INSIGHT: Canada’s new sanctions regime spells uncertainty, risk for financial firms

The Canadian government has introduced a new regulatory regime that will allow it to impose financial sanctions on individuals linked to human rights abuses and corruption: the Justice for Victims of Corrupt Foreign Officials Act.

Under the measure which took effect last month, the government will be able to act against individuals who it believes are involved in violations of internationally recognized human rights or acts of significant corruption. Asset freezes and travel bans are among the sanctions that can be levied by the Canadian government against individuals.

Canadian regulators have sent a strong message that they expect businesses, including financial institutions to comply with sanctions screening obligations; however, firms face an uncertain and potentially challenging path to compliance.

Background

The act authorizes the Canadian government to impose targeted sanctions and travel bans on foreign nationals who are responsible for or complicit in “extrajudicial killings, torture or other gross violations of internationally recognized human rights” as well as acts of “significant corruption.”

In theory, the new law also extends whistleblower protection to those who expose the illegal conduct of government officials or individuals, regardless of nationality and geographical location. In practice, the Canadian government has not clarified how it intends to protect whistleblowers who are not Canadian citizens and who reside outside of Canada.

In addition to creating an entirely new legal framework, the act also introduced amendments to the Special Economic Measures Act (SEMA).

Canadian officials have moved quickly to introduce sweeping new sanctions against individuals under the new laws, and signal their intent to use it forcefully. They have imposed sanctions against three individuals in South Sudan for human rights abuses and crimes against women; 19 individuals associated with the government of Nicolas Maduro in Venezuela, for corruption; and 30 individuals linked to acts of corruption and the death of Sergei Magnitsky, an incident which also prompted the U.S. government to introduce sanctions against Russian individuals.
Asset freezes, travel bans and other sanctions ordered under the Justice for Victims of Corrupt Foreign Officials Act against individuals named from these countries are in addition to existing SEMA sanctions. (WHAT ARE SEMA SANCTIONS?)

OSFI guidance for FRFIs

Earlier this month, Canada’s federal bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), published guidance outlining compliance obligations for federally regulated financial institutions in relation to the new act.

OSFI expects all regulated firms to implement procedures to regularly search for names of individuals targeted under the act and freeze their assets. Firms are expected to search all of their records for designated names at least once a week, and more frequently if necessary. Firms are also expected to screen new clients against names on sanctions lists when they open and account or enter a business relationship.

The act also imposes obligations on federally regulated financial institutions to continuously monitor whether they are in possession or control of property that they have reason to believe belongs to a sanctioned individual.

If firms have such property they are required to report such information to the anti-terrorist financing team at the Royal Canadian Mounted Police or the Canadian Security Intelligence Service immediately.

Potential challenges in compliance

Complying with the requirements set out by OSFI could prove challenging for financial institutions.

The definition of individuals that can be sanctioned for human rights abuses and corruption is worded broadly, giving the Canadian government wide discretion to impose sanctions, even against people from countries not currently subject to international economic sanctions.

Myanmar, China, Israel and the Philippines are just a few examples of countries whose governments have been linked to human rights abuses or corruption, yet are not subject to international economic sanctions.

To meet OSFI’s expectations, financial institutions would have to have the systems in place to be able to screen all past and present client transactions to determine whether they are in control or possession of property that belongs to a designated name and report any flagged transactions to authorities swiftly.
Canadian laws on beneficial ownership present an additional challenge to the ability of financial institutions to fulfill OSFI’s expectations under the new act. Canada has been sharply criticized by Transparency International and the Financial Action Task Force (FATF)
for opaque legal frameworks governing the disclosure of beneficial ownership in trusts, private companies and other investment vehicles. Both international organizations have asserted that the lack of transparency frustrates efforts by authorities to combat terrorist financing, money laundering, corruption and other financial crimes in Canada.

Aside from law enforcement purposes, the current legal framework also leaves financial services firms vulnerable to breaching SEMA requirements, as well as their new obligations under the Justice for Victims of Corrupt Foreign Officials Act.

Financial institutions may find it challenging to conduct proper due diligence on designated names if they lack access to complete beneficial ownership information to determine whether corporate vehicles are being controlled by sanctioned individuals or whether agents are acting on behalf of designated names.

Takeaways

— Financial institutions face potentially onerous and uncertain compliance obligations in meeting regulatory expectations under the Justice for Victims of Corrupt Foreign Officials Act.
— The broad reach of the new sanctions regime will require financial institutions to maintain meticulous documentation regarding past and present client transactions that can be readily retrieved and analyzed on a continuing basis. In order to promptly report suspicious transactions, firms will also need escalation channels to report transactions, as well as continuous staff training and testing to ensure that the channels remain functional.

— Developing and implementing effective internal controls to conduct due diligence on designated names will prove most challenging due to the opaque nature of Canadian laws on beneficial ownership of private companies, trusts and other investment vehicles.

— While the Canadian government has signaled that it has lofty expectations for the new act, the extent in which authorities will enforce the Act against financial services firms remains to be unseen. To date, OSFI has laid out expectations for firms to self-enforce and self- police; however, no one has touched upon what will be at stake for firms who do not comply.

By: 
Helen Chan, Regulatory Intelligence

Produced by Thomson Reuters Accelus Regulatory Intelligence
17-Nov-2017

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