Foreign Affairs Committee on Nov. 23rd, 2016

[The Chair, Liberal, Bob Nault]

Now, colleagues, we'll take a couple of minutes and then we'll go to our next witnesses, the Canadian Bankers Association and the Canadian Imperial Bank of Commerce. We'll have them in front of us in a few minutes, and then we'll go to their presentations.

[The Chair, Liberal, Bob Nault]

I want to bring this meeting back into session. Before us you will find Sandy Stephens, the assistant general counsel for the Canadian Bankers Association, and from the Canadian Imperial Bank of Commerce, Mr. Stephen Alsace, the senior director, sanctions, global AML group.

Are we making one presentation, or are there two?

[G. Stephen Alsace, Senior Director, Sanctions, Global AML Group, Canadian Imperial Bank of Commerce]

It's just one, of introductory remarks, and I'm here for questions.

[The Chair, Liberal, Bob Nault]

My apologies, Ms. Stephens. I didn't realize that you had exited the room. Welcome back, and thank you for being here.

I think you've seen how the committee operates, so take the time to make your opening comments, and then we'll get right into questions. I'm going to turn it over to you.

[Sandy Stephens, Assistant General Counsel, Canadian Bankers Association]

Good afternoon.

We would like to thank the committee for inviting the Canadian Bankers Association to provide the banking industry's perspective on your review of the Freezing Assets of Corrupt Foreign Officials Act and SEMA.

The CBA works on behalf of 59 domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada, and their 280,000 employees.

First I would like to emphasize that the CBA and its members do not have a position with regard to the policy objectives or the effectiveness of economic sanctions as a form of policy instrument. Those decisions are firmly at the discretion of the federal government. Banks do, however, play an important role in their implementation. Banks are on the front line of Canada's economic sanctions regime, as our institutions must restrict financial transactions or freeze the assets of individuals or businesses that have been designated by the government.

We believe that the committee's review of these two acts is timely. Our focus today is on how the administration of the economic sanctions regime in Canada can be improved to ensure that the government, as well as the private sector, is well equipped to respond to the expansion of sanctions programs over the last several years.

Banks have extensive and sophisticated control systems in place to ensure that they are compliant with the laws and regulations dealing with economic sanctions. As the banking industry's prudential regulator, the Office of the Superintendent of Financial Institutions has a mandate to ensure banks and other financial institutions are in sound fiscal condition and compliant with their governing statutes and supervisory requirements. This includes a legislative requirement imposed by the two acts currently being reviewed by the committee.

With respect to economic sanctions specifically, OSFI last issued guidance in 2010, outlining how banks are expected to comply with the legislative and regulatory requirements. Banks must demonstrate to OSFI that their control measures are capable of continuously searching records for individuals and entities subject to financial sanctions, determining whether the bank is in possession or control of property of designated persons, preventing prohibited activity with respect to property of designated persons, monitoring for and preventing prohibited transactions, disclosing information to the RCMP and CSIS concerning property of designated persons in the bank's possession or control, and reporting to OSFI monthly on the aggregate value of property of designated persons in the bank's possession or control.

The legislative and regulatory requirements associated with the economic sanctions regime are significant and require a substantial amount of resources to ensure compliance. This can be especially challenging for smaller financial institutions that are expected to meet the same requirements as larger ones.

We would like to share with the committee our recommendations, which we believe could help improve the effectiveness and the efficiency of the economic sanctions framework in Canada.

First, we believe additional comprehensive guidance from the government would assist financial institutions in complying with the laws and regulations with respect to economic sanctions. OSFI has issued guidance to enhance the understanding of existing laws, but that guidance has not been updated since 2010.

Further guidance from Global Affairs Canada to assist the private sector would be consistent with the approach used in other jurisdictions such as the U.K., the U.S., and the EU. Many Canadian businesses are now looking to those other jurisdictions for information on how to interpret similar measures implemented domestically. The increasing complexity of the sanctions regime, which includes not only list screening but also activity- and sectoral-based sanctions, reinforces the need for more comprehensive guidance and a collaborative approach between the government and industry.

Second, building on the theme of additional guidance from the government, we believe the framework for economic sanctions would benefit from increased collaboration between the government and the private sector. Greater dialogue would facilitate a deeper understanding by the private sector regarding the interpretation of the laws and regulations. In addition, the government would gain greater insight into the challenges faced by other stakeholders.

Options to consider could include the appointment of a financial services industry liaison to address issues specific to financial institutions, and the availability of telephone or online assistance to respond to questions from the public. This would be consistent with the approach used in the U.S. and would provide an open line of communication to facilitate compliance.

For example, when financial institutions are having difficulty determining whether an individual or a business has been flagged by the regime and what measures must be implemented to meet the expectations of the sanctions program, having direct and real-time assistance from the government would greatly assist in compliance with the regime. On another front, it would be beneficial if the private sector had a better understanding of the permit application process, in which there are often significant delays.

Third, we strongly believe that there should be one consolidated list of designated persons to which financial institutions can refer. Today, banks must refer to 19 separate lists of sanctioned individuals and entities. The absence of a systematic method of communicating the continuous updates to these lists imposes an unnecessary burden on the private sector and creates greater risk of non-compliance, which undermines the entire regime.

In closing, we believe that these recommendations would improve Canada's current economic sanctions regime, which would ensure that the government's foreign policy objectives can be achieved, while not impeding valid business transactions. Although our recommendations do not provide specific legislative amendments, they would nonetheless improve the efficiency and effectiveness of the current framework, as well as the compliance of the private sector, by providing greater guidance and clarity.

Banks take their responsibilities with respect to economic sanctions very seriously in an effort to ensure that they are fully compliant with the requirements. Banks in Canada recognize that economic sanctions are an important foreign policy tool for the government, and no bank wants to undermine the government's objectives or risk its reputation by being non-compliant with the various laws and regulations that comprise the regime.

Once again, thank you for inviting the CBA to be here today. We look forward to taking your questions.

[The Chair, Liberal, Bob Nault]

Thank you very much. I appreciate that, and I appreciate your opening comments.

We're going to go straight to questions, and we'll start with Mr. Kent, please.

[Peter Kent, Conservative, Thornhill, ON]

Thank you, Chair.

Thanks, both of you, for making yourselves available today. It is interesting.... I'm sure the committee will take serious note of your recommendations, being entirely in line with testimony we've heard from lawyers who act for companies that are determined to comply with sanction regulations but are lacking any material advice to help them. Those who can't afford lawyers sometimes avoid potentially legal economic dealings with companies simply because they don't want to face any risk.

We've heard testimony that when it comes to monitoring and compliance by institutions like banks, as well as detection of violations and enforcement, very often there is a question of resources and prioritizing by the various groups responsible in this area. What resources do Canada's major financial institutions, the chartered banks, actually have in place, and what sort of economic burden does that place on the banks internally?

[Sandy Stephens]

I'm going to refer that to my colleague Stephen, as he has more practical experience in this area.

[G. Stephen Alsace]

Thank you, Mr. Chair and committee members, for allowing me to speak here today. I will take that question.

We're not critiquing the sanctions regime and we're not even here to critique the amount that it costs to comply with the sanctions regime. We're happy to do that in the sense that we understand the policy considerations and we're good corporate citizens. However, I will say that it is significant. It's substantial. We're not the biggest of the big five banks, but easily we spend millions of dollars a year in compliance. We're constantly cognizant of having to upgrade our systems, our processes. We have significant numbers of people and resources devoted just to reviewing sanctions and processes.

If you could indulge me just for two minutes, maybe I'll describe at a high level—

[Peter Kent, Conservative, Thornhill, ON]

Please.

[G. Stephen Alsace]

—what we do on a daily basis.

We screen our entire customer database, millions of clients, for any new hits that could arise, either on a sanctions list or in our current client database. We also review upwards of hundreds of thousands of transactions every day. Of those hundreds of thousands of transactions for list-based screening, we probably receive anywhere around 40,000 to 50,000 hits. These are potential matches.

My team doesn't do it. We have operational groups that do it. They do a first-level review to see if it's a true match, again because we're using fuzzy logic to catch all the variations of names. After that, it gets screened. It comes to my team, and they'll review it. We have to clear payments every day by a five o'clock cut-off because we don't want to interrupt the financial system. It is a burden, but we bear it. However, there significant costs to doing that.

[Peter Kent, Conservative, Thornhill, ON]

Another question involves looking beyond the formal list and the lack of a consolidated list of sanctioned individuals or entities through FINTRAC or through FACFOA.

Do you have a responsibility to pass on questionable transactions from sanctioned countries where entities or individuals are listed to organizations like the RCMP or the superintendent of financial services or, in fact, CSIS?

[G. Stephen Alsace]

We comply with regulatory requirements, and it comes through reporting. To the extent you make a positive match on a listed person, there are certain obligations under the various statutes to report to the RCMP directly, or to CSIS. We do that.

Beyond that, outside of the sanctions realm, potentially we could have transactions involving a listed terrorist organization separately with our other obligations. Then we report through FINTRAC. We may file a suspicious transaction report, and in some instances we may report directly to the RCMP and CSIS.

[Peter Kent, Conservative, Thornhill, ON]

Do you have a regular dialogue with Canada's security agencies, with Immigration Canada, with Global Affairs Canada, all of the different groups that have different areas of responsibility with regard to the various types of sanctions?

[G. Stephen Alsace]

Unfortunately, depending on the government department and agencies, they're less inclined to open collaboration. Typically we try to facilitate any types of dialogue with government agencies such as that through the Canadian Bankers Association. There are standing committees—for example, on security—that meet regularly with RCMP and some other groups, so it does occur, but not with every department.

[Peter Kent, Conservative, Thornhill, ON]

We talked a little bit in our study about unintended consequences. There's one case with which I'm familiar. It was a constituent, an injured veteran, who received a payout, a substantial amount of money, and for legitimate personal reasons, he deposited these funds in an international bank that has branches both in Canada and abroad. When it came time to withdraw those funds, he was unable to, because it was registered as a questionable and possibly illegal transaction.

Do many of those cases come up, of folks being caught in a net unintentionally or accidentally?

[G. Stephen Alsace]

If I understand the question, I'll take it that the—

[Peter Kent, Conservative, Thornhill, ON]

I don't want to name the bank.

[G. Stephen Alsace]

No, but the individual involved was not a listed person, I take it. He was not sanctioned.

[Peter Kent, Conservative, Thornhill, ON]

No, not at all.

[G. Stephen Alsace]

Okay.

[Peter Kent, Conservative, Thornhill, ON]

However, through FINTRAC, I believe, or through the bank's own internal prudence or caution....

[G. Stephen Alsace]

I can't really speak to that. I know that the banks do have monitoring systems in place to detect potential money laundering. There are various rules that are applied, so it is possible that suspicious activity could have been detected. It may or may not have been legitimate. It varies, but I do know that if there is a hit, banks—at least our bank—investigate it. They'll pursue it on a case-by-case basis, hopefully to a proper resolution.

[Peter Kent, Conservative, Thornhill, ON]

As for compliance, if a listed entity, a numbered organization or corporation, is in your possession, is it your responsibility or the security agencies' responsibility to keep track of possible associated...? If it's a numbered company or a subsidiary numbered company that is responsible for trying to mask some of the funds, either in or out of Canada....

[G. Stephen Alsace]

That's actually a very good question. I'm glad you asked that with respect to a listed entity and its subsidiaries, because that's one of the questions that we have for Global Affairs Canada. That's one of the areas where there's some ambiguity. We follow the guidance from 2010 that OSFI published, the OSFI guideline. There's a specific line in there that says that federally regulated financial institutions can approach the Department of Foreign Affairs—at that time, DFAIT—for guidance specifically on the interpretation of the legislation. We've actually tried that with Global Affairs in the last few years, without any success.

We met with Global Affairs in 2015 and we were hoping that we would have more collaboration, but it hasn't happened. In that regard, we had a question outstanding about listed entities and their wholly owned subsidiaries. Are they also caught? If you look at the property definition, it could apply to shares held in a subsidiary. We've asked that question directly of Global Affairs—