Canada: Financial Institution Compliance With Canadian Export Controls And Economic Sanctions

Compliance with Canadian laws governing export controls and economic sanctions can present a significant challenge for financial institutions doing business in Canada. These rules cover federally and provincially regulated entities including Canadian banks, authorized foreign banks, securities dealers, investment advisors, trust and loan companies, cooperative credit societies, life insurance companies, property and casualty insurance companies, and fraternal benefit societies. These measures are primarily contained in five statutes and their regulations: the United Nations Act, the Criminal Code, the Special Economic Measures Act, the Export and Import Permits Act, and the Foreign Extraterritorial Measures Act.

Due to the number of individuals and entities targeted by these sanction programs and the breadth of prohibited activities, developing and maintaining an effective system to ensure compliance is a complex task. The following are key factors for financial institutions to consider when designing and implementing export control and economic sanction compliance programs.

1. Dealing with "Red Flag" Countries and Organizations

Any internal compliance system should provide for the effective screening of transactions against "red flag" destinations or parties. As an initial screen, any dealings with the following countries and organizations should be flagged by the financial institution and further steps should be taken to examine compliance with Canadian law:

Myanmar (Burma)
North Korea
Iran Democratic Republic of the Congo
Côte d'Ivoire
Sierra Leone
Al-Qaeda and Taliban
Listed Terrorists and Terrorist Organizations under the Criminal Code and anti-terrorism legislation

Canada maintains economic sanctions of various degrees in respect of all of these destinations and entities.

2. Identifying Designated or Listed Persons

In response to global events and in accordance with Canada's international obligations, Canadians are required to restrict their financial dealings with certain individuals. These individuals and entities are specifically listed or designated under the relevant rules, and such persons are generally subject to asset freezes (described further below). Some of the rules require every financial institution operating in Canada — including a foreign branch — to review its records on a continuing basis for the names of persons and or organizations covered by these rules, and to report its findings monthly to the relevant regulator.

Financial institutions must act with diligence in order to ensure they comply with all applicable Canadian rules. Identifying persons or organizations covered by the rules can in itself be a daunting task, and often requires navigation through the relevant Canadian legislation and/or United Nations resolutions and other documents issued by committees of the United Nations Security Council.

3. Complying with Asset Freezes

The Canadian government imposes asset freezes on numerous individuals and organizations from various countries. Once imposed, the asset freezes generally prohibit financial institutions from dealing directly or indirectly in any property of a listed person. They also prohibit financial institutions from entering into or facilitating, either directly or indirectly, any financial or other related service involving property owned or controlled by a listed person or any person acting on behalf of a listed person. Financial institutions are also prohibited from making any property available, either directly or indirectly, to or for the benefit of a listed person. In order to ensure that any proposed transactions do not involve listed person or organizations, the lists associated with each of the following countries and entities must be reviewed:

Myanmar (Burma)
North Korea
Democratic Republic of the Congo
Côte d'Ivoire
Al-Qaeda and Taliban
Listed Terrorists and Terrorist Organizations under the Criminal Code and anti-terrorism legislation

The official lists are located in a variety of instruments, including schedules to Canadian regulations and resolutions and committee documents of the United Nations Security Council. Regularly updated and unofficial consolidations of the lists covering Al-Qaeda and Taliban, Listed Terrorists and Terrorist Organizations under the Criminal Code and anti-terrorism legislation, and Iran and North Korea, are maintained by the Office of the Superintendent of Financial Institutions (OFSI) and available on its website.

4. Ongoing Review of Compliance is Required

Some of the relevant regulations single out financial institutions as having an ongoing duty to review their day-to-day operations to determine if they are in possession or control of property either directly or indirectly owned or controlled by listed persons — or by those acting on behalf of, or at the direction of, listed persons. This task is made more difficult by the fact that the lists of persons and entities are continuously updated. Financial institutions have this "duty to determine" on a continuing basis for the listed persons and organizations of the following countries and entities:

Myanmar (Burma)
North Korea
Al-Qaeda and Taliban
Listed Terrorists and Terrorist Organizations under the Criminal Code and anti-terrorism legislation

For the listed persons and organizations of the above-noted countries and entities, all Canadians, including financial institutions, are required to disclose without delay to the RCMP, and in some cases CSIS, the existence of any property within their possession or control that they have reason to believe is owned or controlled by a listed person, by a person acting on behalf of, or at the direction of, a listed person, or by a person owned or controlled by a listed person. For example, if financial institutions discover they are holding accounts for, or contracts with, listed persons or organizations, they are required to report such information immediately. Immediate disclosure is also required for any information concerning a transaction or proposed transaction in respect of such property.

Further complicating matters is the fact that financial institutions must also take into account other considerations in addition to the list associated with a given country.

For example, in the case of Iran, Bank Sepah is the only listed Iranian bank. Nevertheless, there are also other considerations that make dealings with any Iranian bank a very sensitive matter. The latest UN Security Council resolution against Iran (in March 2008) called upon all UN States to exercise vigilance over the activities of financial institutions in their territories with all banks domiciled in Iran — in particular, Bank Melli and Bank Saderat. The need for increased due diligence was also communicated in an OSFI advisory to financial institutions in October of 2007 with respect to the inter-governmental Financial Action Task Force's (FATF) statement on Iran. The statement expressed concern with Iran's lack of a comprehensive regime for anti-money-laundering/combating financing of terrorism, and stated that FATF member countries are advising their financial institutions to take into account, for enhanced due diligence, the risk arising from the deficiencies in Iran's regime. Canada is a FATF member.

5. Financial Institutions Have a Periodic Reporting Obligation

The regulations also single out financial institutions as having to report monthly to a supervising agency their findings arising out of their "duty to determine" obligation as described above — even when the financial institution determines that it is not in possession or control of such property. For federally regulated institutions, the supervising agency is the OSFI. Financial institutions must report on this basis pursuant to the applicable United Nations Act regulations for listed persons and organizations of the following countries and entities:

North Korea
Al-Qaeda and Taliban
Listed Terrorists and Terrorist Organizations under the Criminal Code and anti-terrorism legislation

6. Financial Institutions Are Also Subject to Technology Transfer and Export Controls

On first glance, it may seem that export controls are not relevant to the affairs of financial institutions since they are generally concerned with the distribution of goods such as dual-use items or weapons. However, there is a broad range of goods and technology that are listed on Canada's Export Control List (ECL) and that may not be exported without a permit. For example, exporting goods or software having certain information-security features or cryptographic functions without the appropriate permit is a violation of Canadian law.

Technology as defined under the export controls rules includes technical data or technical assistance, and can be exported or transferred without a physical shipment. Indeed, e-mailing technology or software to someone outside of Canada is considered to be a transfer of technology covered under these rules.

7. Canada's Standards Can Exceed International Standards

Financial institutions cannot solely rely on compliance with international measures such as those of the United Nations or those of another jurisdiction, such as the United States, as a guarantee of compliance with Canadian law.

Under the Special Economic Measures Act (SEMA), the Canadian Government has the authority to impose sanctions in the absence of a United Nations Security Council resolution. Canada has imposed some of the most stringent of international sanctions against Myanmar (Burma) and Zimbabwe, the only countries currently subject to regulations issued under SEMA. These measures include: (1) a broad freeze on assets of listed Burmese and Zimbabwean persons and entities; (2) a prohibition on the provision of Canadian financial services, with certain exceptions, to and from Myanmar; (3) a prohibition on the export of any technical data to Myanmar; (4) a prohibition on the provision of technical or financial assistance or services relating to arms or related material (including the provision, transfer or communication of technical data) to Zimbabwe; and (5) a ban on new investment in Myanmar.

Every person in Canada, and all Canadians outside of Canada, are also required by the Myanmar and Zimbabwe regulations to disclose without delay to the Commissioner of the Royal Canadian Mounted Police the existence of any property within their possession or control that they have reason to believe is owned or controlled by a listed person or by an entity owned or controlled by a listed person. Immediate disclosure to the RCMP is also required for any information concerning a transaction or proposed transaction in respect of such property.

Without any direction from the United Nations, Canada has enacted comprehensive export bans against Myanmar and Belarus under the Export and Import Measures Act (EIPA). Myanmar and Belarus are on Canada's Area Control List (ACL), effectively prohibiting exports of goods or technology to these countries without a permit.

8. Beware: Complying with Another Country's Laws May Violate Canadian Law

Compliance with US laws regarding trade with or investment in Cuba entails special risks for financial institutions doing business in Canada.

Canada is one of Cuba's largest trading partners and one of its most significant sources of foreign direct investment. An Order issued under Canada's Foreign Extraterritorial Measures Act prohibits Canadian companies, including those that are US-owned or -controlled, from complying with various elements of the US trade embargo of Cuba. This "blocking order" also requires them to inform the Canadian Attorney General of any communications relating to the US trade embargo of Cuba that they receive from anyone in a position to control their activities in Canada, including a US parent. Violation of the Order is punishable with fines of up to $1.5 million and/or five years imprisonment.

There may be instances, particularly where the issues have not been carefully considered, in which a financial institution's action or inaction regarding transactions having a Cuban connection may mean compliance with the laws of one country — but at the same time, violation of the laws of the other.

9. Consequences of Non-Compliance

Violating Canadian export controls or economic sanctions can result in significant penalties. Canada's United Nations Act provides that non-compliance with its sanction programs may render the contravener guilty of an offence — and liable, on summary conviction, to a fine of not more than $100,000 or to imprisonment for a term of not more than one year, or to both; or, on conviction on indictment, to imprisonment for a term of not more than 10 years.

Willful contravention or failure to comply with SEMA regulations are both punishable on summary conviction with fines up to $25,000 and/or imprisonment for a term of up to one year. Contraventions of SEMA regulations may also be prosecuted as indictable offences and attract liability to imprisonment of up to five years.

Exporting to a country on the ACL, or exporting an item on the ECL without an export permit, are contraventions of the EIPA and are punishable on summary conviction with a fine of up to $25,000 and/or imprisonment for a term of up to one year. Contraventions of the EIPA may also be prosecuted as indictable offences and attract liability to a fine in an amount at the discretion of the court or to imprisonment of up to 10 years, or both.

Further, past experience indicates that non-compliance in this area can have a significant reputational impact on a financial institution, sometimes more damaging than any financial penalty that may be imposed.

It is therefore important that effective programs be designed and implemented throughout the business to ensure compliance with Canadian export control and economic sanction measures — including written compliance policy and procedure manuals, regular training programs, periodic internal verification audits, procedures for dealing with violations, and screening systems that are updated to reflect the frequent changes in these measures.

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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