When Canada first imposed economic sanctions in March 2014 in response to Russia’s military intervention in Crimea, the measures were targeted against certain Ukrainian and Russian officials. However, as the situation in Crimea escalates, the Canadian government has imposed increasingly broader sanctions which now target entities and key sectors of Russia’s economy. Canadian companies operating abroad should be particularly mindful of their obligations under the law and how to mitigate exposure to risk.
The first set of economic sanctions imposed by the Canadian government was an asset freeze against former Ukrainian government officials pursuant to the Freezing Assets of Corrupt Foreign Officials Act (“FACFOA”). Subsequently, further economic sanctions and travel bans against Ukrainian and Russian officials were imposed under the Special Economic Measures Act (“SEMA”). There are currently 49 individuals and 4 entities listed under the Special Economic Measure (Ukraine) Regulations (the “Ukraine Regulations”) and 47 individuals and 29 entities listed under theSpecial Economic Measures (Russia) Regulations (the “Russia Regulations”), together the “Regulations”.
Recent Expansion of Sanctions
On July 24, 2014, the Canadian Government announced that the economic sanctions were being further broadened to include additional individuals and entities as a result of the downing of Malaysia Airlines flight MH17 over Ukraine. The Russia Regulations were amended to include seven more Russian entities in the financial, energy and arms sectors. Canada has also imposed restrictions on new debt financings and new equity financings provided to certain named entities.
Obligations on Canadians
The Regulations generally require all Canadians and Canadian companies to carry out due diligence, and search, freeze, and disclose to the RCMP any property in their possession or control that they know or believe to be directly or indirectly controlled by a designated person or by an entity controlled by a designated person. In addition, the Regulations prohibit persons in Canada and Canadians abroad from:
- dealing in any property, wherever situated, held by or on behalf of designated persons;
- facilitating or providing financial (or related) services, whether directly or indirectly, in respect of property in (1);
- making any goods available to designated persons;
- providing financial (or related) services to or for the benefit of the designated persons.
The Regulations also prohibit any person within Canada and Canadians outside Canada to in any way cause, assist or promote any of the prohibited activities. There are a limited number of exemptions set out in the Regulations.
The Regulations list certain categories of Canadian entities that must ensure compliance on a continuing basis, including, inter alia, authorized foreign banks, credit unions, insurance companies, trust companies, and loan companies. This obligation also applies to entities that engage in the dealing of securities or that provide portfolio and investment management services.
Compliance Obligations and Risk Mitigation
Companies operating abroad can mitigate the risk of non-compliance by carefully reviewing their business activities and monitoring any transactions that could be implicated under the Regulations. Having in place trade compliance programs and screening procedures is critical for risk management. As the scope of the sanctions against Russia are expected to continue to become more severe, it is important to stay updated.
Companies that are unsure about their obligations under the Regulations should consider seeking assistance from legal counsel. Although at first glance the Regulations seem deceptively simple, they have been drafted with what appears to be purposeful ambiguity so as to have broad and flexible reach in their application.
Mistakes in compliance can be costly as is apparent from the willingness of the Canadian Government to enforce its economic sanctions even when the violation is possibly due to inadvertence. In April 2014, Alberta-based company Lee Specialties Ltd. (“Lee”) was charged with violating SEMA by attempting to export controlled goods valued at $15 to the Islamic Republic of Iran. The company pleaded guilty and the plea agreement required that Lee pay a fine of $90,000.