Over the course of the past two months, Canada has put in place a more comprehensive global sanction regime against Iran, consisting of both multilateral and unilateral measures. The objectives of the international sanctions regime are to induce cooperation with the International Atomic Energy Agency, and to encourage Iran to suspend its uranium enrichment and reprocessing activities. On July 26, 2010, a little over one month after domestic implementation of the fourth and latest round of United Nations sanctions on Iran (the “U.N. Sanctions Regulations”), Canada announced that it was imposing unilateral sanctions on Iran under the infrequently used Special Economic Measures Act (the “Unilateral Sanctions Regulations”).2 This marks the first time that Canada has gone beyond U.N.-based sanctions against Iran.
The Unilateral Sanctions Regulations, which, according to statements made by the Canadian Government, focus on the energy sector as well as the financial services sector, are meant to complement other recent unilateral measures imposed by the U.S. and the European Union, and to enhance the global effort to temper Iran’s behaviour.3 These unilateral measures are aimed at further encumbering Iran’s ability to participate in global commerce, including hindering its ability to develop, produce, export and import refined petroleum.
In the area of financial services, the latest round of U.N. Sanctions Regulations expanded the prohibition on the provision of property, financial or other related services, to include a prohibition on making such services available to Iran, or any person or corporation in Iran or subject to its jurisdiction, for the purpose of investing in commercial activity related to uranium mining, production or use of specified nuclear materials and technology in Canada.4 As such, the complexity of due diligence and reporting obligations for financial institutions had already increased prior to Canada’s Unilateral Sanctions regulations. 5
According to information posted by Canada’s Department of Foreign Affairs and International Trade (“DFAIT”), the Unilateral Sanctions Regulations implement further restrictions by prohibiting the establishment of correspondent banking relationships with Iranian financial institutions, as well as prohibiting the provision or acquisition of financial services that allow an Iranian financial institution to be established in Canada. In addition, DFAIT has advised that the Unilateral Sanctions Regulations prohibit the purchase of any debt from the Government of Iran. The cumulative effect of these restrictions will be to make it very difficult to transact business with Iran or other associated entities, while simultaneously making it increasingly difficult for Iranian entities to participate in the global economy.
In addition to strengthening the multilateral regime imposed on financial institutions, the Canadian government has announced that the Unilateral Sanctions Regulations target Iran’s oil and gas sector. Iran is one of the world’s top oil producers, yet it is forced to import refined oil, as it does not have adequate refinery capacity.6 According to statements made by DFAIT, the Unilateral Sanctions Regulations prohibit the export of goods and technology used in refining oil and gas. In addition, they prohibit new investment in the Iranian oil and gas sector. While there is no indication that the Unilateral Sanctions Regulations speak to current investments, it is difficult to conceive of how existing investments could be maintained, given the scope of the export prohibitions and the prohibitions relating to financial services. Thus, while it appears that certain trade with Iran continues to be permissible, the landscape for Canadian businesses doing business with Iran has become significantly more complex.
In light of the increased scope and complexity of the Iran sanctions regime, and the fact that key terms such as “financial services” and “investment” have not been defined with precision in other Canadian sanctions regimes,7 parties contemplating any form of business transaction or undertaking which even remotely involves Iran, would be well advised to seek legal advice prior to proceeding.
Canada’s domestic regime is not the only regime of which Canadians doing business with Iran must be cognizant. On July 1, 2010, the President of the United States signed the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (the “U.S. Act”). Prior to the U.S. Act becoming law, the U.S. already had an extensive embargo on trade with Iran with certain extra-territorial application. The U.S. Act significantly expands the sanctionable activity applicable to non-U.S. entities and increases the severity of those sanctions, particularly in the target sectors. The U.S. Act also further increases the burden on financial institutions to prevent and monitor prohibited activity. Given the increased focus of the U.S. Act on non-U.S. entities, Canadian companies, especially those in the oil and gas and financial services sectors, must proceed with extreme caution when dealing with Iran, and certain other notable countries (such as Malaysia and the United Arab Emirates).8
In addition to specifically targeting the behaviour of non- U.S. entities, other sections of the U.S. Act may impact Canadian business. This is most pronounced in the area of government procurement. Canadian businesses that participate in government contracts in the U.S. may inadvertently disqualify themselves by running afoul of the U.S. Act. Even companies that do not do business outside of Canada, which are contemplating a transaction or undertaking which even remotely involves Iran, would be well advised to ensure that their proposed activities are in compliance with U.S., European and other relevant sanctions, as well as export controls laws.