Over-Compensation Is An Issue In
Export Controls/Economic Sanctions
Compliance

February 14, 2017

On February 10, 2017, the CBC posted an article entitled “PayPal freezes Canadian media company’s account over story about Syrian family".  A community newspaper (Flin Flon Reminder) in Canada saw PayPal freeze its account.  What prompted the freeze was the local newspaper entering an article entitled “Syrian family adapts to new life” in an awards competition.  When the payment for entry into the competition was made, it referenced the article and the message contained the word “Syrian”.

This caused PayPal’s export controls/economic sanctions internal compliance mechanisms to kick in.  The payment was flagged as a suspicious transaction. Under economic sanctions, PayPal cannot facilitate payments for prohibited goods and services.

What happened is that PayPal’s internal compliance procedures over-compensated and caught a transaction that  was not prohibited.  The over-compensation is in response to an OFAC fine in 2015 of $7,658,300.  In 2015, PayPal entered into a Settlement Agreement with the United States Department of the Treasury after violations of U.S. economics sanctions laws.  The Settlement Agreement stated that the penalty was paid because “[f]or several years up to and including 2013, PayPal failed to employ adequate screening technology and procedures to identify the potential involvement of U.S. sanctions targets in transactions that PayPal processed. ”

It is not just U.S. sanctions. Canada imposes economic sanctions against Syria under the the Special Economic Measures Act and the Special Economic Measures (Syria) Regulations. Canada could impose fines against PayPal if PayPal facilitated prohibited transactions.  Global Affairs Canada describes the sanctions, which are quite broad, as follows:

“In addition to the restrictions on dealings with designated persons, the Regulations prohibit:

  • The import of goods, excluding food for human consumption, from Syria;
  • The provision or acquisition of financial services to, from or for the for the benefit of or on the direction or order of Syria or any person in Syria;
  • New investments in Syria;
  • The export to Syria of goods, including technical data, used for monitoring telecommunications;
  • The export of luxury goods to Syria;
  • The exports of goods listed in Schedule 2 of the Regulations, including any technical data related to such goods.

Causing, assisting or promoting prohibited activities is likewise prohibited.”

PayPal is exercising caution and legitimate transactions are going to be frozen from time to time.  This is an unfortunate consequence of compliance programs – in order to ensure that all improper transactions are stopped, some legal transactions are prevented or delayed.

Over-compensation is a consequence of targeted economic sanctions.  For this reason, countries try to target their unilateral economic sanctions and trade restrictions. However, the system is not perfect and fines for non-compliance can be significant.

For more information about export controls and economic sanctions, please contact Cyndee Todgham Cherniak at 416-307-4168 or cyndee@lexsage.com.

*LexSage Professional Corporation is approved by the Law Society of Upper Canada