Royal Prerogative throws a wrench in Brexit

By Christine Duhaime | November 3rd, 2016

The UK High Court has ruled that the process for the UK to leave the EU, including when, must be made by Parliament and not the government. The government was pursuing the exit from the EU pursuant to what is called the “Royal Prerogative”. The High Court ruled that the government does not have power under the Royal Prerogative to override legislation and exercise the withdrawal from the EU.

In case you did not know, the Royal Prerogative is ancient, dating back to the medieval monarchy. In a nutshell, it preserves in the Crown, residual, discretionary and arbitrary powers that can be exercised in numerous circumstances. In regular language, Royal Prerogative means the power that the King or Queen of England retained when Absolute Reign was abolished in favor of a democracy in the UK. In respect of Canada, because we inherited the laws of the UK, we also inherited the Royal Prerogative and it remains in force in a place like Canada because we have the UK monarchy as part of our constitutional legal regime.

The Royal Prerogative powers cannot be catalogued but key areas include powers relating to the legislature, the judicial system, foreign affairs, defence of the realm, conferring state honors and appointments, state immunity, emergency powers and parens patriae role. Parens Patriae is an odd area of law that gives the Crown power over people who are legally incompetent (such as children who are too young to understand legal consequences).

The Royal Prerogative includes both domestic and international jurisdiction. In Canada, for example, the issuance of a passport is a domestic exercise of jurisdiction given pursuant to the Royal Prerogative. Canada could legislate in respect of the right to issue passports but it has more power to keep that area as a Royal Prerogative.

The Royal Prerogative is not widely taught at law schools anywhere and the most recent law text book on it was written in 1820, and because powers exercised pursuant to the Royal Prerogative are largely non-judiciable, there are few cases on its scope.

Despite little known information about it, the Royal Prerogative is alive and well in the UK and in places like Canada.

As a matter of law, it is possible to erode the Royal Prerogative by statute which is  never advisable particularly in respect of emergency situations. In Canada for example, the recent anti-terrorism legislation that gave powers under the CSIS Act that were previously available under the Royal Prerogative expressly eroded the Royal Prerogative in respect of some terrorism legal areas.

In the Brexit decision released today, the government and the applicant both accepted that the exercise of the Royal Prerogative was judiciable in this case. The government has said that it will appeal.

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FBI going after lawyers criminally and globally who help money launderers

By Christine Duhaime | October 24th, 2016

The FBI announced today that it has launched a program with resources to target and investigate criminally, lawyers and accountants who help money launderers launder proceeds of crime by providing services to them. Some lawyers help money launderers in a multitude of ways including parking proceeds of crime in trust accounts,  setting up beneficial ownership structures to hide the corporate or personal identity of a person who has proceeds of crime or corruption that they are investing in shares, homes, ventures and other businesses, or by assisting them to set up structures in tax havens.

As of today, the FBI has allocated more resources to ferret out lawyers and other facilitators in the US and internationally. The FBI has agents in Canada, particularly in Vancouver, and pursuant to the notice, the FBI will be working with international law enforcement partners on this new criminal investigations effort.

People who use lawyers for such purposes, as noted above, are not protected by privilege and any law firm with client files for such suspected activities leaves itself wide open for a raid of documents since they cannot claim privilege over any of the files of that client.

As part of the announcement, the FBI also said it was going after digital currencies (those are, for example, Bitcoin, Ethereum, etc.) because of the anonymity that they give criminals to move money internationally.

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European Central Bank calls on EU not to promote Blockchain & distributed ledger tech and to end anonymous digital currency wallets for FIUs

By Christine Duhaime | October 22nd, 2016

In an opinion released on October 12, 2016, for the European Parliament, the European Central Bank has made some interesting pronouncements about the financial crime risks arising from the use of digital currencies and Blockchain and distributed ledger technology.

The EU is considering a new directive to mitigate against money laundering and terrorist financing by requiring the licensing of those who act as exchangers of digital currencies (whether it be on the Blockchain, Ethereum or Ripple or any closed system) and those who host or control digital currency wallets. Digital currency wallet providers and exchangers would be required to comply with the anti-money laundering and counter-terrorist financing obligations applicable to money services businesses. Those are described here and include reporting suspicious transactions, terrorist transactions, large transactions and electronic funds transfers; ascertaining and verifying the identity of account holders before undertaking any transactions for those clients; preparing a risk assessment for the activity to mitigate against money laundering and terrorist financing; and implementing a competently designed compliance plan.

The ECB supports the imposition of anti-money laundering controls for digital currencies and their operating systems, as suggested by the Financial Action Task Force (described here), because digital currency transactions can be anonymous. It remains possible to send value of any amount (from $10 to $10 million) in digital currency from any two persons across a room or across the planet without law enforcement being aware of the transaction, violating sanctions law, laundering funds or funding terrorists. Despite concerns raised in financial crime circles about digital currencies since as early as 2012, no one in the  private sector involved in this sector anywhere in the world  has removed the anonymity of digital currency transactions or developed tech to mitigate against financial crimes.

The ECB noted that they pose “greater risks than traditional means of payment” because the transfer is online (they likely meant to say immediate and M2M); and whole payment ecosystems can exist for payments without ever engaging the financial system (meaning that a person can keep obtaining and spending money through a wallet without ever cashing out and being detected at the cash out intersection point).

The ECB cautioned the EU against jumping onboard to promote the Blockchain or distributed ledger technology because, inter alia, they represent illegal currencies.

The ECB also cautioned that digital currencies are a threat to the supply of currency (noted a number of years ago here). The ECB also suggests expanding the definition of digital currencies (or virtual currencies) to includes its non-payment uses that include its use as a means of exchange.

In order to address some of these risks, the ECB recommends that the EU require laws be amended to 100% remove anonymity so that FIUs can know the identity of every digital currency holder globally.

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Beneficial ownership and money laundering issues in real estate

By Christine Duhaime | October 12th, 2016

The 4th Annual ACAMS Conference in Toronto on October 25-26, 2016 will cover a session on the hot topic of real estate and money laundering, including the role of beneficial ownership with an explanation from a legal perspective on what beneficial ownership is and how transactions are structured to avoid the reporting requirement under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. 

Registration is here.

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Eritean refugees get green light to sue Vancouver mining company for slavery and crimes against humanity

By Christine Duhaime | October 11th, 2016

Late last week, the Supreme Court of British Columbia approved a representative lawsuit for damages for slavery and crimes against humanity filed by three refugees from Eritea against Nevsun Resources Ltd., a BC incorporated mining company (“Nevsun”).

The Reasons for Judgment are not the most clear, in part because the litigation involved an attempt to create new law in Canada. Be that as it may, the facts of the case are that three refugees from Eritea allege that they were forced to work at the Bisha Gold Mine in Eritea by the Government of Eritea from 2008 to the present date under the threat of torture. The Bisha Gold Mine is being mined by Nevsun.

The refugees claim that Nevsun, through third parties, contracted with the Eritean military, Segen Construction Company and Mereb Construction Company, the latter two allegedly controlled by government officials of Eritea, to construct the mine and that those three groups forced them to work at the mine under conditions that involved torture, slavery and crimes against humanity. They are suing Nevsun for negligence arising from the alleged commission of these crimes against them.

There are some unusual aspects to the litigation and below, I highlight only those parts that strike me as odd.

According to the Reasons for Judgment, the refugees are traitors although the Reasons do not explain why they have been found to be traitors and by whom, and are unable to return to Eritea.

According to the Reasons for Judgment, none of the refugees are Canadian permanent residents, refugees to Canada or reside in Canada. Its unclear how the CJPTA applies to plaintiffs with no ties to British Columbia. We do not learn where they are, which is very unusual since the country in which they are currently chilling as refugees may be the ideal place to litigate, as opposed to Canada. The parties argued one aspect of the CJPTA (forum non conveniens) but not that part of the legislation that is related to jurisdiction over a person.

In a table of allegations set out in the Reasons for Judgment, the refugees appear to admit that they were not employed by Nevsun but rather were “employees” of the third party; presumably as “employees”, they were paid with wages and benefits, as opposed to forced to provide unpaid slave labour which would not make them “employees.” Only one of the three alleges he was tortured; the other two say they saw torture happening to others. The Reasons for Judgment did not articulate the alleged acts of slavery or the crimes against humanity. Both these terms have specific meanings in international law.

As to the whereabouts of the refugees, they may be in the EU. Eritea is an East African nation of 6 million people. It is frequently in the news because it is one of the biggest sources of migrants who pay illegal human smuggling rings, often controlled by or with ties to, terrorist groups such as Islamic State, to move them into the Sudan and across to Libya before sailing to Italy with false identity documents. How the refugees migrated from Eritea to wherever they may be was not part of the Reasons for Judgment.

The law in Canada as it relates to allegations of crimes against humanity, slavery and torture arises under the Crimes Against Humanity and War Crimes ActThat legislation creates criminal offenses for crimes committed against victims who are Canadian (but not non-Canadian) and does not give a private right of action for those crimes and does not permit a claim of negligence as is being advanced in this litigation.

Moreover, there is no jurisdiction under that statute for these plaintiffs even if it did. According to the Reasons for Judgment, the refugees are neither in Canada nor Canadian citizens and therefore they have no jurisdiction under the Crimes Against Humanity and War Crimes Act. Even assuming there was jurisdiction, the most the plaintiffs could be entitled to would be compensation from a compensation fund.

The Court held that because Canada enacted the Justice of Victims of Terrorism Act, which is legislation for victims with ties to Canada of acts of terrorism, and has not enacted legislation for private rights of action against companies for alleged crimes against humanity in a similar vein, does not mean that the government expressly intended not to do so. In other words, the Court appears to have held that just because there is no law yet on the books does not mean that Parliament expressly did not want there to be such a law. The Court seemed to be suggesting that the Justice of Victims of Terrorism Act can be combined with the Crimes Against Humanity and War Crimes Act to create a new common law right of action based on negligence that is a mix of both statutes.

In the end result, the representative action was allowed to proceed for, inter alia, slavery and crimes against humanity as against Nevsun, although it is merely at the preliminary phase.

None of the parties, surprisingly, touched upon the obvious financial crime and money laundering aspects that could arise for both sides.

I suspect that Nevsun may appeal on numerous ground and given the novel aspects, the appeal will likely go all the way to the Supreme Court of Canada and will not be heard before another five years.

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Money laundering charge a sufficient ground for refusing refugee protection in Canada

By Christine Duhaime | October 8th, 2016

In a not-often cited decision from 2011, the Federal Court of Canada upheld a decision of the Immigration and Refugee Board of Canada denying a foreign national refugee protection in Canada for serious criminality based on money laundering charges even though the foreign national was never convicted of money laundering.

The facts of the case are that Espinel Naranjo, a foreign national from Venezuela, was arrested in 1998 entering the United States with US$1.2 million cash hidden inside stereo speakers that he failed to declare on a currency transaction report at the Miami Airport. An additional US$2 million cash was found hidden at his house in Florida. He was charged with money laundering, lying to officials, structuring, and a failure to file a currency transaction report and entered into an agreement to plead guilty to six counts of structuring (namely, to avoid filing a currency transaction report). He was sentenced to 15 months in a US prison. He served 13 months and was ordered to leave the US when he was released due to his criminality and was eventually deported from the US.

After he was deported from the US, Naranjo attempted to enter the US illegally through Mexico and was returned to Venezuela by US authorities. He managed to enter Canada and from there he made a second illegal entry into the US in 2005 and was removed from the US again. In 2006, for a third time, Naranjo entered the US illegally and was arrested and convicted of being unlawfully in the US. He was deported again in 2007. During that time, and despite his criminality, Naranjo was able to enter Canada on many occasions.

In 2010, while in Canada, Naranjo applied for refugee status pursuant to the Convention Relating to the Status of Refugees, 1951, C.T.S. 1969/6; 189 U.N.T.S. 150  1951, C.T.S. 1969/6; 189 U.N.T.S. 150, alleging that his life would be at risk if he was returned to Venezuela.

A Convention refugee is a foreign national who has a well-founded fear of persecution for reasons of race, religion, nationality, membership in a particular social group or political opinion and is outside the country of their nationality, and is unable, or by reason of that fear is unwilling, to avail himself/herself of the protection of that country. A person who has availed themselves of the Court system of their own country, for whatever reason, is automatically not entitled to be a Convention refugee because it negates the claim of an alleged fear of persecution if they attorned to their own Courts for a legal remedy.

A person is not eligible to claim refugee status in Canada if, among other things, they are inadmissible to Canada on security grounds, criminal activity or human rights violations. In the case of serious criminality, a refugee claim is ineligible if the person has a conviction outside Canada for an offence that in Canada carries a term of imprisonment of at least ten years.

The Immigration and Refugee Board of Canada denied Naranjo’s application for refugee protection on the basis that he was not entitled to refugee protection pursuant to Article 1F(b) of the Convention. Article 1F(b) of the Convention denies refugee protection for non-political serious crimes and excludes such persons from Canada whether they have been rehabilitated or not, or are fugitives or not. (Febles v. Canada 2014 SCC 68). 

Naranjo was denied refugee protection because the Board found that his conduct in lying to US authorities and the charge of money laundering (neither of which he was sentenced for) in another country constituted sufficient grounds for serious criminality for Canadian immigration purposes and regarding the money laundering offence, carried a ten year term of imprisonment in Canada had that offence been committed in Canada.

Naranjo appealed the Board’s decision to the Federal Court of Canada on the ground, inter alia, that the fact that he was not convicted of lying to US authorities or of money laundering but was merely charged with structuring (which ironically is a money laundering offence), meant that he was not ineligible under Article 1F(b) of the Convention. He argued that the crimes in the US for which he was prosecuted and convicted did not carry a ten year term of incarceration in Canada and therefore the Board erred in determining he was inadmissible as a money launderer.

The Federal Court of Canada upheld the Immigration and Refugee Board’s decision that Naranjo was ineligible for refugee protection in Canada for serious criminality related to his activities as a money launderer, even though Naranjo was never charged as such. The Court held that the Board is entitled to consider and rely on charges that are laid against a person even where the charges do not result in a conviction . The Federal Court of Appeal held that an Article 1F(b) finding of ineligibility is possible even where an applicant has not been convicted and further even when charges have been dismissed.

The Federal Court held that the Board was entitled to consider that a large sum of money was in the possession of Naranjo and that he had been charged with money laundering  to conclude that there were serious reasons for considering that Naranjo had committed the offence of money laundering, rendering him inadmissible.

It goes without saying that a foreign national in Canada seeking refugee protection who is charged with a money laundering offence in Canada, even if the charges are pled down to lesser offenses, or dismissed, is also not entitled to refugee protection on the basis of this decision and on the basis of the Convention. Whether Naranjo’s life was in danger in Venezuela if he was returned was irrelevant for the purposes of refugee status because he was not entitled to rely on the refugee Convention for protection, given his conduct.

Subsequent to the decision, Naranjo was ordered removed from Canada but he disappeared and was the subject of a Canada-wide arrest warrant.

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Canada a major money laundering country with concern from China and Pakistan noted, according to US Annual Narcotics Control Strategy Report

By Christine Duhaime | October 6th, 2016

1. Canada a Major Money Laundering Country

The 2016 International Narcotics Control Strategy Report (“INCSR“) published in March 2016 by the U.S. Department of State identifies Canada as a “major money laundering country” along with, among others, Afghanistan, Brazil, BVI, Cayman Islands, Cambodia, Cyprus, Dominican Republic, Guernsey, Jersey, Hong Kong, Iran, Iraq, Libya, Mexico, Macau and Somalia.

A “major money laundering country” is one whose banks and financial institutions engage in currency transactions involving “significant amounts of proceeds from international narcotics trafficking.” For several years in a row, Canada has been identified as such (see our other annual reviews here and here).

2. What’s New in the 2016 INCSR for Canada

Bulk Cash Smuggling Widespread; Shadow Banking Developing in Canada

The 2016 INCSR identifies lawyers and professional services firms as a key money laundering threat. It also reports for the first time that Canada has developed an underground financial system (shadow banking and lending) among the immigrant community and bulk cash smuggling into Canada is “widespread.”

Canada used for Laundering Funds for a Listed Terrorist Group and for Organized Criminal Gangs from China, Mexico & Columbia

Also noted was that a transnational organized crime group affiliated with Altaf Khanani from Pakistan uses Canada and other countries such as UAE and Australia, to launder billions of dollars in proceeds of crime every year for crime gangs from China, Columbia, Mexico and for the listed terrorist organization, Hezbollah. According to the Report, Altaf Khanani has also moved terrorist funds for the Taliban.

Substantial Amount Laundered from China in Vancouver, Sydney, London, New York

According to the Report, “a substantial amount of money is laundered through the purchase of overseas properties in places such as Vancouver” as well as Sydney, London, San Diego, and New York from Chinese foreign nationals.

Chinese foreign exchange rules cap the maximum amount of yuan individuals are allowed to convert into other currencies at approximately $50,000 each year and restrict them from transferring yuan abroad directly without prior approval from the State Administration of Foreign Exchange. A variety of money laundering techniques are used to circumvent the restrictions, including structuring, using networks of family and friends, transferring value with the help of family emigrating abroad, overseas cash withdrawals using credit cards, underground remittance systems such as fei-qian or “flying money,” and organized  junkets to Macau, some of which involves Chinese organized crime.

3. Key Findings

The key findings of Volume 1 on the drug trade vis a vis Canada are:

  • Canada is a major producer of precursor chemicals used in the production of illicit narcotics, along with Afghanistan, Brazil, Columbia, Egypt, Iraq, Mexico and several other countries.
  • Canada is a significant supplier of estasy and marijuana to the US, and Canada is a supplier to places like Thailand of estasy that arrives via commercial flights.
  • Illegal drugs are produced mostly in British Columbia, Quebec and Ontario.
  • Canada is a primary source country of high potency marijuana and estasy to the US, Asia and Australia.
  • Cocaine continues to enter Canada from South America and Mexico, some of which is transited through the United States.
  • Canada is the 2nd largest per capita consumer of prescription opiates in the world.


The key findings in respect of money laundering and financial crimes in Volume 2 for Canada are:

  • Money laundering activities in Canada are still primarily from illegal drug trafficking and financial crimes from capital markets, payments fraud and mass marketing fraud.
  • Canada has both domestic laundering of funds occurring and foreign laundering.
  • Laundered methods in Canada have remained constant and involve using money services businesses, casinos, purchasing real estate, wire transfers, setting up offshore companies, digital currencies like Bitcoin, use of nominees, use of foreign bank accounts, and the use of lawyers.
  • This years report noted that the use of professional services (lawyers) is a key money laundering threat.
  • Underground financial systems (shadow banking and lending) among immigrants was noted as a threat for Canada.
  • Also noted was that bulk cash smuggling into Canada is “widespread”.
  • The report noted that Canada has human trafficking organizations that use Canada’s banking system.
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Europol Report highlights increased global cybercriminality, threats with NFC and Blockchain payments

By Christine Duhaime | September 27th, 2016

Europol released its 2016 Internet Organized Crime Threat Assessment Report on cybercrime today and the results are more disturbing than last years’ report. The Report can be accessed here.

Generally, the Report findings were that the volume and scope of cybercrime has reached very high levels and now surpasses regular non-online crimes.

The Report made a number of key findings focussing especially on the threats from all digital currencies including Bitcoin, and the technology that runs them including Blockchain and distributed ledger technologies arising from its anonymous nature and use as a preferred payment method for cybercriminals.

Some of the key takeaways from the Report are as follows:

  •  Critical infrastructure (ports, railways, pipelines, financial services, bridges, electrical grid, air ports, dams, etc.) remains particularly vulnerable because those industries that build and maintain critical infrastructure have not done enough to design and implement against threats from cyber-criminality, leaving them open to attacks.
  • Threats to banks remain significant, particularly from Trojan attacks.
  • In terms of financial fraud, e-commerce is an ever-present threat with fraud and cyber-criminality occurring mostly from airline ticketing, car rentals and hotel accommodation. The threats are two-fold – stolen card numbers are used for payments from these services and identity theft from the databases online of these types of merchants that are unprotected.
  • NFC card systems, thought to be more secure, are now being used for cybercrime by transnational criminal organizations.
  • Cybercriminals are increasingly targeting what are called “high value targets” – CEOs of large corporations, high profile lawyers and judges and high-ranking members of government. According to the Report, tens of thousands of high value targets are defrauded annually, mostly CEOs for their banking information, or are extorted for payments over personal details that cybercriminals have obtained about them (e.g., the most common anecdotally appears to be CEOs who are engaged in extra-marital relationships).
  • Bitcoin and other digital currencies, and the Blockchain and distributed ledger technologies that power them, remain the number one concern for cybercriminality because they continue to be the payment of choice for cybercriminals who engage in all varieties of cybercrime from child pornography, extortion and attacks on critical infrastructure and businesses. Users of digital currencies continue to be able to conduct financial transactions anonymously because, among other things, wallets are anonymous, and that has spawned the payment phenomena of P2P C2C payments (peer-to-peer criminal-to-criminal payments) which are not part of the financial system and undetectable by law enforcement.
  • Ethereum’s smart contracts ability will act as a reinforcement of the crime-as-a-service model for the digital underground and will be used for payments to criminals for criminal acts committed.
  • The increased use of mobile phones around the world correspondingly increases the risks of cybercrime because criminals are moving attacks and hacks to the mobile environment, which is a concern because mobile phone devices are less secured by the end user than desktop systems.
  • The anonymitity of digital currencies on the Blockchain or distributed ledger technologies have resulted in the increase of the live-streaming of child sexual exploitation involving children from poor countries because digital currencies allows this industry to flourish with anonymous subscribers who cannot be easily traced through traditional payment methods, as is historically done.
  • A new target for cybercriminality is the hacking of stored medical records online or through mobile phone apps arising from the new practice of consumers uploading their medical records online without realizing the risks to them of doing so of, among other things, the waivier of privilege over their medical records, the disclosure of medical records and the risks of extortion by cybercriminals.
  • Canada ranks 7th place in the world in terms of destinations where law enforcement identify online criminality.

Among the many recommendations from Europol was that governments devote financial resources to ensure that its law enforcement personnel have expertise on, inter alia, Blockchain and distributed ledger technology and the relevant law applicable to this area in order to fight cybercriminality.

All cybercriminal activities general proceeds of crime to the extent there is a financial transaction connected therewith and therefore, there are money laundering risks with all cyber-criminal activities that must be reported as suspicious activities.

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US lists Vancouver company a “significant transnational criminal organization”

By Christine Duhaime | September 22nd, 2016

Vancouver company listed as a criminal organization 

Allegations of global money laundering from Vancouver through the financial system

Today, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC“), designated Vancouver based PacNet and its connected companies, as a significant transnational criminal organization (“TCO“) for its role acting as an alleged money laundering service. It is the first time a Vancouver company has been designated by OFAC as a TCO.

According to OFAC, PacNet has a “lengthy history of money laundering” and payment processing from Vancouver and is alleged to have used the financial system to move money between several countries.

The OFAC notice covers 24 PacNet companies and 12 persons affiliated with PacNet. The notice blocks all transactions of the PacNet entities worldwide pursuant to US sanctions law, and prohibits US persons and companies from dealing with them.

According to the US Treasury, PacNet has been allegedly laundering the proceeds of crime as a payment processor for over 20 years. In 2002, PacNet was previously implicated in similar activity involving criminal money laundering in the US said the US Treasury.

The company apparently had its own tiny airline, PacNetAir, that US Treasury said was used to move bulk proceeds of crime across the EU. It also had its own IT lab called Deepcove Labs in Vancouver and an entity called the Payments Factory, located in the UK, Ireland and Vancouver.

The US Attorney General, Loretta Lynch, held a news conference to announce that the bank accounts of PacNet had been seized and that it was aware that PacNet processed payments for more than 100 mass mail fraud schemes.

 A designation reserved for the likes of Las Zetas and Camorra criminal gangs

US Treasury has only issued seven TCO notices of sanctions and this is the first Vancouver entity to be listed.

The notice is issued pursuant to Executive Order 13581. EO 13581 was issued when the President of the US declared a national emergency to deal with the unusual and extraordinary threat to national security, foreign policy, and economy of the US by the growing threat of significant TCOs when they reach such scope and gravity that they weaken democratic institutions, degrade the rule of law and undermine economic markets.

Its authority is the International Emergency Economic Powers Act (50 U.S.C. §§ 1701 et seq.) and the National Emergencies Act (50 U.S.C. §§ 1601 et seq.)

It is used to sanction the most serious criminal activity involving the most serious  international criminal organizations. It was used to designate the Camorra, Italy’s latest criminal gang, and Las Zetas, Mexico’s Gulf cartel. Other designations include MS-13, Yamaguchi gang and the Brother’s Circle gang.

Canadian banks - freezing order effective immediately

As a result of the designation, all property (money, securities, and other property) of the designated persons and entities in the U.S. or in the possession or control of a U.S. person, or U.S. company must be immediately frozen and cannot be dealt with in any way.

The sanction applies to a U.S. person, a U.S. incorporated company or entity, a U.S. based partnership, joint venture, trust, group or any organization (even if Canadian parented) and any foreign branches of any of those entities.

Banks, funds, brokers, trust companies and in particular, charge and credit card companies in the U.S. or situated elsewhere but with a U.S. parent or U.S. connection need to take extra precautions to confirm they are not holding funds belonging to persons or entities on the list.

The list of entities and persons blocked is here.

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Canada’s anti-money laundering evaluation shows Canada is doing worse, not better, in combatting money laundering and terrorist financing

By Christine Duhaime | September 15th, 2016

Canada get 25% compliance grade from FATF

FATF notes the concern of proceeds of crime coming into real estate in Vancouver from China

The FATF Mutual Evaluation of Canada was released today and according to the Report, Canada achieved a grade of 25% compliance with international anti-money laundering and counter-terrorist financing standards. Out of 40 evaluation criteria, Canada was compliant in only 11 and was outright non-compliant in four categories. In the rest of the categories, Canada was partially or somewhat compliant with room to improve.

The 25% was derived from the number of areas of “compliance” in which there were 11 out of 40.

In a nutshell, here is a summary:

Where Canada failed

Areas where Canada failed include:

  •  Beneficial ownership (Although I agree with this assessment, in fairness to Canada, the FATF clearly did not understand beneficial ownership (e.g.,corporate law) in Canada and the deficiencies it identified are not the actual deficiencies that exist in this area in Canada. For example, it referred to “professional trustees”, a concept that does not exist in Canada and it did not appreciate the fact that trusts and corporate records are maintained in law firms.
  • Lack of AML / CTF requirements for lawyers
  • Lack of AML / CTF requirements for online gambling. This failure is not accurate and repeats a mistake the FATF made of Canada in its last mutual evaluation wherein it failed to distinguish between online gambling undertaken by the public sector and that which is undertaken by the private sector from other countries that target Canadian consumers – the FATF lumped them together as one, which skewed the result.
  • Customer due diligence for FinTech, third parties and lawyers is inadequate.
  • FinTech not included as part of a risk assessment as required
  • Politically exposed persons – not compliant

Note worthy comment from FATF:

There are cases of Chinese officials laundering the proceeds of crime through the real estate sector, particularly in Vancouver and the Chinese government has listed Canada as a country that it wishes to target for recovering the proceeds of Chinese corruption. Canada may be particularly vulnerable to such money laundering as there is no extradition treaty with China.”

What this means for banks is that they are now going to have to add to their risk assessments, more protocols for money flowing into Canadian banks from China and particularly for real estate transactions, to ensure that they verify whether a person being on-boarded is a PEP and if so, to verify the PEP’s source of funds. Many banks ask PEPs to self-declare their PEP status, which is inconsistent with the law and not permissible, subjecting the banks to fines.

Where Canada scored so-so

The areas where Canada scored so-so include:

  • Employing risk based approach (I don’t fully agree with this one as our legislation is not risk-based)
  • Forfeiture of proceeds of crime (this is criminal legislation and not related to anti-money laundering law)
  • Terrorist financing offence – some criminalization absent from the Criminal Code
  • Oversight of terrorist financing – Canada does not have a body that monitors compliance with terrorist financing requirements (that is true and the same is true for sanctions)
  • Customer due diligence lacking in areas such as factoring, leasing and numbered companies
  • Record keeping requirements are not adequate in the law
  • Correspondent banking supervision lacking
  • Tipping off offence is not strong enough
  • Provincial inadequacies of monitoring listed companies
  • Lack of power to law enforcement for money laundering investigations
  • Cash couriers are not adequately reported by CBSA as cross border
  • Administrative fines are too low to be a deterrant
  • Lack of ability to engage in interception of communications of persons suspected of money laundering

Where Canada passed

The areas where Canada passed include:

  • Canada has a national coordinated approach to money laundering
  • The money laundering offence is adequate in the Criminal Code
  • The secrecy laws for banking are adequate
  • The regulation of money services businesses is adequate
  • Canada has a list of high risk countries as required
  • Canada’s supervisory powers are adequate
  • Law enforcement and investigations are fully met

You can read the full 200-page report here.

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