OFAC revokes so-called U-turn authorization for Cuba-related financial transactions
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
The April 2016 “Panama Papers” leak highlighted the attraction for transnational actors of the confidentiality available in certain offshore financial centres. Some of these jurisdictions have laws that make it a criminal offence for banks to disclose information about their clients, providing powerful protection for individuals and corporations who wish to keep their financial affairs private. However, if a bank becomes involved in Canadian proceedings, those foreign laws may conflict with the disclosure obligations imposed on litigants here. These situations raise questions about when foreign law can provide a basis to excuse production, or to refuse the answering of a question, in a Canadian proceeding, and under what circumstances a Canadian court will compel disclosure despite potential foreign legal jeopardy.
In making these determinations, Canadian courts do not apply a bright-line rule, but have developed a collection of factors they consider when deciding if a foreign statute will be applied to excuse production or testimony in Canada.
Canadian courts begin with respect for foreign laws and the general principle that, as our courts would not order a Canadian to break domestic law, nor should they compel a foreign litigant to break the laws of its home jurisdiction.1
This principle was recently cited and applied in TD Bank, NA v Lloyd's Underwriters,2 where an American subsidiary of the Toronto-Dominion Bank commenced an action in Ontario against its syndicated fidelity insurance underwriters for declining coverage when it was sued by investors allegedly defrauded by a customer in Florida.
TD advised the defendant insurers that it could not produce certain documents because disclosure was prohibited by American laws. These included banking records of TD customers, which were subject to privacy laws. The insurers brought a motion to compel production.
The court cited a number of factors that favoured accommodation of the Florida privacy law: the policy of the law was analogous to policies in Canadian law; Florida had the closest and most real connection to the documents at issue; the privacy interests being protected were largely those of Florida residents; the insurers had voluntarily chosen to extend coverage to operations in Florida; the penalty for violating the Florida statute was potentially severe; and the legal risk to TD in Florida was by no means imagined or fanciful.3
The court held that TD was not required to produce the documents, but granted that the insurers could seek production through the American courts.
Canadian courts generally accord comparable respect to the laws of other countries, including offshore jurisdictions.4 Litigants have occasionally tried to impugn the legal systems of offshore financial centres, but these allegations have not been seriously entertained by our courts. Many offshore jurisdictions are British Overseas Territories and, like Canada, have legal systems based on English law. Such systems are familiar to Canadian judges and, absent evidence to the contrary, are respected as equivalent to our own.5
That said, there is a tension between respect for foreign law and our courts’ reluctance to allow litigants in Canada to avoid their disclosure obligations.
The leading case of Frischke v Royal Bank6 was an exercise of the principle of respect for the laws of an offshore jurisdiction. In Frischke, evidence was sought at trial in an Ontario proceeding from the Panama City branch of RBC. No claim was being made against the bank, but investment funds that the plaintiff sought to trace had passed through its accounts. The trial judge ordered RBC to produce documents regarding the funds, but the branch manager refused because to do so would place him and the branch in breach of Panamanian civil and criminal laws, which precluded disclosure of the information.
Noting RBC’s limited involvement in the proceeding and that it had attempted to comply with the trial judge’s order, the Court of Appeal for Ontario declined to order that the branch provide information that would breach Panama law. The Court of Appeal queried whether production should have instead been sought through the Panamanian courts.
Conversely, Canadian courts have refused to allow foreign confidentiality statutes to be used as a shield to block relevant evidence where the prospect of prosecution under the foreign law is remote or where the person invoking the foreign law has commenced proceedings in Canada.
In Spencer v The Queen,7 the former manager of an RBC branch in the Bahamas refused to testify—in a Canadian tax prosecution when subpœnaed by the Crown—because Bahamian law prohibited bank employees from disclosing customer information without consent, on penalty of fine or jail term. However, the witness was now a Canadian resident and had not returned to the Bahamas for more than a decade. The Supreme Court of Canada upheld the Court of Appeal for Ontario that he was required to testify.
A similar outcome was reached by the Quebec courts in Arab Banking Corporation v Wightman.8 In that case, multiple foreign banks had issued a negligence claim in Quebec against a firm of auditors. At discoveries, the banks’ representatives refused to answer certain questions because of the confidentiality obligations imposed by the laws of Germany and Switzerland, where they were located. The courts held that, having chosen to proceed in Quebec, where bankers’ obligations of confidentiality were more limited, the banks could not rely on foreign statutes to withhold information that might otherwise be material, and ordered the questions to be answered.
Canadian courts will generally respect foreign laws, including those of offshore financial centres, and a foreign bank or branch that is merely managing its own affairs and is dragged into Canadian proceedings may be able to limit its productions and testimony in order to comply with the laws of its home jurisdiction. However, if a foreign bank issues a claim in Canada, or is directly engaged in business in Canada and becomes involved in proceedings as a result, it may be required to adhere to Canadian rules and make full production and disclosure.
This is a factor that should be carefully considered before issuing a claim in Canada, particularly for institutions that may be accustomed to more limited disclosure regimes in their home jurisdictions. If this issue is mishandled, a bank could be forced into a choice between facing non-compliance sanctions in Canadian proceedings or putting itself in legal jeopardy at home.
Michael Bunn practised in the Cayman Islands from 2007 to 2011 at a multijurisdictional offshore law firm. Sharissa Ellyn is an editor of our global blog Financial services: Regulation tomorrow. Erik Penz leads our transnational litigation group in Canada. The authors thank Guy White and articling student Geoff Mens for their assistance in preparing this legal update.
1 Frischke v Royal Bank of Canada (1977), 80 DLR (3d) 393 (Ont. CA).
2 TD Bank, N.A. v Lloyd's Underwriters, 2016 ONSC 4188 at para. 18.
3 Ibid at paras. 40-41.
4 See for example decisions re Bermuda: Gleeson v Brascan Corp., 2005 CarswellOnt 9981 (SC); Kolibri Capital Corp. v LSOF Canada I, L.P., 2004 CarswellOnt 1430 (SC); and Smith & Nephew Inc. v Marriott's Castle Harbour, 2000 CarswellOnt 1131 (Master); Anguilla: Edwards v Bell, 2003 BCSC 1602; the Cayman Islands: Milligan v Lines Overseas Management (Cayman) Ltd., 2002 CarswellOnt 1536 (Master); Turks and Caicos Islands: Skippings Rutley v Darragh, 2008 BCSC 159; and the Isle of Man: Sistem Mühendislik Insaat Sanayi Ve Ticaret Anonim Sirketi v Kyrgyz Republic, 2012 ONSC 4351.
5 Edwards v Bell, supra at para. 81(d); Skippings Rutley v Darragh, supra at para. 54.
7 Spencer v Her Majesty The Queen  2 SCR 278, affirming 145 DLR (3d) 344 (Ont. CA).
8 Arab Banking Corporation v Wightman, 1996 CarswellQue 1681 (SC), affirmed 1997 CarswellQue 73 (CA).
On 5 September 2019, Professor John McMillan AO’s Final Report (Report) on the operation of the Narcotic Drugs Act 1967 (ND Act) was tabled in Parliament. Section 26A of the ND Act required the Minster to cause a review of the operation of the ND Act to be undertaken.