Last week, Canada announced two sets of amendments to the Special Economic Measures (Russia) Regulations in coordination with its allies at the G7 Summit in Japan. Additionally, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) updated its April 2022 guidance on Russia-related anti-money laundering (AML) and sanctions evasion risks and the U.S. Office of Foreign Asset Control (OFAC) added a number of Canadian companies to its Specially Designated Nationals list (SDN List).
Amendments to Special Economic Measures (Russia) Regulations
On May 19, the Government of Canada announced further sanctions in relation to Russia at the G7 Summit in Japan. The sanctions target 17 individuals and 18 entities linked to Russian companies that “provide military technology and know-how to Russia’s armed forces, family members of listed persons, and members of the Kremlin elite”; and 30 individuals and 8 entities involved in “Russia’s ongoing human rights violations, including the transfer and custody of Ukrainian children in Russia”. These sanctions entered into forced on May 18, 2023.
The sanctions are levied in coordination with Canada’s allies and are in addition to the over 1,600 parties listed under Schedule 1 of the Regulations.
Generally speaking, designation under Schedule 1 of the Regulations imposes an asset freeze and dealings prohibition against the designated person. Subject to limited exceptions, any person in Canada or any Canadian outside Canada cannot:
- deal in any property, wherever situated, that is owned, held or controlled by or on behalf of a designated person whose name is listed in Schedule 1;
- enter into or facilitate, directly or indirectly, any transaction related to such a dealing;
- provide any financial or other related services in respect of such a dealing;
- make available any goods, wherever situated, to a designated person listed in Schedule 1 or to a person acting on their behalf; or
- provide any financial or related service to, or for the benefit of, a designated person listed in Schedule 1.
Additionally, individuals listed in Part 1.1 of Schedule 1 of the Regulations are also inadmissible to Canada under the Immigration and Refugee Protection Act.
Since February 2022, Canada has continually updated the Regulations, as well as the Special Economic Measures (Belarus) Regulations and the Special Economic Measures (Ukraine) Regulations.
Unofficial copies of the legislative amendments to the Special Economic Measures (Russia) Regulations that came into effect on May 18, 2023 and are available on Global Affairs Canada’s website here and here.
FINTRAC Updates Special Bulletin on Russia-Linked Money Laundering
FINTRAC published an update to its 2022 strategic intelligence on money laundering and terrorist activity financing in relation to Russia. FINTRAC warns that persons designated under the Special Economic Measures (Russia) Regulations (the Russia Regulations) may rely on established money laundering techniques and channels to circumvent and evade sanctions and to move assets outside Russia. The bulletin underlines Canada’s increasing use of existing AML enforcement mechanisms and sanctions.
Red flags for Canadian financial institutions to root out sanctions evasion, which are also typical of a high risk of exposure to money laundering activity, include:
- Using intermediary jurisdictions to hide ultimate beneficial ownership interests of assets by establishing shell and front companies networks. This may include registering business addresses in offshore financial centres or tax havens that are known secrecy jurisdictions.
- Transferring the legal ownership of assets to family members, close associates, or nominees.
- Use of non-resident bank accounts in a jurisdiction that differs from the company’s registration.
- Connections to legal firms in offshore financial centres specializing in Russian clientele.
- Formation of limited partnerships (LP), limited liability partnerships (LLP), or international business corporations (IBC), in jurisdictions where there has been a significant increase in the number of corporations, and which use generic corporate names and lack an online presence.
- Use of nested correspondent banking whereby banks in higher-risk jurisdictions hold accounts in lower-risk jurisdictions and conduct international transactions through these accounts.
- Receipt of funds from financial institutions or intermediaries that are connected to the Russia payment system established in 2014, SPFS, or from jurisdictions where the Government of Canada alleges AML deficiencies or a decline in accountable governance (e.g. the United Arab Emirates or Hong Kong).
The bulletin also highlights risks associated with virtual currency transactions:
- Virtual currencies used to obfuscate the origin of the funds to integrate them into the financial system.
- Customer transactions are initiated from or sent to IP addresses in Russia, Belarus or neighbouring jurisdictions which are known to have weak AML regulatory frameworks.
- Transactions have links to wallets linked to sanctioned persons.
- Transactions have links to virtual currency mixing services / cryptocurrency tumblers.
- Receipt of cryptocurrency from a private wallet followed by initiation of multiple rapid transfers for alternative virtual currencies followed by a withdrawal into a fiat currency.
Canadian Persons added to OFAC’s SDN List
On May 19, OFAC added one Canadian individual and one associated entity to its SDN list. The individual is a senior executive of the associated entity, which is an alleged supplier of electronic components used to manufacture drones used by the Russian military. Other non-Canadian entities were also designated due to their relationship with the designated individual. The related OFAC fact sheet is available here.
Compliance with Canadian Sanctions Legislation
Businesses should continually assess their sanctions compliance in this shifting legal landscape. Regulations enacted under the Special Economic Measures Act obligate persons in Canada and Canadian citizens to disclose certain property held by Schedule 1 entities and any related transactional information to the RCMP. Additionally, certain entities have a continuing duty to determine and disclose certain property held by Schedule 1 entities.
Businesses, should also assess their sanctions due diligence procedures and sanctions compliance policies against the red flags identified by FINTRAC outlined above, and ensure that they are not dealing with persons included on OFAC’s SDN List. Obfuscating control and ownership of property through shell corporations or the use of trust instruments is a common red flag that may indicate a high risk of sanctions evasion.