Due diligence is about trying to look around corners. Not only do you look backward at a person’s history, but you also want to try to anticipate potential problems for the client if they hire Mr. X. or go into business in Country Y.
Country Y for the purposes of this blog today is Canada.
Things are moving quickly under Canada’s new emergency powers regime, yet there appears to have been little legal guidance published in the U.S. about the new world for banks in that country.
This is Know Your Customer on steroids, and it applies not only to banks but to payment service providers and fundraising platforms, which will now have to file suspicious transaction reports.
First a little background. Even after the three weeks of demonstrations against Canada’s Covid policy were cleared from around the country’s Parliament and from several border crossings, Canada’s government declared a Public Order Emergency, which suspends certain rights in the country (some forms of assembly, but also permits the freezing of financial accounts with a court order). You can see the sweeping rules in the Canada Gazette, published Feb. 15.
The law in Canada allows for the government to declare an emergency but then needs to have the emergency confirmed by Parliament. The House of Commons voted this week to confirm the emergency, though it is still being debated in the country’s appointed Senate, which rarely overturns a Commons vote.
In the meantime, the rules are sweeping and changing by the day. It would make sense for any U.S. financial institution operating in Canada to pay close attention. In addition, the rules cover accounts by certain people held anywhere, not just in Canada.
The rules prohibit banks from dealing with a “Designated Person… dealing in any property, wherever situated, that is owned, held or controlled, directly or indirectly, by a designated person or by a person acting on behalf of a designated person.”
We asked ourselves: If an American bank operating in Canada has a U.S. account for a lawyer who represents one of the demonstrators, does that lawyer get swept up in the rules that require an account freeze?
So far, it appears the answer is no, but who knows what next week will bring?
Last week the Justice Minister said donors to the demonstrations were subject to having their bank accounts frozen. “Trump supporters,” he said, “ought to be worried” about this. Then last night, an Assistant Deputy Minister of Finance told a House of Commons committee that the Royal Canadian Mounted Police were working with financial institutions to unfreeze such accounts. How many have been unfrozen? Who knows?
Still, banks are under a duty to “determine on a continuous basis whether they are in possession or control of property that is owned, held or controlled by or on behalf of a designated person.” Canadian law firm Blakes writes that this means doing an information sweep at least once a week. Their commentary on the rules is here.
We are not experts in banking law in either the U.S. or Canada. But when,
- New sweeping rules are put into place and then (perhaps) reversed, we know enough to recommend proceeding with extreme caution.
- The rules say on their face that they apply to bank holdings the world over, that is something an institution would want to get a grip on right away.
After all, if more demonstrations break out this story could be back on the front pages of the world’s papers, from which it has now largely disappeared.