Responding to a money-laundering investigation – a Canadian perspective
February 2014 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
When a law enforcement officer advises a financial institution that one of its clients is under investigation for money-laundering and requests information, the financial institution is caught between competing interests. Financial institutions owe their clients a duty of confidentiality, they wish to preserve their reputation for trustworthiness, and they want to avoid civil liability for improper disclosures. On the other hand, a financial institution may be under a legal obligation to cooperate with authorities and, regardless of whether there is a duty to cooperate, failing to take reasonable steps to prevent known or suspected money laundering could result in liability for the financial institution, as well as reputational consequences.
Step 1: Is there a legal obligation?
A critical first step is to determine whether the law enforcement officer’s request is backed by legal compulsion. For example, the investigator may be asking for information pursuant to a production order under s.487.013 of Canada’s Criminal Code (‘Code’), which authorises a court to require production of a suspect’s account information. If the order appears to be deficient or unreasonable, an immediate court challenge may be considered. But absent this option, immediate compliance is advised. Failure to adhere to a production order within the specified time could result in criminal charges against the institution or its employees.
However, s. 487.014(1) of the Code expressly contemplates that, even if a production order has not been obtained, a law enforcement officer may ask a financial institution for information, such as banking records, as long as disclosure is not legally prohibited.
Step 2: Is cooperation permissible or advisable?
When an investigator’s request for information is not backed by legal compulsion, a financial institution must weigh conflicting considerations; specifically, duties of confidentiality to the client under common law, contract or privacy legislation on one hand, and the desire to avoid any liability or reputational harm for facilitation on the other hand. Fortunately, Canada’s criminal and privacy laws afford some latitude for institutions to make reasonable judgements about whether disclosure should be made.
Under s. 7(3)(c.1) of Canada’s federal privacy statute, the Personal Information Protection and Electronic Documents Act (‘PIPEDA’), disclosure to law enforcement is permissible if an officer has requested the information to enforce a law and demonstrated lawful authority to obtain it. Accordingly, when an officer from a legitimate law enforcement agency makes a request for information, the financial institution may provide the requested information without violating its privacy obligations, even though there is no compulsion to share the information.
Similarly, disclosure may be made to law enforcement, in the absence of legal compulsion, if the financial institution has sufficient information to reasonably suspect that the client is laundering money or engaged in crime. Under s. 462.47 of the Code, a person is justified in disclosing to law enforcement any facts on the basis of which that person reasonably suspects that any property is proceeds of crime or that any person has committed or is about to commit a crime. This principle is echoed in s. 7(d) of PIPEDA, which states that an organisation can voluntarily disclose personal information to an investigative body if it has reasonable grounds to believe the information relates to the contravention of Canadian or foreign laws. Although there is no clear-cut definition of reasonable, the very information received from authorities may support counsel’s reasonable suspicion of criminal activity.
It is also prudent for a financial institution to conduct its own investigation, after learning from law enforcement that one of its customers is under investigation for money laundering. A red flag about the client may have been missed. Under Canada’s AML regime, banks must report on ‘suspicious transactions’. If, upon hearing that a client is being investigated, a bank discovers suspicious financial activity that was undetected, it may have to consider blocking accounts on a discretionary basis, filing any required reports with regulators, or terminating the relationship with the client.
Step 3: How much to cooperate, and other options
Even if disclosure is permissible, an institution does not want to be regarded as recklessly disclosing customer information. It is often advisable to provide some information to inquiring investigators, and then asking them to return with a court order for further information.
In several Canadian cases, institutions have engaged in restrained cooperation, disclosing only basic information. These disclosures have been lauded by the courts as cooperation based on the institutions’ reasonable grounds to suspect criminal activity. For example, in Regina. v. Lillico,  OJ No 4521 (Gen Div), affirmed  OJ No 95, although a bank confirmed for the police that there was significant activity occurring in a fraud suspect’s account, it would not provide further information without a warrant. Similarly, in Regina v. James,  OJ No 3591, a bank’s counsel provided basic account information of a money-laundering suspect to the authorities, which allowed them to obtain production and restraint orders to further a money-laundering investigation. As the court in Regina v. James recognised, it is only reasonable expectations of privacy that are protected under PIPEDA and Canada’s Charter of Rights and Freedoms. Accordingly, there is room for reasonable disclosures to law enforcement.
Regardless of how much information an institution volunteers, if it suspects that a client is using its services to commit criminal activities, it should consider proactive steps, such as freezing the client’s assets. Two major banks in Canada took this action in the James case, and their actions were upheld by the court as reasonable measures. An institution never wants to be seen as supportive of, or wilfully blind to, a client’s criminal activity.
If a financial institution receives an informal request for information from an investigator, it should always deal with the request promptly and carefully. Turning a blind eye will often only complicate or worsen the dilemmas counsel face. Instead, these cases should be investigated, and counsel should decide whether to comply, and how much information to provide, based on what counsel knows, and the applicable laws and regulations governing the privacy of the institution’s customers and the disclosure of personal information.
At a high level, counsel should log these cases and use them when developing internal policies for its AML and other regulatory compliance regimes, and when drafting its agreements with its customers. Notably, in Regina v. James, the Court noted that a bank’s terms of agreement with the suspect included an acknowledgement that the bank would comply with Canadian laws and disclose customer information as required to meet legal and regulatory requirements.
Andrew Matheson is a partner and Justin H. Nasseri is an associate at McCarthy Tétrault. Mr Matheson can be contacted on +1 (416) 601 8379 or by email: firstname.lastname@example.org. Mr Nasseri can be contacted on +1 (416) 601 7884 or by email: email@example.com.
© Financier Worldwide
Andrew Matheson and Justin H. Nasseri