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U.S. should mind its own business: Merrill's rules on sanctions have no place in Canada

By Diane Francis
National Post, Canada
July 20

There is an additional, unfortunate "know your client" rule at U.S.-owned Merrill Lynch Canada Inc., according to a company memo leaked to me recently.

It was a reminder to all employees of Merrill Lynch that they must comply with the U.S. Foreign Corrupt Practices Act. This means that they must report to their legal department any transactions involving countries that are the subject of U.S. economic sanctions.

The U.S. government has imposed various types of sanctions against Cuba, Angola, Burma, Iran , Iraq, Libya, North Korea, Sudan, Syria and Yugoslavia.

"Attached is an important compliance reminder which was sent to all Merrill Lynch employees in June 1998. Please note that further information regarding economic sanctions can be found on the Web site of the Office of the General Council under 'Policies and Procedures'," writes Merrill Lynch Canada's legal counsel, Bradley Doney, in an April 28 memorandum to Canadian managers.

The June 1998, memo, addressed to all employees worldwide, is contained on the Web site of Merrill Lynch & Co. Inc. and highlights include: "

Recently, you were sent a reminder about complying with the Foreign Corrupt Practices Act. There are other important laws concerning U.S. economic sanctions and international boycotts that affect Merrill Lynch's worldwide business relationships. Merrill Lynch has established policies to enable the company and its employees to comply with these laws, and to ensure that we 'know our customers'. "

"If at any time you have questions concerning economic sanctions imposed by the U.S. or by other countries, or if you become aware of or receive a boycott-related request, you should immediately contact your business unit counsel or corporate law," it said.

"Some economic sanctions enforced by the United States prohibit transactions with the sanctioned government only. Others prohibit Merrill Lynch from dealing with a sanctioned country's assets, citizens, residents, companies or anyone physically located within a sanctioned nation, regardless of nationality. In some instances, U.S. economic sanctions extend to certain nationals or entities in third countries who have extensive ties with sanctioned nations.

To ensure compliance with these laws and Merrill Lynch policy, it is incumbent upon you to 'know your customer,' which requires inquiry into a customer's residency, nationality, ownership and business activity," it said.

In Italics, the memo then states: "You must report all boycott-related requests immediately to Merrill Lynch corporate law or your manager. It is not enough to merely refuse such requests."

In not doing so, it warns, a registered representative could be subject to criminal or civil penalties, depending upon the nature of the transaction, or even for "the failure to report the receipt of a request to participate in, co-operate with, or furnish information in furtherance of a boycott."

Merrill is also subject to penalties for non-compliance.

Then it mentions Canada.

"Some countries, including Canada, Mexico and those in the European Union, prohibit branches, affiliates and subsidiaries of U.S. firms located in such countries from complying with certain of the U.

S. sanctions. Therefore, these issues must be analyzed by Merrill Lynch counsel on a case-by-case basis." Which brings us to the point of this column.

Canadian law forbids branch plant operations from adhering to sanctions unless there are also sanctions here. This puts companies like Merrill Lynch Canada right in the middle, so I interviewed its personable president, Bob Schultz, recently on the issue.

"We will comply with Canadian law but, to the extent there are conflicts, our legal counsel analyzes these individually," he said.

Only a handful of clients or transactions have been referred in the past year, perhaps five or six, and no one was refused an account because of where they came from or what their citizenship was, another spokesman said on behalf of the legal department.

Schultz came to Merrill as head of Midland Walwyn Capital, acquired last year. Ironically, Midland was the co-lead underwriter for Sherritt Gordon, controlled by Ian Delaney, who has run afoul of U.S. sanctions for doing business in Cuba. Delaney cannot enter the United States because he's on a sanctions hit list. Schultz and Delaney are also neighbours in Toronto.

Would Merrill raise money for him again?

"He's not looking for money at the moment but if he was we would be a participant," he said. "I'd have no problem but would have to defer to counsel."

Interestingly, he pointed out that this complication exists for many other Canadian companies, not just for U.S.-owned ones operating here.

"Other Canadian financial institutions [banks and their brokers] did not participate [in the Sherritt underwriting] because they had operations in the U.S.," he said. "Canadian companies with external operations outside Canada are caught in the same dilemma."

So the U.S. branch operations of Canada's biggest banks or other companies that comply with U.S. sanctions would be non-compliant with Canadian requirements to ignore U.S. sanctions. Is this enforced? I doubt it.

How about individuals with Iranian or Burmese or Yugoslavian citizenship who wish to open accounts at Merrill?

"Personally, if a person from one of these countries was resident in Canada and passed all of the checks we do with clients, I'd have no problem dealing with them. But we'd have to refer this to counsel."

It's obvious that the Americans have no business imposing any rules on the Canadian operations of their corporations here, and they also have no business imposing rules on the branch plant operations of Canadian firms operating in the U.S.

But they do and they will.

This memo was leaked to me by an employee who sees this as a sovereignty issue. I don't agree. But it's certainly a thorny matter for businesses and clients.


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