Tuesday, May 08, 2007

Keeping Tab of Corrupt Foreigners' Bank Accounts

The Globe and Mail, Tara Perkins, 8 May 2007

Canadian financial institutions are scrambling to figure out how to comply with pending legislation that will put them front and centre in the effort to crack down on corrupt foreign politicians.

Money-laundering experts have long complained that banks, credit unions and securities dealers have turned a blind eye to foreign diplomats, government officials and executives of state-owned companies who have sheltered illegal bribes, stolen government money and dodged taxes with sham accounts.

Following the example of a number of other countries, Canada responded to the international rallying cry with proposed legislation that will require Canadian financial institutions to keep close tabs on foreign customers who are in a position of public trust. The rationale behind the legislation is that politicians, ambassadors, judges, high-ranking military officers and heads of state-owned companies have more opportunities than the average banking customer to engage in corrupt activities.

The rules are creating confusion among the financial institutions that will have to comply with them. Lawyers say keeping track of the foreign officials and their family members will be a daunting task.

Two years ago, when U.S. Senate investigators untangled the American money trails of the late Chilean dictator Augusto Pinochet, they got a chilling lesson in the ineffectiveness of the country's money-laundering regulations.

Investigators uncovered a web of 125 U.S. securities and bank accounts the Chilean president had used to hide his fortune from tax authorities, and many of them were opened using fake names, his family members' names, or the names of Chilean military officers.

Outrage over his extensive financial subterfuge sparked cries from regulators in the U.S. and beyond for banks to be more vigilant about the money flows of current and former officials such as Mr. Pinochet.

The Canadian government rushed its new bill through the system late last year, as it prepared to be evaluated this year by the Financial Action Task Force, an intergovernmental body based in Europe that comes up with policies to stop fraudsters from using the financial system. The task force has highlighted government officials, known as politically exposed persons, as high-risk money-laundering suspects.

Those that come from countries where corruption is endemic present the highest risk, the task force says, but "it should be noted that corrupt or dishonest (politically exposed persons) can be found in almost any country."

Their financial crimes can be harder to track than the average person's, because financial institutions have traditionally afforded them more discretion because of their status.

Canada's proposed rules will push deposit-taking financial institutions and securities dealers to identify those customers that are foreign officials. They must also determine if they are doing business with their family members, which can be an overwhelming task when it involves complex family relations.

"If you're looking at a family where there's been a divorce or two, you're certainly, even within one family, looking at a very extensive group of people," says Robert Elliott, the director of Fasken Martineau DuMoulin LLP's financial institutions services group.

If a bank, credit union or dealer finds that it does have a customer — or prospective customer — that is a foreign official, its senior management has to approve the opening of the account. The financial institution is then required to make inquiries about the origins of money transfers and payments.

While the regulations to accompany the bill have not been released yet, legal experts say the rules — which are expected to take effect later this year — are already creating mountains of work for the financial community and its advisers.

At a recent conference in Toronto, officials from financial institutions had questions about how they should determine whether their customers fit the bill. It's just not practical, bank officials and lawyers complained, to ask each person opening an account if they are, or are related to, a politically exposed person.

The bank would likely be responsible if customers lie about their ties to foreign officials, prompting concerns that Canadian financial institutions and their senior officials could face fines and other consequences if they fail to target improper transactions.

Penalties for violating the law include fines of up to $2-million and up to five years in prison, says Prema Thiele, a partner in the Toronto office of Borden Ladner Gervais LLP.

It's not clear whether bank executives could face those personally. "You're not supposed to take this on until senior management approves it."

Ms. Thiele says the government sees financial institutions as the first line of defence to stop proceeds of crime from entering Canada.

"It's the whole gatekeeper mentality," Ms. Thiele says. "We're going to set these broader principles of what we expect, and you, based on your business circumstances, come up with the way you're going to implement that."