly basis at a minimum. According to OSFI, circumstances may dictate more frequent determinations and new client names should be checked against the applicable lists "as part of, or as soon as reasonably possible after, the process of opening new accounts or otherwise entering into new business relationships." There is no assurance, however, that the courts will require or accept OSFI's interpretation of the requirements. Federally regulated insurance companies must also report on a monthly basis to OSFI whether they are in possession or control of such property and, if so, the number of persons, contracts or accounts involved and the value of the property. Further, according to OSFI, a short or long Form 525 and a short or long Form 590 are to be filed each month. The relevant short forms are to be used for "nil" reports where there is no frozen property to be reported and the relevant long forms are used to file positive reports. Companies making such disclosure are immune from criminal and civil proceedings when making reports in good faith.

Offences

Those in contravention of any of the above sections are liable on summary conviction to a fine of up to $100,000 and/or imprisonment of one year or, on a conviction on indictment, to imprisonment for up to 10 years.

B) Regulations under the Special Economic Measures Act (Canada), S.C. 1992, c. 17.

Section 4(1)(a) of the Special Economic Measures Act (SEMA) allows the Governor in Council to make orders or regulations restricting or prohibiting an enumerated list of activities with respect to a foreign state. The list of activities that may be prohibited or restricted includes dealing in property held by the relevant foreign state or a person in the foreign state. To that end, regulations under SEMA have been made with respect to Burma (SOR/2007-285) and Zimbabwe (SOR/2008-248) (collectively, the Special Economic Measures Regulations). Among other things, the Special Economic Measures Regulations prohibit Canadians from dealing in the property of designated persons and, in the case of Burma, from providing or acquiring financial services. Much like the provisions of the Criminal Code, insurance companies, among others, must determine on a continuing basis whether they are in possession or control of property owned or controlled by or on behalf of designated persons and disclosure requirements also exist. Again, it is unclear what will satisfy the requirement that determinations be made on a "continuing basis".

(C) Regulations under the United Nations Act (Canada), R.S.C. 1985, c. U-2.

The United Nations Act provides the Governor in Council with the authority to make orders and regulations necessary or expedient for enabling United Nations Security Council measures. Numerous regulations have been made under this legislation to address Security Council resolutions, including those dealing with Al-Qaida and the Taliban, Iran, Iraq and North Korea (collectively, the UN Regulations). Similar to the restrictions discussed above, the regulations generally prohibit Canadians and persons in Canada from dealing in property held in the respective state or providing financial services related to property held in the state.

Core Provisions

The core rules establishing reporting and property freezing requirements are repeated in substantially the same form in the relevant Criminal Code provisions, the Special Economic Measures Regulations, and the UN Regulations. Generally, the only significant difference relates to the definition of the property or persons targeted.

"Freezing" of Assets

  • no person in Canada and no Canadian outside Canada shall knowingly deal directly or indirectly in any [designated property];
  • no person in Canada and no Canadian outside Canada shall knowingly enter into or facilitate, directly or indirectly, any financial transaction related to a dealing in [designated property];
  • no person in Canada and no Canadian outside Canada shall knowingly provide any financial services or any related services in respect of any [designated property];
  • no person in Canada and no Canadian outside Canada shall knowingly make any property [or any financial or other related service] available, directly or indirectly, to or for the benefit of [a designated person];


Duty to Determine

  • every [insurance company] must determine on a continuing basis whether it is in possession or control of property owned or controlled [directly or indirectly] by or on behalf of [a designated person];


Disclosure

  • every [insurance company] must report, monthly, to the principal agency or body that supervises or regulates it under federal or provincial law either:
    • that it is not in possession or control of any [designated property]; or
    • that it is in possession or control of such property, in which case it must also report the number of persons, contracts or accounts involved and the total value of the property; and
  • every person in Canada and every Canadian outside Canada shall disclose without delay to the Commissioner of the RCMP and/or to the Director of CSIS:
    • the existence of property in their possession or control that they have reason to believe is owned or controlled [directly or indirectly] by or on behalf of [a designated person]; and
    • information about a transaction or proposed transaction in respect of such property.

Variations

Despite similarities, there are some noteworthy variations in the provisions:

  • the regulations in respect of Burma, Côte d'Ivoire, Congo, Eritrea, Liberia, Somalia, Sudan and Zimbabwe do not require monthly reporting on suspicious property to a regulatory body;
  • not all regulations require disclosure to the RCMP and/or CSIS, and the regulations in respect of Burma, Eritrea, Somalia, and Zimbabwe require that the possession of property owned by designated persons be disclosed only to the RCMP and not CSIS;
  • the equivalent disclosure requirement in the regulations for Iraq requires disclosure to the Department of Foreign Affairs and International Trade (DFAIT) and, unless notified otherwise by DFAIT, ultimately the transfer of such property to the Federal Reserve Bank of New York;
  • each statute or regulation imposes a different set of "designated persons";
  • "property" is defined differently in the UN Regulations and Special Economic Measures Act;
  • the regulations in respect of Terrorism and in respect of Al-Qaida and the Taliban impose additional funding restrictions; and
  • under the regulations in respect of Burma, investment in property held by, or on behalf of, a person in Burma is prohibited, as are financial services transactions with persons in Burma, with limited exceptions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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