Friday, January 19, 2007

RBC Closed U$ Accounts of Some Dual Citizens

The Globe and Mail, Eric Reguly & Tavia Grant, 19 January 2007

The American operations of Royal Bank of Canada and rival Canadian and foreign banks would face painful and perhaps catastrophic consequences if they failed to comply with American regulations on U.S.-dollar accounts.

Gordon Nixon, RBC's chief executive officer, said the bank never received an explicit threat from U.S. banking regulators but the theoretical threat was abundantly clear.

"If the bank were in violation of U.S. laws, the ramifications would be very significant," he said in a phone interview yesterday. "There could be fines or the institution could be forced to close or restructure its U.S. operations. The U.S. bank managers could face legal liability too."

In the worst-case scenario, RBC Dominion Securities, the bank's massive investment banking, trading and research arm, would have to close its U.S. business. In fiscal 2006, RBC derived 16 per cent of its $4.7-billion in profit from the U.S. About one-third of RBC Dominion's revenue comes from U.S. sources.

American banking regulators have issued "cease-and-desist" orders against Canadian banks in the past. In late 2003, CIBC settled a U.S. Department of Justice probe into the bank's relationship with Enron Corp. by paying a $80-million (U.S.) fine and agreeing to exit certain lucrative U.S. businesses, such as asset securitization and other structured products.

Last year, RBC's U.S. retail bank, RBC Centura, faced a lesser probe from North Carolina's Commissioner of Banks and the U.S. Federal Reserve Board. The two regulators performed a joint "informal investigation" into Centura's compliance with the Patriot Act, the Bank Secrecy Act and "other anti-money laundering statutes." The upshot was that the regulator wouldn't allow Centura to buy other U.S. banks until it cured the compliance problems (which it did).

No Canadian bank has been fined by U.S. regulators for allegedly violating U.S. banking rules on U.S.-dollar accounts and transactions. But two European banks, ABN Amro Bank NV and UBS AG, did get fined in recent years.

The case illustrates how many banks run into problems when they expand in the U.S., probably the world's most regulated banking market. "I find this an offensive situation, but I don't really blame the banks because the banks have to follow the law if they are to operate in the United States," said John McCallum, a Liberal MP and RBC's former chief economist. The situation amounts to "an extraterritorial application of U.S. law and I think we have to fight it," he said.

RBC has been cleaning up the compliance on its U.S.-dollar accounts to prevent retaliation by American regulators, including the Treasury Department's Office of the Comptroller of Currency. The effort saw RBC close the U.S.-dollar accounts held by several hundred customers who hold Canadian citizenship and passports from countries under U.S. sanctions: North Korea, Iran, Iraq, Cuba, Sudan and Myanmar, the former Burma.

RBC officials explained that customers with a U.S.-dollar account are subject to the full suite of U.S. banking, money-laundering and anti-terrorism laws and regulations. Any U.S.-dollar account is "really an account with Royal's New York City branch," an official said. Cheques written on the account are cleared through the U.S. bank clearing system and therefore subject to U.S. oversight.

RBC says that, as far as it knows, none of the holders of U.S.-dollar accounts is under investigation by U.S. authorities, nor has the bank been asked to provide information on the customers to the authorities.

RBC clarified Wednesday that it will open accounts to customers with dual citizenships -- provided they aren't living outside the country for extended periods of time. It's unclear precisely how long a client needs to be outside the country for the bank to raise a red flag.

Toronto-Dominion Bank confirmed yesterday it hasn't closed any accounts, nor denied anyone a new account based on their citizenship. Bank of Nova Scotia wouldn't comment.

The dual citizenship issue raises an important question about privacy rights, said Omar Alghabra, the federal Liberal citizenship critic.

"I really don't see any legitimate business reason a bank needs to know your citizenship to open an account," Mr. Alghabra said.

Canadian banks are subject to the Personal Information Protection and Electronic Documents Act, which says institutions generally should limit the collection of private information and must tell people why they are being asked for the information.

The Office of the Privacy Commissioner can investigate complaints. But nobody has yet complained about RBC or any other Canadian bank in the case of the U.S.- dollar accounts, says Anne-Marie Hayden, the spokeswoman for the commissioner.

Ins and outs of U.S.-dollar accounts

Why does the U.S. Treasury care about the bank accounts of Canadians and other foreigners?

The U.S. dollar is the world's most widely accepted currency and U.S. officials have traced foreign cash transfers directly to terrorist plots. Stop the flow of money and the killing will stop, they argue.

Can the United States dictate who can and can't hold U.S.-dollar bank accounts?

Indirectly, yes. Transfers in or out of any U.S. dollar account, including cheques, must be cleared by a U.S. bank. Royal Bank of Canada, for example, clears all of its U.S. dollar cheques at a branch in New York. Other Canadian banks use U.S. intermediaries. These transactions are subject to all applicable U.S. laws.

Are Canadian banks imposing stricter standards than U.S. banks?

In some cases, yes. All banks use risk assessment techniques to prevent running afoul of anti-terrorism laws. In some cases, that means denying services to individuals at greater risk of breaking the rules. U.S. law, for example, prohibits banks from offering any services to "persons in Iran." That's why RBC won't open U.S.-dollar accounts for individuals who routinely travel to Iran.

Don't Canadian banks worry about becoming a tool of U.S. foreign policy?

Maybe. But the U.S. market is too lucrative and important for Canadian institutions to forsake. RBC, for example, has 600,000 U.S. dollar accounts. And like other Canadian banks, RBC also has extensive U.S. operations that depend on cordial relations with U.S. regulators. They risk steep fines for violating U.S. laws.

What U.S. entity enforces U.S. sanctions laws?

The U.S. Treasury Department's Office of Foreign Assets Control is mandated by the President to develop and enforce sanctions against foreign countries, terrorists, international narcotics traffickers, and people involved in the proliferation of weapons of mass destruction.
The Globe and Mail, Andrew Willis, 17 January 2007

Royal Bank of Canada says it will allow customers with dual citizenship to open U.S. dollar denominated bank accounts, providing they can prove they are resident in Canada.

Gordon Nixon, chief executive officer at Canada's largest bank, said he was concerned that immigrant clients would feel that Royal Bank did not value their patronage.

“The message to clients is we will open U.S. dollar accounts, for dual citizens of any country, so long as the customers meet the ‘know-your-client' rule and anti-money laundering statues, and are residents of Canada,” said Mr. Nixon.

“The issue the banks face comes from Canadian citizens who don't reside in Canada,” said Mr. Nixon. “Royal Bank is no different from other financial institutions when it comes to dealing with those customers.”

“With some exceptions, RBC will provide a U.S. dollar account to dual citizens of sanctioned countries as long as they meet our ‘Know Your Client' and ‘Anti-Money Laundering' requirements, which include proof of residency in Canada,” the bank said in a statement.

“It is our understanding that the policies and procedures of Canadian banks in dealing with U.S. dollar accounts are consistent with banks in both Canada and around the world.”

The bank has been under fire from critics who said that it had closed U.S. dollar accounts held by anyone with dual citizenship. It had argued that this was necessary to comply with U.S. rules on antiterrorism and money laundering. It said the moves were mandated in order to comply with U.S. Treasury Department rules.

Critics said the move smacked of discrimination and racial profiling. It affected Canadian citizens with dual nationalities of Iran, Iraq, Cuba, Sudan, North Korea and Myanmar. They said not only were many of these individuals engaged in businesses that would require U.S. dollar transactions, but also that many international transactions are denominated in that currency in order to transfer funds to relatives and friends in other countries.

RBC said Wednesday that it will work with clients who may be impacted by the requirements in a manner that is consistent with anti-money laundering regulations, and will provide the option of having the issue escalated for further review.

Separately, Bank of Nova Scotia spokesman Frank Switzer confirmed to The Globe and Mail that Scotiabank cannot offer U.S. dollar accounts to clients who are not resident of Canada.

The Globe and Mail, Tavia Grant & Simon Dobrota, with a report from Simon Tuck in Ottawa, 17 January 2007

Royal Bank of Canada has closed the U.S. dollar chequing accounts of hundreds of dual-citizen Canadians and refuses to open new ones — a move it asserts was necessary to comply with U.S. rules on anti-terrorism and money laundering.

The decision, which has prompted charges of discrimination and racial profiling, has affected “a couple of hundred” Canadian citizens with dual nationalities of Iran, Iraq, Cuba, Sudan, North Korea or Myanmar since April, RBC spokesman David Moorcroft said yesterday.

Mr. Moorcroft stressed that RBC, which has the most U.S. dollar accounts in Canada, is simply complying with U.S. Treasury Department rules that govern any dealings with the U.S. currency.

“These are not rules made by Royal Bank, ... they are rules for banks all over the world,” he said.

The move, first reported by the CBC, sparked concern among many Canadian immigrants who need U.S.-dollar accounts to send money home or make global payments.

Closing accounts will unjustly target those who are sending money to relatives in their country of origin, said Dak Nyuon, president of the African Sudanese Association of Calgary. Many Sudanese Canadians prefer to send U.S. currency to their families, he said.

“This is discrimination of people who have a dual citizenship,” Mr. Nyuon said of the regulations. “We are not a threat to Canadian security.”

Finance experts called RBC's move unprecedented.

“In my experience, I know of no precedent,” said Don Brean, a professor of finance and business economics at the Rotman School of Management in Toronto. “It smacks of discrimination.”

Mr. Moorcroft said U.S. authorities have fined several European banks million of dollars for not complying with these regulations, and that failure to follow the rules could mean banks like RBC would be prohibited from offering any U.S.-dollar chequing accounts.

“It's their currency, it's their dollar, it's their clearing system,” he said. “It's their right and they've made that very clear.”

Since Sept. 11, 2001, U.S. authorities have clamped down on terrorism financing and beefed up money-laundering controls.

The Treasury Department has also introduced economic sanctions regulations, which prohibit certain people from holding U.S.-dollar accounts.

Toronto-Dominion Bank and the Bank of Nova Scotia said they still offer U.S.-dollar accounts to people who meet their criteria — regardless of nationality.

“If a person in that circumstance has the correct ID, and satisfies our know-your-client requirements and our anti-money-laundering requirements, we would open a U.S.-dollar account,” said Scotiabank's Frank Switzer.

He said Scotiabank complies with Canada's Bank Act, but that it's also fully complying with U.S. rules.

RBC has more than 600,000 U.S.-dollar accounts in Canada and says non-compliance with U.S. regulations could jeopardize its ability to offer those services.

It has some reason to be concerned. Two years ago, U.S. authorities fined ABN Amro $80-million (U.S.), partly because the Dutch bank violated U.S. sanction laws.

Canadian rules work the same way for Canadian-dollar accounts in other countries, he said. “It's not an incursion into Canadian sovereignty,” Mr. Moorcroft said.

Several immigrant groups said Canadian banks should reject U.S. interference with the country's banking system.

“We're asking Canadian banks not to follow the intimidation and blackmailing of the American administration,” said Mohamed Elmasry, head of the Canadian Islamic Congress. “The U.S. should not have the right to dictate to Canadian banks which citizen or person is allowed to open a bank account in a certain currency.”

He said the move amounts to “racial profiling.”

Many immigrants use U.S.-dollar accounts to send money home because that's the only currency banks will recognize in making international wire transfers.

Communities affected by the RBC measures yesterday reacted with a mix of anger and contempt.

But an Iranian community organizer in Montreal said he didn't expect fellow expatriates to be negatively affected by the measures. Canadian Iranian business owners will simply find another bank, or another way to do business, Reza Zarin said.

“Most of this is just propaganda,” he said. “Most probably if the people are in business and they really need to have accounts with U.S. [dollars], I'm sure there are all kinds of sources out there they can use.”

Ottawa says it plays no role in policing U.S.-currency accounts at Canadian banks.

Eric Richer, press secretary to Finance Minister Jim Flaherty, said U.S.-currency accounts at Canadian banks are processed through American banks in the United States, which means that those accounts — and the banks offering them — must comply with U.S. law.

“This is how banks that choose to have U.S. dollar accounts have to work,” Mr. Richer said. “It's under U.S. law.”

Mr. Richer said Canada's banking laws guarantee all Canadian citizens basic banking services in domestic currency — but not foreign currencies. “The Canadian government doesn't have the authority to change U.S. law.”

RBC, meantime, says its policy is geared toward people who don't live in Canada full-time. People who have had their account closed can appeal the decision, it says.