Canada’s Anti-money Laundering, Terrorism Financing and Economic Sanction Regimes
|Area||Banking and Finance Law, Corporate and Commercial, Litigation, White Collar Risk Management and Investigations|
One of the key priorities for any government is ensuring the security of its country and its allies. Addressing these priorities means not only developing military and domestic police capabilities, but also implementing the necessary financial regulations to curb financing of criminal and terrorist activities, and taking actions against foreign state actors and foreign nationals who engage in criminal and terrorist activities.
Like its allies, Canada has enacted various statutes to thwart money laundering and terrorist financing, and to impose economic sanctions on foreign states and nationals where appropriate. This commentary provides an overview of Canada’s legislative regime to combat money laundering and terrorist financing, as well as its economic sanctions regime to respond to actions of international actors that undermine the interests of Canada, the U.S. or its allies.
A. Jurisdiction To Address Money Laundering, Terrorism and Economic Sanctions
Canada has a parliamentary system of government, which means governmental power is shared between the federal Parliament of Canada and the provincial and territorial governments. Under the Constitution Act, 1867, the federal government has exclusive jurisdiction over both criminal matters and banking. The statutes and measures discussed below are therefore within the purview of Canada’s federal government.
Notably, however, there are areas of provincial jurisdiction that have been leveraged to combat money laundering and terrorist financing. For instance, in response to growing concerns about “snow washing” (the flow of money into Canada for money laundering purposes), finance ministers from across Canada signed the Agreement to Strengthen Beneficial Ownership Transparency, under which the provinces committed to amending certain statutes within their jurisdiction to address money laundering. However, these efforts tend to be incorporated into other aspects of provincial jurisdiction, such as provincial corporate statutes and civil forfeiture remedies.
B. Money Laundering
Canada’s anti-money laundering regime is primarily set out in a number of provisions of the Criminal Code and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PC(ML)TFA”). These two statutes work in concert to address different aspects of money laundering. The Criminal Code creates a criminal offence for money laundering and the PC(ML)TFA implements measures to detect and deter money laundering by requiring certain entities (“Reporting Entities”) to implement compliance programs, ascertain the identity of clients, and report certain information to the authorities.
A number of entities are responsible for enforcing these laws. Local and provincial police authorities, as well as the national Royal Canadian Mounted Police (RCMP), are responsible for enforcing the Criminal Code’s money laundering provisions. The federal Department of Public Safety and Emergency Preparedness (known as Public Safety Canada) and the Canada Border Services Agency (CBSA) are involved in combatting money laundering. Starting in 2019, the federal government made a number of investments to strengthen Canada’s anti-money laundering initiatives, including by creating the Trade Fraud and Trade-Based Money Laundering Centre of Expertise.
The PC(ML)TFA and its regulations are implemented and enforced by the federal Financial Transactions and Reporting Analysis Centre of Canada (FINTRAC). FINTRAC is an independent federal agency that operates at arm’s length from law enforcement. FINTRAC publishes non-binding guidelines to assist Reporting Entities in complying with the PC(ML)TFA.
Canada’s money laundering legislation imposes due diligence requirements on the Reporting Entities who fall within the PC(ML)TFA regime, which are primarily companies in the financial services sector, including those dealing with crypto-currencies. In particular, Reporting Entities are required to adopt policies and procedures to assess the risk of money laundering in their activities. As part of establishing a compliance system as required under the PC(ML)TFA, Reporting Entities must assess and document the risk of money laundering arising from their dealings with clients and other third parties by considering the person’s or entity’s clients and business relationships, products and delivery channels, and geographic location. Where this investigation reveals a high risk of money laundering activity, Reporting Entities must take enhanced measures to mitigate those risks. FINTRAC issues guidelines on how to conduct a risk-based due diligence and implement appropriate measures to mitigate identified risks.
In addition, special due diligence obligations apply when a Reporting Entity is dealing with a domestic or foreign political figure (known as politically exposed persons), or a family member or close associate of that person.
Under the Criminal Code it is an offence to launder the proceeds of crime. In general, it makes it an offence to deal with any property, or proceeds of any property, in any manner and by any means with the intent to conceal or convert it, when it is known or believed to be the proceeds of crime. The Criminal Code also makes it an offence to attempt to launder the proceeds of crime.
The PC(ML)TFA requires Reporting Entities to report, among other things, any transaction to FINTRAC that they reasonably suspect may be related to money laundering activities. The PC(ML)TFA provides for offences and penalties for anyone who knowingly contravenes or fails to comply with this Act, and includes offences against the directors and officers of the company for directing or acquiescing in such breaches. Furthermore, efforts to conceal an offence may result in obstruction of justice charges.
Most crimes in Canada require prosecutors to prove that the accused had the requisite degree of intention or knowledge (i.e., mens rea) when committing the alleged offence. Thus, to prove a money laundering offence occurred contrary to the Criminal Code, the prosecution must prove there was an intent to conceal or convert the property or proceeds, as well as knowledge or belief that the property or proceeds were derived from certain crimes. The accused will not be liable if they can establish they did not possess the requisite intent or knowledge.
The PC(ML)TFA provides a due diligence defence for companies failing to file the necessary reports with FINTRAC. A further defence is available to employees: an employee is not liable for failing to report certain matters to FINTRAC if the employee reported the information to his or her superior.
Those convicted of money laundering under the Criminal Code are subject to imprisonment for up to 10 years.
The civil and regulatory penalties for failing to comply with the PC(ML)TFA vary depending on the specific violation. The largest fine available is $2,000,000. Imprisonment is also permitted, up to a maximum of five years.
Local and provincial police, and the national RCMP, can use the full scope of police powers to investigate money laundering under the Criminal Code.
In addition, FINTRAC has broad search powers under the PC(ML)TFA. It may examine records and inquire into the business and affairs of Reporting Entities to ensure compliance with the PC(ML)TFA. To do so, it may enter most premises without a search warrant as long as the FINTRAC official believes, on reasonable grounds, that the premises contain relevant records. The person in charge of the premises must provide all reasonable assistance and any information to FINTRAC officials. Furthermore, FINTRAC may seize certain currency and monetary instruments that were not reported as required without obtaining a warrant.
There is formalized cooperation between FINTRAC and police – FINTRAC will provide information obtained through its investigations to law enforcement officials where it has reasonable grounds to suspect that it is relevant to the investigation of a money laundering offence. Not only will FINTRAC share information with Canadian police authorities, but FINTRAC also has entered into agreements for the exchange of information with regulators in over 50 countries.
C. Terrorist Financing
Following the 9-11 attacks in New York City in 2001, the Parliament of Canada passed the Anti-Terrorism Act, which amended a number of statutes to strengthen the government’s powers to address terrorism. As part of those amendments, the existing anti-money laundering statute was amended to include provisions to deal with terrorism financing, and was renamed the PC(ML)TFA. Canada’s regime to combat terrorist financing is primarily set out in the Criminal Code, the PC(ML)TFA, and the United Nations Act.
The Criminal Code makes it an offence to collect or provide funds or other financial services, either directly or indirectly, to support terrorist activities or groups. The Criminal Code authorizes the Canadian government to create and maintain a list of terrorist organizations. In addition, the Criminal Code imposes reporting obligations on those possessing, controlling or transacting with property associated with terrorism (including property belonging to organizations on the government's terrorist list). Local and provincial police, and the national RCMP are responsible for enforcing the Criminal Code’s anti-terrorism provisions.
The PC(ML)TFA also subjects Reporting Entities to various reporting and record-keeping requirements to help detect terrorist financing activities. FINTRAC is responsible for implementing these provisions.
The United Nations Act and its related regulations establishes a list of individuals or entities (“Listed Persons”) believed to be involved in or associated with terrorism. This Act and its related regulations create offences and impose certain reporting obligations in respect of transactions with Listed Persons. FINTRAC, the RCMP, and CBSA share responsibility for implementing and enforcing the United Nations Act and its regulations.
The Canadian government also has the ability to revoke the charitable status of a charity that it believes is engaging in or financing terrorist activities. Under the Charities Registration (Security Information) Act, the Minister of Public Safety and Emergency Preparedness may issue a certificate to have the entity’s charitable status revoked. If the court finds the certificate to be reasonable, the charitable status of the entity will be revoked.
The Criminal Code establishes criminal offences for terrorist financing. In general terms, these sections make it an offence to:
- collect or provide funds or financial services with the intention or knowledge that the funds or services will be used by a terrorist group, for the benefit of a terrorist group, or to facilitate or carry out a terrorist activity;
- use or possess property for the purpose of facilitating or carrying out a terrorist activity; or
- attempt to do any of the foregoing.
The PC(ML)TFA requires Reporting Entities to report to FINTRAC, among other things, any transaction it reasonably suspects may be related to terrorist financing. Failure to do so is an offence and efforts to conceal an offence may result in obstruction of justice charges.
The United Nations Act and its related regulations make it an offence to knowingly provide or collect funds for, or transact with, Listed Persons. Furthermore, this Act and its regulations require certain entities to report the existence of any property in their possession or control that is owned by or on behalf of a terrorist group, and any transactions in respect of this property, to FINTRAC and the RCMP. Failure to comply with this Act and its regulations is an offence.
Terrorist financing offences under the Criminal Code and the United Nations Act and their related regulations generally require the prosecution to prove intent, knowledge, or another mental element to establish that the accused is guilty of an offence. An accused who proves that the requisite knowledge element was not present may escape liability.
The due diligence defences described above under the PC(ML)TFA’s terrorist financing provisions regarding money laundering, apply equally to terrorist financing activities.
Violations of the terrorism offences in the Criminal Code are punishable by unlimited fines and up to 10 years’ imprisonment.
As noted above, available penalties for failure to comply with the PC(ML)TFA include fines up to $2,000,000 and imprisonment for up to five years.
Violations of the United Nations Act and its related regulations are punishable by unlimited fines and up to 10 years’ imprisonment.
Local and provincial police, and the national RCMP, can use the full scope of police powers to investigate terrorist financing under the Criminal Code. The RCMP and CBSA enforce the United Nations Act.
As noted above, FINTRAC has broad search and seizure powers under the PC(ML)TFA. These powers are also available to enforce the terrorist financing provisions, and FINTRAC may share the results of its investigations with law enforcement officials in Canada and abroad.
D. Economic & Trade Sanctions
Another tool used by governments to address wrongful actions by foreign state and non-state actors is the imposition of economic and trade sanctions. Canada’s economic and trade sanctions regime is set out in the United Nations Act; the Special Economic Measures Act (SEMA) and the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) (the “Magnitsky Law”).
These Acts, and their related regulations, impose various restrictions on economic dealings with designated countries and individuals, including prohibitions on trade and the freezing of assets. The RCMP and the CBSA enforce these measures.
The United Nations Act and the SEMA address traditional forms of economic sanctions against state and non-state actors. For instance, the United Nations Act gives the Canadian government authority to implement sanctions against state and non-state actors that have been sanctioned by the United Nations. Similarly, SEMA allows the Canadian government to impose its own sanctions on states and non-state actors even where there have not been formal sanctions issued by the United Nations. These regulations impose an asset freeze on certain designated persons and place restrictions on certain economic sectors, such as the financial and energy industries.
For example, the Canadian government used the SEMA to pass the Special Economic Measures (Russia) Regulations to impose sanctions on Russia in response to Russia’s ongoing violation of the sovereignty and territorial integrity of Ukraine. Sanctions have also been imposed under the United Nations Act and the SEMA including in respect of Iraq, Iran, Ukraine, Venezuela, Zimbabwe, Lebanon, Yemen, Mali, Al-Qaida, Taliban, Democratic Republic of Congo, Libya, South Sudan, North Korea, Somalia, Sudan, Belarus, Burma, Nicaragua, and others.
The Magnitsky Law is a more recent addition to Canada’s economic and trade sanctions regime. It aims to impose sanctions on corrupt foreign officials who are responsible for gross violations of internationally recognized human rights. In addition to creating a new Act, the Magnitsky Law also amended the SEMA. The Magnitsky Law’s history is intriguing. Sergei Magnitsky was a Moscow lawyer who uncovered the largest tax fraud in Russian history. He was detained without trial, tortured and consequently died in a Moscow prison on November 16, 2009. No independent and objective investigation was conducted by Russian authorities into Magnitsky’s detention, torture and death, and no individuals responsible were brought to justice. Instead, following his death, a posthumous trial was held and Magnitsky was convicted of the fraud he uncovered. Magnitsky’s story was made known by the advocacy efforts of Bill Browder, an American and the chief executive of Hermitage Capital for whom Magnitsky worked. Following Browder’s advocacy efforts, a number of countries have passed laws similar to the Magnitsky Law.
Under the Magnitsky Law, Canada has imposed targeted measures against foreign nationals who are, in the Canadian government’s opinion, responsible for or complicit in gross violations of human rights, or are public officials or an associate of such an official who are responsible for or complicit in acts of significant corruption. In particular, the Magnitsky Law allows the Canadian government to make orders and regulations to restrict dealings in property and freeze the assets of foreign nationals if it is of the opinion that the circumstances described below have occurred:
- a foreign national is responsible for or complicit in, gross violations of internationally-recognized human rights against individuals in any foreign state who seek to obtain, exercise, defend or promote internationally-recognized human rights and freedoms or who seek to expose illegal activities carried out by a foreign public official;
- a foreign national acts as an agent of or on behalf of a foreign state in a matter relating to an activity described above;
- a foreign public official, or an associate, is responsible for or complicit in ordering, controlling, or otherwise directing acts of significant corruption; or
- a foreign national has materially assisted, sponsored, or provided financial, material or technological support for, or goods or services in support of, an act of significant corruption by a foreign public official or their associate.
The Magnitsky Law prohibits persons in Canada and Canadians outside Canada from:
- dealing, directly or indirectly, in any property, wherever situated, of the listed foreign national;
- entering into or facilitating, directly or indirectly, any financial transaction related to a dealing described above;
- providing or acquiring financial or other related services to, for the benefit of, or on the direction or order of the listed foreign national; and
- making available any property, wherever situated, to the listed foreign national or to a person acting on behalf of the listed foreign national.
The Minister of Foreign Affairs may issue permits and general permits to persons in Canada and Canadians outside Canada to carry out a specified activity or transaction, or class of activity or transaction that is otherwise prohibited under the Magnitsky Law or its regulations.
Because the Act may require a person to in effect freeze the assets of a foreign national in their possession, there is a concern that civil liability could ensue for not allowing the foreign national to deal with their property or otherwise breaching a contract with the foreign national. To address this concern, Magnitsky Law also provides a safe harbour provision, protecting any person who takes measures to comply with an order made under the Act from any civil liability that might otherwise arise provided that they took all reasonable steps to satisfy themselves that the property in question was subject to an order under the Act.
Examples of how the Canadian government has used the Magnitsky Law since its inception include the following:
- On November 3, 2017, Canada imposed sanctions related to the case of Sergei Magnitsky, and incidents of corruption and gross human rights violations by officials linked to the Maduro regime in Venezuela and by officials in South Sudan.
- On November 29, 2018, Canada imposed sanctions on 17 foreign nationals from Saudi Arabia who, in the Canadian government’s opinion, were responsible for or complicit in the torture and extrajudicial killing of Saudi journalist Jamal Khashoggi.
The United Nations Act, SEMA and the Magnitsky Law allow the Canadian government to enact regulations that identify the sanctioned conduct on a case-by-case basis. As a result, the particular activities that are prohibited under the sanctions depends on the particular sanctions in issue. Violations of these regulations are an offence under these Acts.
There are limited defences to committing an offence under the United Nations Act. However, the regulations passed under this statute may include limited exceptions to permit certain transactions with the country or individual subject to the sanctions. In addition, the federal Minister of International Affairs may issue certificates and permits on a case-by-case basis to allow certain transactions with persons in countries subject to economic sanctions.
In respect of the SEMA, an offence will only be proven if the individual willfully contravenes or fails to comply with an order or regulation made under that Act.
Violations of the United Nations Act are punishable by fines up to $100,000 and imprisonment of not more than one year for a summary conviction and a maximum of 10 years’ imprisonment in the case of an indictable offence, as well as be subject to forfeiture of any property dealt with contrary to the Act.
Offences under the SEMA and Magnitsky Law are punishable by fines not exceeding $25,000 and imprisonment not exceeding one year if convicted for a summary conviction, and a maximum of 10 years’ imprisonment in the case of an indictable offence.
The RCMP and CBSA enforce the United Nations Act, the SEMA and the Magnitsky Law. Furthermore, Canadian police and CBSA have the power to conduct any property search to ensure compliance with economic sanctions under SEMA and its regulations. The officers must have reasonable grounds to believe an offence has been committed, or that the search will afford evidence with respect to an offence. A warrant is not required if obtaining one would be impractical.
F. Considerations for Companies Operation in Canada
The anti-money laundering, terrorism financing and economic sanction regimes raise a number of considerations for companies doing business in, or acquiring a business in, Canada.
First, companies engaging in the financial services sector, or considering acquiring a business in this sector, should consider whether they have reporting obligations under the PC(ML)TFA, and, if so, make appropriate inquiries into whether the company has an appropriate and robust compliance program.
Second, companies with interests in Canada and that are contemplating engaging in transactions with companies or foreign nationals from countries that have been involved in conflicts with Canada, the US or their allies, and particularly transactions involving individuals with potential political connections in those countries, should consider undertaking increased due diligence to ensure the parties they are transacting with are not subject to any economic sanctions.
Lastly, international events that receive attention from the governments of Canada, the U.S. and its allies, should be monitored to determine if any economic sanctions are imposed that may impact the company’s existing business.