Canada: AML/ATF Compliance In Syndicated Loan Transactions

Multi-lender loans require special consideration from the standpoint of compliance with money laundering and anti-terrorist financing ("AML/ATF") legislation. The challenge in a multi-lender loan is to ensure that each lender complies with all of its AML/AFT obligations, while avoiding unnecessary duplication of procedures.

Canada's AML/ATF legislation in contained in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act¹(the "PCMLTFA") and the regulations² made under the Act (the "PCMLTFR").

Borrower Identification

Under the PCMLTFA, each lender has a separate obligation for borrower identification even though the borrower may already be an identified customer of one of the lenders. The PCMLTFR allow a financial institution to appoint another person to act as its agent to ascertain identity and establish and maintain the appropriate records, but only if the financial institution and agent have a written agreement to this effect. Accordingly if some or all of the syndicate lenders are relying on one of them for borrower identification, this must be documented in writing to avoid a breach of the Act by the delegating lenders.

Screening for Sanctioned Parties

If all lenders are domestic Canadian financial institutions, it is possible for one among them to screen for sanctioned parties under Canadian and UN sanctions applicable in Canada. If this is the case, the agreement appointing an agent for ascertaining identity should specifically mention that the agent will undertake the screening as well. However, if there are foreign institutions involved, such as foreign lenders lending into Canada from off-shore, Schedule III foreign bank branches, or in some cases, possibly a Schedule II foreign bank subsidiary, the foreign sanctions legislation may also apply. The foreign institutions in the syndicate may be required to do their own screening under their domestic sanctions legislation. Similarly, a Canadian lender screening for a syndicate that includes foreign lenders should take steps to avoid giving the impression that it is undertaking any screening under foreign legislation.

Politically Exposed Foreign Person ("PEFP") Identification, Risk Assessment and Due Diligence

Subject to the specific PEFP identification, risk assessment and due diligence policies of each lender, PEFP identification can be included in a delegation to an agent. If so, is should be documented. Each institution will have its own policies for risk assessment and determining whether a high risk situation exists. If one lender determines that a high risk situation exists, the special measures to deal with the situation should be documented. Similarly, where the PCMLTFR require on-going due diligence where PEFPs are involved, the delegation and undertaking of these measures should be documented.

Third Party Payments on Directions

Syndicated loans, especially in project finance, occasionally include provisions requiring the lenders to pay draw downs to third parties on behalf of the borrower. In these circumstances, the third party recipient is subject to having their identity ascertained as described in Borrower Identification above. Therefore if one lender acts as agent of the others for this identification, it too should be explicitly recognized in the delegation to the agent. Payments to foreign third party beneficiaries, especially in the developing world, carry an increased risk under the Corruption of Foreign Public Officials Act,³ particularly under the new facilitation payment provisions that are soon to come into force. Lenders should be particularly diligent to avoid remittances to fourth parties on the direction of a borrower-related third party.

Footnotes

1 Proceeds of Crime (Money Laundering) and Terrorist Financing Act, SC 2000, c 17, as amended

2 Proceeds of Crime (Money Laundering) and Terrorist Financing Act Regulations, SOR/2002-184, as amended

3 Corruption of Foreign Public Officials Act, SC 1998, c 34, as amended

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.