Often revered as a peaceful and largely untroubled nation, Canada made international headlines earlier this year. The government’s adoption of the Emergencies Act, announced by Prime Minister Justin Trudeau on 15 February 2022 and subsequently revoked eight days later, was a response to ongoing disruptive protests in the nation’s capital Ottawa. The controversial use of the Act, which encompasses the Emergency Economic Measures Order, gave financial institutions (“FIs”) new obligations under broad action to ‘follow the money’ and stop funding flowing to the newly-illegal protests.
Given time to reflect on such a broad sweeping move, and while awaiting the findings from the official Rouleau Commission’s inquiry, FINTRAIL examines Canada as a case study to extract valuable lessons for FIs. Looking forward and in the face of another potential emergency, how can compliance staff logistically implement such urgent measures? And what lessons can be learned for the wider international compliance community?
Change of Rules
In the case of Canada, the never-before-invoked Emergencies Act demanded that FIs, including payment platforms, funding platforms and digital currency exchanges, assess whether they control or are in possession of property by a designated person. In essence, these organisations were to cease business with anyone directly or indirectly associated with the newly-illegal activities of the protest.
The following measures were adopted:
The scope of Canada’s AML/CTF rules was expanded to cover crowdfunding platforms and the payment processors they use. They are obliged to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and report suspicious or large transactions.
FIs could immediately freeze or suspend accounts suspected of financing the demonstrations without a court order. This covers all forms of transactions, including digital assets.
FIs were to review their relationships with anyone involved in the blockades.
FIs were required to report any relevant relationships or activity to the Royal Canadian Mounted Police (“RCMP”) or Canadian Security Intelligence Service (“CSIS”).
Unlike typical sanction scenarios where institutions are given a list of individuals and businesses by law enforcement, the broad application of anyone who is “engaged, directly or indirectly” in prohibited public assemblies as a ‘designated person’ leaves much up to the discretion of FIs.
Though one week after the measures were announced, on 22 February 2022, the Canadian federal police gave FIs a list of both “influencers in the illegal protest” and “owners and drivers of vehicles who did not leave the protest zone” — this non-exhaustive list is just a piece of the puzzle. FIs had to continue to use their own judgement when determining who falls under the category of ‘designated person’ and what is effectively considered ‘suspicious activity’. In practical and logistic terms, this can prove to be difficult.
FI’s Discretion
Left to their discretion in determining which individuals and businesses are associated with the illegal blockades, FIs were undoubtedly informed by publicly available information like media reports. However, the looseness in definition led to some critiques and questions about what exactly qualifies as suspicious and what type of recourse customers would have once their accounts were frozen.
One particular difficulty is the sheer number of those potentially involved, with leaked donor lists showing more than 92,400 donations made on fundraising websites. Despite government officials dismissing the likelihood of small-scale donors being affected, unsubstantiated claims of those who had their accounts frozen despite donating prior to the 15 February state of emergency emerged. The official inquiry examining the use of the Emergencies Act, which will produce a final report in February 2023, notably does not grant standing to a number of individuals who had their bank accounts frozen.
Best Practices
While Canada’s use of a state of emergency to target protestors is largely unprecedented in a Western democracy, some experts have argued that it is part of a larger pattern of using anti-money laundering and counter-terrorist controls beyond their initially intended purpose — suggesting an event like this, stoked by rising global political uncertainties, could occur in other jurisdictions. Other governments have also reacted with firm responses to recent public protests, such as the Black Lives Matter protests in the US, Extinction Rebellion actions in the UK, and the Gilets Jaunes movement in France. It is, therefore, possible to imagine scenarios in other countries where similar actions could be taken to cut off protestors’ funding. After examining the situation in Canada, we recommend the following best practices for compliance teams.
Clear internal communication. For FIs, clear and distilled internal instruction on what and who constitutes a designated person needs to be consistent, proportional, and well-communicated among compliance teams. Since a broad and poorly understood legal definition can easily lead to inconsistencies and a heavily subjective approach, clear communication and protocols should be widely distributed.
Work closely with law enforcement. Clear communication between law enforcement and FIs are paramount. In the case of Canada, the RCMP began working closely with FIs to unfreeze accounts after giving lists of crypto wallets to exchanges, and the names of certain individuals involved to FIs.
Work closely with peers. When it comes to responding immediately to such rapidly evolving situations, everyone is in the same boat. Rather than each FI devoting resources to identifying details of fundraising activities and linked names individually, such information could be pooled and shared to make the industry response more effective and efficient. Similar actions were taken by a number of banks in 2016, when the US and EU imposed “sanctions by extension” on all corporate entities owned 50% by sanctioned people or entities.
Awareness of financial exclusion. While in Canada, the FIs themselves were given protection from civil liabilities for any actions taken to comply with the orders, the potential consequences for customers are enormous. As gatekeepers of the financial system, understanding those individuals who have their assets frozen may be at risk of financial exclusion in the future is another factor to consider, and encourages the need for thorough due diligence and informed action.
When reflecting on the situation in Canada and any similar situations which may emerge in the future, FIs and their often thinly-spread compliance teams may find themselves walking a tightrope between proportionate action and obeying the law. The aftermath of Canada's Emergencies Act provides valuable analysis, serving as a case study for other countries that may see this type of broad application of AML/CFT controls.
In rapidly evolving situations, sharing information with peers can be extremely valuable. The FinTech FinCrime Exchange provides a unique network for FinTech compliance professionals to do exactly that, and leverage the collective efforts of a community. Click here to find out more and join the community, or email us at ffe_admin@fintrail.com.