The Office of the Superintendent of Financial Institutions (OSFI) has issued a notice dated March 5, 2014, directing banks, trust companies, insurers and other federally regulated financial institutions (FRFIs) to immediately freeze assets of the former Ukranian president, Viktor Yanukovych, and his close associates and to refrain from having any dealings with these individuals.
Although FRFIs bear the highest compliance burden, these regulations will apply to all persons within Canada, as well to Canadians located outside the country.
In imposing these targeted sanctions, Canada is acting in concert with the EU and the United States. The EU imposed measures on March 5 similar to those implemented by Canada. The Decision of the Council of the European Union provides for the freezing of funds and assets of the same individuals targeted by Canada. In the case of the United States, on March 6, 2014, President Obama signed an Executive Order permitting the blocking of property of persons who undermine both the democratic institutions and the peace and stability of Ukraine. The Executive Order gives the U.S. Secretary of the Treasury authority to penalize both Ukrainian and Russian persons. At this time a specific list has not been issued by the U.S. Treasury Department.
The Freezing Assets of Corrupt Foreign Officials Act (FACFOA) permits the Canadian government, at the written request of a foreign state, to freeze the assets of or prohibit dealings with persons who misappropriated or inappropriately acquired the property of the foreign state by virtue of their office or a personal business relationship. The Governor-in-Council may make an order or regulation under the Act if it is satisfied that the foreign country is in a state of turmoil or political uncertainty and if making an order or regulation is in the interest of international relations. This legislation was first enacted at the time of the Arab Spring to target former Egyptian and Tunisian government officials.
The Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations (Ukraine Regulations) were made effective on March 5, 2014, and were prompted by a request from the new Ukrainian government to Canada. The Ukraine Regulations target 18 Ukrainian officials and certain family members by requiring that their assets within Canada be frozen, and impose on all Canadians (not just FRFIs) searching, freezing, monitoring, disclosure and due diligence obligations.
The Ukraine Regulations freeze the assets of listed politically exposed foreign persons (PEFPs) by prohibiting the following activities by anyone in Canada or any Canadian outside Canada:
- Dealing, directly or indirectly, in any property, wherever situated, of a listed PEFP;
- Entering into or facilitating, directly or indirectly, any financial transaction related to a dealing referred to in point 1;
- Providing financial services or other related services in respect of any property of a listed PEFP.
Compliance Obligations on Financial Institutions
Practically speaking, banks, trust companies, insurers and other FRFIs will bear the greatest compliance burden for implementing the Ukraine Regulations because they will have to ensure that transactions with and financial services provided to listed PEFPs are blocked and reported. The financial services that are prohibited under the Ukraine Regulations encompass a wide range of services, including asset management, lending (including mortgage lending) and the provision of property insurance and other insurance policies and services.
These sanctions require financial institutions to search their customer records in order to identify financial assets to which the asset freeze applies. OSFI has advised that, at a minimum, it expects that FRFIs will be able to search their records for the listed PEFPs at least on a weekly basis and more frequently if need be. The Ukraine Regulations impose continuous searching and reporting obligations. The PEFP list is exhaustive for now, and FRFIs are not required to determine whether other persons are or were closely associated with PEFPs and therefore would be captured by the Ukraine Regulations.
OSFI states that certain financial institutions that are subject to the money laundering and anti-terrorism financing legislation (Proceeds of Crime (Money Laundering) and Terrorist Financing Act) are also required to search their corporate records to determine the ownership of their corporate and other business clients, and obtain and record prescribed information on persons that own or control – directly or indirectly – 25% or more of their clients. OSFI therefore expects that these financial institutions will need to review their records to determine if their clients are owned or controlled, directly or indirectly, by PEFPs designated under the Ukraine Regulations.
If a financial institution finds that it has property in its possession or control that it has reason to believe is owned or controlled – directly or indirectly – by PEFPs, or if it is providing prescribed financial or other services to PEFPs, it must immediately report that information to the Royal Canadian Mounted Police.
Compliance Obligations on All Canadians
Canadian companies should carefully review their business activities abroad and monitor any transactions that could implicate compliance under the Ukraine Regulations. In particular, companies should be alert to any involvement of the persons listed in the Ukraine Regulations, in addition to the companies and persons listed in the other regulations made under the United Nations Act, the Special Economic Measures Act, the Criminal Code and the FACFOA.
Canadian companies should also continue to stay up to date on regulatory developments, because the Canadian government may decide in conjunction with the United States and the EU to broaden the sanctions to deter Russia from its territorial and other ambitions in Ukraine.