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Canadian Regulation of Capital Flows

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Title: Canadian Regulation of Capital Flows


1
Canadian Regulation of Capital Flows
  • David Butler
  • McMillan Binch LLP
  • Toronto, Canada
  • Saturday, October 2, 2004

Materials prepared with the assistance of Jeff
Scanlon, McMillan Binch LLP
2
Outline
  • Capital Flows in Canada
  • New Regulations
  • Traditional Regulations
  • Conclusion

Members of the State Capital Global Law Firm
Group practice independently and not in a
relationship for the joint practice of law, and
are located in capital cities, business markets
and financial centers around the world.
3
Capital Flows in Canada
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
4
Canada Preferred Capital Destination
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Modern and efficient banking system
  • Excellent and reliable financial infrastructure
  • Mature business environment
  • Extensive regulation

5
Greater Toronto Area
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • 3rd largest financial centre and 4th largest
    economic basin in North America after New York
    and Chicago
  • 200,000 people work in financial and investment
    services sector
  • 65 of Canada pension fund managers are
    headquartered in Toronto, representing 50 of the
    pension assets under management
  • Canadas largest five banks and 80 of foreign
    banks operating in Canada have their headquarters
    in Toronto
  • 60 of Canadas top insurers, responsible for 90
    of the industrys total assets, have their head
    offices in Toronto

6
Canadian Capital Markets
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • TSX Group
  • Toronto Stock Exchange (TSX)
  • serves the senior equity market
  • TSX Venture Exchange (TSX-V)
  • serves the public venture equity market
  • The TSX Group ranks as North Americas third
    largest by market capital (7th globally)
  • US1.06 trillion market cap (TSX-V consists of
    US18 billion of this total)

7
Canadas International Liabilities
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
8
Clearing and Settlement Systems
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Legislation
  • Canadian Payments Act
  • Payment Clearing and Settlement Act
  • Canadian Payments Association (CPA)
  • Three clearing and settlement systems
  • Automated Clearing Settlement System (ACSS)
  • Large Value Transfer System (LVTS)
  • U.S. Dollar Bulk Exchange (USBE)

9
Clearing and Settlement Systems
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Automated Clearing Settlement System (ACSS)
  • system through which vast majority of payment
    items in Canada are cleared
  • information system used to track volume and value
    of payment items exchanged between participants
    and determine balances due to and from
    participants
  • used for clearing both paper-based payment items,
    such as cheques, and electronic items, including
    Automated Funds Transfer debits (e.g.
    pre-authorized debits) and credits (e.g direct
    deposits)
  • 99 of the daily transaction volume cleared
    through ACSS but represent only about 15 of
    total Canadian capital flows cleared

10
Clearing and Settlement Systems
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Large Value Transfer System (LVTS)
  • electronic wire system introduced in February
    1999 to facilitate transfer of irrevocable
    payments in Canadian dollars across country in
    real time
  • first model of its kind combining benefits of two
    main models for current payment systems
    real-time payment finality of a Real Time Gross
    Settlement (RTGS) system, with lower collateral
    costs of netting system
  • Approximately 88 of total Canadian capital flows
    cleared via the LVTS

11
Clearing and Settlement Systems
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • U.S. Dollar Bulk Exchange (USBE)
  • parallel system to ACSS used for payment items in
    U.S. dollars, drawn on and payable to accounts at
    financial institutions in Canada
  • although not a clearing and settlement system
    like ACSS, it provides similar mechanism to track
    exchange of U.S. dollar payment items and
    resulting balances due to and from participants
  • Settlement is effected through correspondent
    banks in New York and is accomplished through a
    series of wire payments the Bank of Canada is
    not involved in process

12
Clearing and Settlement Systems
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • On average, 13 million payment items,
    representing more than US110 billion in
    transactions, are cleared and settled through the
    CPAs systems each business day
  • The ACSS and LVTS cleared and settled over US27
    trillion in 2003
  • CPA governing rules at http//www.cdnpay.ca/rules/
    acss_rules.asp

13
New Regulations
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
14
Impetus for Canada
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Alignment with US
  • Acknowledgement that terrorism and organized
    crime affecting both domestic and US interests
    can operate out of base in Canada

15
Money Laundering Regulation (MLR)
  • Problem
  • Global Response
  • Legislation
  • Scope
  • Reporting Requirements
  • Record Retention
  • Client Identification
  • Money Services Businesses
  • Third Party Determinations
  • Compliance Regime
  • Penalties

16
MLR Problem
  • US730 billion US1.81 trillion
  • (2-5 of global GDP)

Sources IMF Government of Canada Website World
Bank
17
MLR Problem
Conclusion
Capital Flows in Canada
New Regulations
Traditional Regulations
  • Antimoney laundering did not historically
    represent a high priority for either
    governments/banking industry and was in past
    perceived as a local issue
  • The International Monetary Fund estimates that
    globally, money laundering accounts for 2-5 of
    worlds gross domestic product, totalling US0.73
    - 1.81 trillion (10th-4th largest economy
    globally)
  • Low Mexicos economy (10th)
  • High U.K.s economy (4th)
  • A 1998 study estimated that between US4 billion
    and US14 billion is laundered in Canada every
    year

Sources KPMG, (Global Anti-Money Laundering
Survey 2004), September 20, 2004 Government of
Canada Website World Bank Website
18
MLR Global Response
Conclusion
Capital Flows in Canada
New Regulations
Traditional Regulations
  • Driven by a growing political determination to
    strike against drug traffickers, organized crime,
    and terrorists, there have been a series of
    concerted national and international initiatives
  • Financial Action Task Force on Money Laundering
  • Inter-governmental organization created by G7
    (mandate extended to 2012) and closely cooperates
    with OECD
  • http//www1.oecd.org/fatf/index.htm
  • International Monetary Fund
  • World Bank
  • Basel Committee on Banking Supervision
  • European Union
  • Ongoing reforms in many countries

19
MLR Canadian Legislation
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Proceeds of Crime (Money Laundering) and
    Terrorist Financing Act (PCTFA)
  • Federal legislation that was introduced in 2000
    but significantly bolstered in the aftermath of
    9/11
  • Online http//laws.justice.gc.ca/en/P-24.501/inde
    x.html

20
MLR Scope of PCTFA
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • PCTFA applies to financial entities
  • Financial entity means
  • Bank to which Bank Act applies
  • Cooperative credit society, credit union, or
    caisse populaire regulated by provincial
    legislation
  • Association that is regulated by the Cooperative
    Credit Associations Act
  • Company to which the Trust and Loans Companies
    Act applies
  • Trust company or loan company regulated by
    provincial legislation
  • Authorized foreign bank within the meaning of
    s.2 of the Bank Act in respect of its business in
    Canada
  • Departments/agents of the federal and provincial
    governments which accept deposits or process
    money orders

21
MLR Reporting Requirements
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Where reasonable grounds to suspect financial
    transaction related to terrorist/money laundering
    activity, financial entity must report suspicious
    transaction to Financial Transactions and Reports
    Analysis Centre of Canada (FINTRAC)
  • Financial entities must also make a report to
    FINTRAC if they know that they are in possession
    or control of property owned or controlled by a
    terrorist or a terrorist group, or if they have
    knowledge of proposed transaction involving
    terrorist assets

22
MLR Reporting Requirements
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Financial entities must make a report to FINTRAC
    if they receive from a client US7,850 or more
    in cash (i.e. hard currency, such as bank notes
    or coins) in single transaction, unless cash
    received from a financial entity or a public body
  • Financial entities must report sending out of
    Canada or receipt from outside Canada, at the
    request of client, of electronic funds transfer
    of US7,850 or more in course of single
    transaction

23
MLR Record Retention
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Financial entities required to keep certain
    records, including records of transactions
    involving US7,850 or more in cash, account
    opening records, copies of client statements, and
    normal records created in course of business,
    such as deposit slips, account operating
    agreements, debit and credit memos, and client
    credit files
  • A financial entity must retain the account
    opening record that shows signature of the
    individual who is authorized to give instructions
    for account, unless account is in name of
    financial entity or another financial entity

24
MLR Record Retention
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • If a financial entity opens an account in respect
    of a corporation, the financial entity must
    retain a copy of the official corporate records
    that relate to the power to bind the corporation
    regarding the account held with the financial
    entity
  • Trust companies have additional record keeping
    requirements concerning trusts for which they act
    as trustee

25
MLR Client Identification
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • financial entities must take steps to identify
    every person who is authorized to give
    instructions for an account
  • identity of a client must be verified before any
    transaction other than the initial deposit is
    carried out on an account
  • financial entities must identify every person who
    requests an electronic funds transfer of
    US7,850 or more or who conducts a foreign
    currency exchange transaction of US2,350 or
    more with the financial entity, unless the person
    has signed a signature card or is otherwise
    authorized to act with respect to an account with
    the financial entity
  • Where the client is a corporation or other
    entity, the financial entity must confirm the
    existence of the corporation or entity

26
MLR Money Services Businesses
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Financial entities also have similar reporting,
    record retention and client identification
    obligations when acting as a money services
    business with persons or entities that are not
    account holders
  • A money services business means a person or
    entity who is engaged in the business of (i)
    remitting or transmitting funds by any means or
    through any person, entity or electronic funds
    transfer network, or (ii) issuing or redeeming
    money orders, travellers cheques or other
    similar negotiable instruments

27
MLR Third Party Determinations
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Whenever a financial entity is required to keep
    record in connection with large cash transaction
    or the opening of new account, it will also be
    required to determine whether a third party is
    beneficial owner of the account
  • Financial entity must record certain information
    in circumstances where they suspect individual is
    acting on behalf of third party

28
MLR Compliance Regime
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Reporting persons and entities such as financial
    entities must implement a compliance regime,
    which consists of organizational policies,
    procedures, and employee training
  • FINTRAC has the power to examine compliance
    regimes and records

29
MLR Penalties
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Failure to comply with the new legislative
    requirements could lead to criminal charges
  • The penalties for failure to comply vary
    depending on the offence, with a maximum penalty
    of up to five years imprisonment and/or a fine of
    US1.5 million for a conviction for failing to
    report a suspicious transaction or failing to
    make a terrorist property report

30
Traditional Regulations
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
31
Investment Canada Act (ICA)
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • What is the ICAs purpose?
  • to encourage investment in Canada by Canadians
    and non-Canadians that contributes to economic
    growth and employment opportunities and to
    provide for the review of significant investments
    in Canada by non-Canadians in order to ensure
    such benefit to Canada
  • Sets out notification/application for review
    requirements
  • 390 acquisitions and 105 new businesses in
    past year

32
Investment Canada Act
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • When is a Notification required?
  • If you are non-Canadian, then every time you
    commence a new business in Canada or acquire
    control of a Canadian business where
    establishment /acquisition is not a reviewable
    transaction, unless an applicable exemption
    applies
  • Must occur no later than 30 days after
    implementation of investment

33
Investment Canada Act
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • When is an investment reviewable?
  • Investment subject to review if asset value of
    Canadian business being acquired exceeds the
    following thresholds
  • If the investor is both non-Canadian and not a
    WTO member, the thresholds are US3.9 million
    for a direct acquisition and US39.8 million for
    an indirect acquisition
  • the lower threshold will apply in cases of
    indirect acquisition if the asset value of the
    Canadian business being acquired exceeds 50 of
    the asset value of the global transaction
  • If the investor or vendor is a WTO member, any
    direct investment in excess of US185 million
    (in 2004) is reviewable indirect acquisitions
    are not reviewable

34
Investment Canada Act
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Review period can take up to 75 days further
    extensions permitted only if investor and
    Minister mutually agree
  • Generally, reviewable investments may not be
    implemented prior to investor having received
    decision from Minister however, there are
    exceptions
  • Undue hardship
  • Acquisition of non-Canadian corporation
  • When investment not normally reviewable

35
Industries with Ownership Regulations (Incl.
Foreign)
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Uranium mining
  • Financial services (banks, trust/loan companies)
  • Transportation companies (air, rail, etc)
  • Books, magazines, and newspapers
  • Film/video products
  • Broadcasting
  • Telecommunications
  • Insurance
  • Oil and gas
  • Alcohol sales
  • Security Dealers
  • Audio/video music recordings
  • Others

36
Taxes on Flows of Capital
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Federal (Income Tax Act) as well as provincial
    and municipal governments impose taxes
  • Withholding taxes of 25 (less under treaty) on
    non-residents who receive dividends, interest,
    rents, royalties or management fees from Canadian
    sources (Canadian payor responsible)
  • Can be reduced by treaty e.g. Canada-United
    States Income Tax Convention, 1980

37
Canadian Economic Sanctions
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • United Nations Act
  • When UN Security Council imposes sanctions,
    Canada must introduce into domestic law
  • E.g. Afghanistan, Iraq, Liberia, Sierra Leone
  • Special Economic Measures Act
  • Federal cabinet may impose sanction separately
  • E.g. Federal Republic of Yugoslavia and Serbia
  • Export and Import Permits Act
  • Used mainly for imposition of trade sanctions
  • E.g. Myanmar (Burma)

38
Conclusion
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
39
Conclusion
Capital Flows in Canada
New Regulations
Traditional Regulations
Conclusion
  • Canada remains a popular destination for capital
    flows
  • Strengths
  • Reliable, safe and secure capital flow
    institutions
  • Mature business environment
  • Modern infrastructure
  • Traditional Regulation
  • Centered on foreign ownership regulation and
    other tools
  • New Regulation
  • Money laundering legislation
  • Going forward?

40
Canadian Regulation of Capital Flows
  • David Butler
  • McMillan Binch LLP
  • Toronto, Canada
  • Saturday, October 2, 2004

Materials prepared with the assistance of Jeff
Scanlon, McMillan Binch LLP
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