Representative Offices of Foreign Banks

The Bank Act, S.C. 1991, c. 46 ("the Act") which regulates the Canadian banking industry generally prohibits foreign banks from carrying on certain activities in Canada, whether directly or through a nominee or an agent. This prohibition encompasses most aspects of the banking business, such as, issuing Letters of Credit, lending money or accepting deposits, and to a certain extent, establishing or accepting data from automated banking machines or similar automated services. However, foreign banks may own shares in a foreign bank subsidiary and, with the approval of the Superintendent of financial institutions and subject to the requirements of The Foreign Bank Representative Offices Regulations, 1992, SOR/92-299 ("the Regulations") maintain representative offices in Canada. For foreign banks, not wishing to incorporate a subsidiary in Canada, but who still intend to have a presence in the Canadian banking sector, the establishment of a representative office can prove to be an important part of their marketing strategy.

Representative Office
A representative office is an office established by a foreign bank in Canada for the purpose of representing that foreign bank. The office must not be occupied or controlled by an entity incorporated or formed in Canada, and its personnel must be employed directly or indirectly by the foreign bank.

Business Activities of a Representative Office
The business activities of a representative office and its employees are limited to promoting the services of the foreign bank or its affiliates and acting as a liaison between clients of the foreign bank and other offices of the foreign bank or its affiliates. Because of the limitations imposed by the Regulations, a representative office is generally not permitted to take deposits, sign commercial banking agreements or negotiate loan transactions, nor may it open accounts for a client or transfer funds to or on behalf of a client.

Application For Registration
The application for registration of a representative office must be submitted to the Superintendent, together with the financial statements (audited, if available) of the foreign bank for its last financial year. The application must be supported with a certificate of good standing from the regulatory authority governing banks in the jurisdiction of the head office of the foreign bank, and a certified copy of the resolution of the board of directors of the foreign bank authorizing the establishment of the representative office. The application must describe, inter alia, the foreign bank's business and operations and the manner in which the foreign bank will supervise the operation of the representative office. If the Superintendent approves the application, he then sends the foreign bank a notice of approval. The Superintendent must be advised of changes in the information which accompanied the application for registration.

Annual Requirements
The Regulations provide for certain annual requirements pertaining to representative offices. Each year, the foreign bank must pay a registration maintenance fee of $1,000.00 (Canadian) for each of its representative offices. Also, a representative office must submit to the Superintendent an annual statement of the number of its employees as well as the financial statements (audited, if available) of the foreign bank for each financial year.

Inquiries Re Operations of Representative Office
The Superintendent has the power to make, at least once in each calendar year, examinations and inquiries into the operations of any representative office and the conduct of the personnel in that office. In this respect, the Superintendent has a right of access to the records of the representative office and may require the directors, officers and auditors of the representative office to provide any information or explanation that may be required regarding the condition and affairs of the representative office. The Superintendent has extended powers to compel the giving of evidence under oath.

Cancellation of a Registration
The cancellation of a registration of a representative office may be ordered by the Minister of Finance, who, after consultation with the Superintendent, concludes that the operations of the representative office or the conduct of its personnel are not in accordance with the Regulations. Finally, the contravention of any provision of the Act or the Regulations constitute an offense for which penal sanctions, including fines of up to $500,000.00 (CANADIAN) and imprisonment of up to one year, may be imposed.

It is difficult to identify a clear demarcation between acting in a promotional or liaison capacity, and participating in certain transactions or to predict with any degree of certainty, whether a specific act by a representative office would constitute, or would be interpreted by the Superintendent to constitute prohibited banking activities. Indeed, it is possible that a pattern of activities, none of which in itself would be likely to constitute banking activities, could be interpreted by the Superintendent as constituting activities prohibited under the Regulation. However, it should be kept in mind that it is possible to consult with the Superintendent in order to determine the acceptability of a proposed activity and, thereby, eliminate any uncertainty.

Advantages
There are significant advantages to be derived by a foreign bank setting up a representative office, in that it creates opportunities for the foreign bank by establishing a presence in the large and diversified Canadian market place. Moreover, with the expansion of the exporting sector of the Canadian economy, a representative office can respond to the growing need of Canadian businesses to identify and establish, a relationship with banking institutions which provide financial services in the importing countries.

The foregoing comments are of a general nature, and are not intended nor should they be used as a substitute for legal advice or opinions which can be rendered only when related to specific fact situations.

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