On February 20, 2014, Prime Minister Stephen Harper announced that targeted economic sanctions against the Ukrainian government will be introduced under the Special Economic Measures Act in an effort to bring an end to violent action being taken against anti-government protesters. In late January 2014, Canada expanded its sanctions against Syria. Similarly, in December 2013, Canada announced additional sanctions against North Korea. And in November 2013, Canada declared that it would maintain its sweeping sanctions against Iran, notwithstanding other states’ moves to reduce their economic restrictions on Iran. Collectively, these steps indicate the Canadian government’s intention to wield economic sanctions as a substantive foreign policy tool. Given that Canada is in many ways a trading nation, and many Canadian businesses have ties elsewhere, such sanctions have significant impact not only on the target countries but also on all Canadian businesses.
In this Bulletin, we review Canadian legislation that imposes a wide range of sanctions against a number of foreign jurisdictions, entities and individuals. The legislation implements measures adopted by the United Nations (UN) Security Council and other international organizations, as well as sanctions that Canada has imposed unilaterally. A variety of measures are introduced in the legislation, including arms embargoes, trade restrictions and restrictions on the provision of financial services and other economic activities. There are also monitoring, reporting and asset freeze obligations for specific regulated entities.
WHO IS SUBJECT TO SANCTIONS LAWS
Canadian sanctions laws generally apply to all persons (which is broadly defined) in Canada and all Canadians wherever situated, including corporations formed under the laws of Canada or a province. Compliance with Canadian sanctions legislation must be addressed in the context of every economic undertaking, including when providing financial services, dealing in securities and completing mergers and acquisitions.
The Canadian government imposes sanctions under the authority of six principal statutes:
1) Criminal Code
The Criminal Code (Code) prohibits every person in Canada and every Canadian outside Canada from dealing with property of terrorist groups, including certain entities identified in the Regulations Establishing a List of Entities. The Code imposes specific reporting requirements and asset freeze obligations relating to such property.
The Code also sets out several offences relating to money laundering and the financing of terrorism that apply to every person in Canada.
2) United Nations Act
The Canadian government gives effect to sanctions passed by the UN Security Council by introducing regulations under the United Nations Act (UN Regulations). Currently, the UN Regulations impose sanctions against the following jurisdictions: Côte d’Ivoire, Democratic Republic of the Congo, Eritrea, Lebanon, Iran, Iraq, Liberia, Libya, North Korea, Somalia and Sudan.
Canada has also introduced regulations under the United Nations Act implementing UN sanctions against al-Qaida and Taliban and UN resolutions on the suppression of terrorism. Together with the regulations made under the Code, these regulations list organizations and individuals that the Canadian government has grounds to believe are associated with terrorism.
Although the sanctions imposed under the UN Regulations vary depending on the subject matter and target of the sanctions, generally they include trade restrictions and arms embargoes on the sanctioned jurisdictions, and prohibitions against:
- dealing in any property that is owned or controlled by a designated person;
- entering into or facilitating any financial transaction related to such a dealing;
- providing any financial or other related service in respect of such property; or
- making any property available to or for the benefit of a designated person (i.e., freezing the assets).
In addition, many UN Regulations prohibit the provision of technical assistance or financial services, including investment, brokerage or other services, related to the provision, manufacture, maintenance or use of arms and related materials or military activities in sanctioned jurisdictions.
Duty to Report: The UN Regulations require that every person in Canada and every Canadian outside Canada report, without delay, to Canadian law enforcement agencies any property in their possession or control that they have reason to believe is owned or controlled by a designated person, and provide all information about the attempted or completed transaction in respect of such property. Importantly, this reporting obligation is triggered where there is a reasonable belief that the person is in control or possession of such property, which is a lower threshold than actual knowledge. The reported property must be subject to an asset freeze.
Financial institutions and other persons and entities that are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTF Act) – Canada’s anti-money laundering legislation – must also report terrorist property to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Duty to Determine: In addition to the obligation to disclose property of designated persons to Canadian law enforcement agencies, regulated financial institutions, including banks, trust and loan companies, credit unions, insurance companies, securities dealers and in some cases money services businesses, are required to continually determine and, where required, report monthly to their principal regulator whether they are in possession or control of property owned or controlled by a designated person.
For federally regulated financial institutions, the Office of the Superintendent of Financial Institutions (OSFI) has published an Instruction Guide in respect of Designated Persons Listings and Sanction Laws. This Guide sets out OSFI’s expectations with respect to the obligation of federally regulated financial institutions to continually determine and regularly report property owned or controlled by designated persons listed under the UN Regulations and other sanctions laws discussed in this Bulletin.
3) Special Economic Measures Act
Absent a UN Security Council resolution, the Canadian government has authority under the Special Economic Measures Act (SEMA) to impose sanctions on foreign jurisdictions and persons for the purpose of implementing a decision of an international organization or where the Canadian government is of the opinion that a grave breach of international peace and security has occurred that is likely to result in a serious international crisis.
Currently, the Canadian government has introduced regulations under SEMA imposing sanctions against the following jurisdictions: Burma, Iran, North Korea, Syria, Ukraine (expected) and Zimbabwe. The SEMA regulations in respect of Ukraine are expected to list certain senior officials of theUkrainian government as designated persons and prohibit the dealing in any property (including financial assets) of such designated persons in the same manner as under the UN Regulations. The regulations are also expected to prohibit the provision of any financial or financial-related service to or for the benefit of a designated person.
The SEMA regulations in respect of Burma and Zimbabwe impose arms embargoes and prohibit the dealing in any property, including financial assets, of a list of designated persons in the same manner as under the UN Regulations. There are also prohibitions against providing or acquiring financial or other services related to military activities or arms and related materials.
The SEMA regulations in respect of Iran, North Korea and Syria are broader and – in the case of Iran and North Korea – go beyond the sanctions imposed under the UN Regulations. We discuss the sanctions against each of these jurisdictions in more detail below.
Through SEMA regulations, the Canadian government has imposed severe restrictions on trade with Iran, including, among other measures, a ban on exporting, selling, supplying or shipping goods to Iran, to a person in Iran, or for the purposes of a business carried on in Iran or operated from Iran. Similarly, the import, purchase, shipment or transhipment of any goods exported, supplied or shipped from Iran after May 29, 2013 are prohibited, subject to certain exemptions. There is also a prohibition on providing or communicating to Iran or any person in Iran technical data relating to liquefied natural gas, as well as other listed goods.
In addition, the SEMA regulations impose sweeping restrictions on the provision of financial services. In particular, the regulations include prohibitions against:
- providing or acquiring any financial services to, from, for the benefit of, or on the order of Iran or any person in Iran, subject to certain threshold exceptions, such as in respect of non-commercial remittances of C$40,000 or less, provided that a record of such transaction is kept;
- providing or acquiring financial or other services to, from, for the benefit of, or on the order of any person in Iran in respect of the import, purchase, acquisition or shipment of natural gas, crude oil or any petroleum or petrochemical products;
- providing or acquiring financial or other services to, from, for the benefit of, or on the order of any person in Iran for the purpose of (i) establishing an Iranian financial institution in Canada or a Canadian financial institution in Iran (or a subsidiary or office of such institution) or (ii) acquiring a significant interest in an Iranian or Canadian financial institution;
- providing or acquiring correspondent banking services to, from, for the benefit of, or on the order of an Iranian financial institution; and
- purchasing any debt obligation issued by the government of Iran.
The regulations list a number of limited exceptions to the foregoing restrictions.
Significant restrictions also exist in respect of Syria. In particular, the SEMA regulations prohibit, among other measures, the importing or shipment of any goods, other than food from Syria. There is also a prohibition on exporting to Syria and to any person in Syria any goods or data for use in monitoring telecommunications, luxury goods and chemicals and products listed in the regulations. There are also significant restrictions on the provision of financial services, including prohibitions against:
- dealing with property held by or on behalf of persons designated under the regulations;
- providing or acquiring financial or related services to, from, for the benefit of, or on the order of Syria or any person in Syria, subject to certain threshold exceptions, such as in respect of non-commercial remittances of C$40,000 or less, provided that a record of such transaction is kept;
- providing or acquiring financial or related services to, from, for the benefit of, or on the order of Syria or any person in Syria for the purpose of facilitating trade in petroleum or related products, other than natural gas or making a prohibited investment; and
- making an investment in Syria that involves dealing in property held by or for Syria, a person in Syria or a national of Syria who does not ordinarily reside in Canada.
A number of limited exceptions to the foregoing restrictions are available under the regulations. There are also monitoring and reporting obligations in respect of property owned or possessed by designated persons listed in the regulations, in the same manner as under the UN Regulations.
The SEMA regulations in respect of North Korea impose sanctions in addition to those provided for under the UN Regulations. These include, among other measures, prohibitions against:
- providing or acquiring financial services to, from, for the benefit of, or on the direction of North Korea or any person in North Korea, except in respect of non-commercial remittances of less than C$1,000, provided that a record of such transaction is kept;
- making an investment in any entity in North Korea that involves a dealing in property held by or on behalf of North Korea, any person in North Korea, or a national of North Korea who does not ordinarily reside in Canada;
- exporting, supplying or shipping any goods to North Korea or any person in North Korea and dealing in any goods destined for North Korea or any person in North Korea; and
- transferring or communicating technical data to North Korea or any person in North Korea.
Limited exceptions to these prohibitions are available under the regulations.
Permits: SEMA enables a responsible minister to issue permits authorizing a person to carry out certain activities or transactions that are otherwise restricted or prohibited under the SEMA regulations.
4) Foreign Extraterritorial Measures Act
The Foreign Extraterritorial Measures Act (FEMA) allows the Canadian government to protect Canadian interests against foreign courts and governments wishing to apply their laws extraterritorially to Canada. This is done by authorizing the attorney general to make orders relating to the measures of foreign states and tribunals affecting international trade or commerce.
Currently, the only such order is the Foreign Extraterritorial Measures (United States) Order, 1992 (FEMA Order), issued in response to U.S. sanctions against Cuba. The FEMA Order is intended to block the Cuban Assets Control Regulations in the United States and other laws having a similar purpose. The FEMA Order prohibits a Canadian corporation, including its directors and officers, managers and employees, in respect of any trade between Canada and Cuba, from complying with:
- an extraterritorial measure of the United States or
- any communication relating to such a measure that the Canadian corporation has received from a person who is in a position to influence the policies of the Canadian corporation.
The FEMA Order also requires Canadian corporations and directors and officers of a Canadian corporation to give immediate notice to the Attorney General of Canada of any direction in respect of an extraterritorial measure of the United States. For further information, see our previous Blakes Bulletin: Doing Business in Cuba: Understanding Canada’s Blocking Legislation.
5) Freezing Assets of Corrupt Foreign Officials Act
The Freezing Assets of Corrupt Foreign Officials Act permits the Canadian government to make orders directing that the property in Canada of a politically exposed foreign person (PEFP) be seized, frozen or sequestered where there is internal turmoil or an uncertain political situation in a foreign state. The Act also allows the government to make orders restricting the dealings that any person in Canada or any Canadian wherever situated may have with such PEFP. The powers under this Act are in addition to those regulating the provision of financial and other services to PEFPs under the PCMLTF Act.
Currently, the only regulation under the Freezing Assets of Corrupt Foreign Officials Act is in respect of individuals associated with the former regimes in Tunisia and Egypt. If you are seeking to conduct a transaction or provide services in respect of the property of the individuals listed in the regulation, you will require a permit.
The regulation prohibits:
- dealing, directly or indirectly, in any property, wherever situated, of any PEFP listed in the regulations;
- entering into or facilitating, directly or indirectly, any financial transaction related to such dealing; or
- providing financial or other related services in respect of any property of such listed PEFP.
6) Export and Import Permits Act
The Export and Import Permits Act imposes export and import trade controls on goods from specific countries or specific types of goods. While strictly speaking not a sanction, it nevertheless has potential application and should be considered in a wide range of cross-border shipments or transactions. The controls are accomplished primarily through the following three regulations:
- the Area Control List (ACL);
- the Export Control List (ECL); and
- the Import Control List (ICL).
The ACL is a list of countries to which the government has deemed it necessary to control the export of any goods. Currently, the only countries on the ACL are Belarus and North Korea. You will require a permit to export goods to these countries.
Both the ECL and the ICL are lists of goods that the government has deemed necessary to control for certain enumerated purposes. For example, Canada closely controls the export of military goods and technology to countries that pose a threat to Canada and its allies, are involved in or under imminent threat of hostilities, or are subject to UN Security Council sanctions. If you are exporting or importing goods identified on the ECL or ICL you will require a permit.
In addition, financial institutions that provide international trade financing services should ensure that they are not indirectly facilitating contravention of the above prohibitions by their clients. Financial institutions should therefore take measures to confirm that their clients’ trade activities are in compliance with the ACL, ECL and ICL or that the necessary permits have been obtained.
SCREENING AGAINST LISTS OF DESIGNATED PERSONS
OSFI and the Department of Foreign Affairs, Trade and Development maintain lists (OSFI Lists and DFATD Lists) of individuals and entities designated under various sanctions laws discussed in this Bulletin. OSFI also offers an email subscription service which allows individuals and businesses to receive electronic updates when new notices are issued or when these lists are updated. This service can be a useful tool for businesses that may regularly be exposed to the risk of dealing with the property of a designated person. Significantly, both the OSFI and DFATD Lists must be checked, as neither covers all Canadian sanctions laws.
It is important to note that unlike the list of designated persons maintained by the United States Office of Foreign Assets Control (OFAC), the OSFI and DFATD Lists do not normally include the names of individuals associated with international organized crime, particularly narcotics trafficking.
Before accepting a new customer or doing a transaction with or on behalf of a customer, check the OSFI and DFATD Lists to ensure that the person is not listed. If the customer is found to be on any of these lists, investigate whether your proposed business with that customer is prohibited.
Screen your entire customer database against the OSFI and DFATD Lists on a regular basis – for example, on a weekly basis – and whenever your customer database, the OSFI or DFATD Lists are updated. You may consider obtaining software to do this automatically, depending on the size of your business.
Any property – including any money – that you are holding on behalf of a customer whose name appears on one of the OSFI or DFATD Lists will likely have to be frozen; ensure that appropriate training is in place for employees in a position to implement such a freeze.
Check the names of any potential employees and prospective vendors against the OSFI and DFATD Lists prior to entering into employment or business relationships with them.
You may also want to establish compliance policies and procedures, including employee education, to ensure screening is conducted and "hits" – including "false positive hits" – are dealt with appropriately.
Clients that are subject to the requirements of the PCMLTF Act may need to rate customers located in sanctioned jurisdictions as being at a higher risk for money laundering and/or terrorist financing activities.
In February 2014, the Canadian government signalled in its Economic Action Plan 2014 that it may introduce measures to make it easier and simpler to screen against a comprehensive list of persons designated under various sanctions legislation.
OTHER GOVERNMENT DEPARTMENT REQUIREMENTS
In addition to the six principal statutes discussed above, a number of provisions in statutes administered by other government departments regulate trade as it applies to specific goods. For example, the Canadian Food Inspection Agency enforces provisions applicable to the trade of various food and agricultural products pursuant to the Canada Agricultural Products Act, the Feeds Act, the Fertilizers Act, the Fish Inspection Act, the Health of Animals Act, the Meat Inspection Act, the Plant Protection Act and the Seeds Act. Restrictions on trade that are imposed under the Wild Animal and Plant Protection and Regulation of International and Interprovincial Trade Act are enforced by Environment Canada. Transport Canada administers restrictions on trade pursuant to the Transportation of Dangerous Goods Act and the Motor Vehicle Safety Act. These statutes represent only a few examples of restrictive legislation. Depending on the goods at issue, a range of other legislative and governmental requirements may apply to regulate trade.
Failure to comply with the applicable requirements under Canadian sanctions laws is an offence which can result in fines, imprisonment or both. Moreover, any publicity on this issue, particularly related to non-compliance, is likely to have an adverse impact on reputation.
It is also important to remember that the prohibitions imposed under the sanctions laws are often quite broad, capturing both direct and indirect dealings. In many cases, conduct that facilitates or assists in the breach of sanctions laws is itself a breach of such laws. Care must therefore be exercised to ensure that the prohibitions are not contravened indirectly.
In some cases, the sanctions laws specifically provide immunity from civil liability for freezing assets of a designated person or group. There is often also immunity from liability for making a good faith disclosure to law enforcement agencies and principal regulators under applicable sanctions laws. However, where the legislation does not provide such immunity, effecting asset freezes or disclosures could result in an allegation that you have breached a contract with your customer. Contractual language addressing these requirements should be carefully drafted.