Canada is finally taking new steps to crack down on sanctions evasion.
New legislative amendments, taking effect on Aug. 19, create expanded reporting obligations for businesses regulated by the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC).
Banks, money services businesses and casinos are among the companies that will be required to flag suspicious transactions related to sanctions evasion in addition to those involving money laundering and terrorist financing. There is no minimum monetary threshold, and the reporting requirements apply to both attempted and completed transactions.
Although those changes to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act come into force in a matter of days, there is concern the available guidance on how to detect and deter sanctions evasion provided by Ottawa is not detailed enough to help all companies meet their reporting obligations.
“What tools do these reporting entities have to educate themselves on what could constitute sanctions evasion?” questioned Julia Webster, a partner at global law firm Baker & McKenzie LLP, in an interview this week.
“First, you have to have a good understanding of what the sanctions are prohibiting and then you have to have a secondary understanding of what sanctions evasion is and what it can look like in your particular industry.”
Most financial institutions already have sophisticated sanctions compliance mechanisms in place, but that may not be the case for every company subject to the legislation, Ms. Webster added.
Banks certainly have more resources but even some of them were already thrown for a loop on sanctions compliance in recent months.
When the Office of the Superintendent of Financial Institutions launched its new website in January, its Instruction Guide on Designated Persons Listings and Sanctions Laws and the Guideline for Deterring and Detecting Money Laundering and Terrorist Financing disappeared.
OSFI says “that information, or its equivalent” is available from FinTRAC. But not everyone seems to agree. The removal of that guidance from OSFI’s website left some financial institutions scrambling for old printouts, according to people familiar with the matter. The Globe and Mail is not identifying the sources because they were not authorized to speak to the media about regulatory matters.
As for FinTRAC, it recently published a special bulletin on financial activity associated with suspected sanctions evasion and a joint financial intelligence advisory on the illegal procurement of dual-use goods by Russian end-users.
They are interesting reads, to be sure. But as Ms. Webster points out, the former only offers “high-level advice” on characteristics of financial transactions associated with sanctions evasion.
The latter, meanwhile, is specific to Russian sanctions. Canada, though, is imposing sanctions against a long list of countries. As a result, businesses need more detailed guidance from Ottawa to thwart sanctions evaders whether they are from Russia, Iran, Libya or any place else.
Even if companies are up to speed on their new reporting requirements, filing suspicious transaction reports about suspected sanctions evasion could prove challenging for businesses with lower transaction volumes. That’s because FinTRAC is still working to restore full service five months after a cyberattack affected its systems.
“For entities that report lower volumes of transactions, FINTRAC is progressing in its implementation of the suspicious transaction report for existing users of the FINTRAC Web Reporting System and is currently testing components of this system with smaller groups of reporting entities, including the receipt of suspicious transaction reports,” spokeswoman Erica Constant wrote in an e-mail to The Globe.
Ottawa must also provide more detailed guidance – and soon – because this is not the only legislative change that lacks explanatory details and could confuse many companies.
Specifically, Ottawa is planning to establish mandatory declarations for sanctions evasion that will affect importers and exporters. The goal is to thwart trade-based financial crime, which is believed to be rampant, but there is potential to create confusion for law-abiding businesses because the specifics are still being hashed out behind closed doors.
The implementation date is not known. It’s also not clear how much detail companies are expected to provide in their declarations to the Canada Border Services Agency, Ms. Webster said. The CBSA says it plans to provide “detailed guidance” after a regulatory framework has been established.
“Since these enhancements rely on existing customs and tax reporting obligations and processes, they are unlikely to impose a new regulatory burden on importers and exporters conducting legitimate business activities,” stated CBSA spokesman Luke Reimer.
That seems like wishful thinking.
Global Affairs Canada, which is responsible for the administration of sanctions, recently tweaked its guidance but still does not provide the level of interpretive detail offered by the Office of Foreign Assets Control in the United States.
Canadian businesses, which are also known to consult OFAC’s guidance, shouldn’t have to rely on the U.S. government for this type of clarity.
Ottawa must do better.
A wide array of businesses are on the front lines of dealing with sanction-evasion risks. But without more substantive guidance, the federal government’s well-intentioned plan risks creating consternation for companies.
Businesses should never be put in the awkward position of guessing how to improve their due diligence and compliance while facing increased legal risk.