The initial round of economic sanctions imposed by the Canadian government in March 2014 in response to Russia’s military intervention in Crimea targeted certain former Ukrainian government officials and their family members by imposing asset freezes. The Canadian government has since imposed increasingly broader and tougher sanctions targeting additional Russian and Ukrainian individuals and entities, and key sectors of Russia’s economy. The latest amendments implemented on September 17, 2014 expand upon a previous round of sanctions made effective on July 24, 2014, which prohibited persons in Canada and Canadians abroad from transacting in new debt and equity financings of certain listed Russian entities.
The first round of economic sanctions imposed by the Canadian government consisted of asset freezes targeting certain former Ukrainian government officials, and in some cases also their family members, and individuals linked to the Russian government pursuant to the Freezing Assets of Corrupt Foreign Officials Act (FACFOA). Our Osler Update of March 11, 2014 details this first round of sanctions.
Subsequently, further economic sanctions and travel bans against Ukrainian and Russian officials were imposed under the Special Economic Measures Act (SEMA). SEMA’s scope extends beyond the FACFOA, allowing for assets freezes and other economic restrictions and prohibitions when dealing with designated individuals, entities or a foreign state. Moreover, the individuals who are the targets of sanctions need not be former government officials. The sanctions can be imposed without a request by a foreign government (which is a requirement for sanctions imposed under FACFOA) and without the need for a UN Security Council Resolution.
Obligations on Canadians
The Special Economic Measures (Russia) Regulations (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 noted above
- 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.
Canadians and Canadian companies are therefore required 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.
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.
Recent Expansion of Sanctions
The Canadian government broadened the sanctions on July 24, 2014 to include seven more Russian entities in the financial, energy and arms sectors, and imposed restrictions on new debt financings and new equity financings for certain designated entities under Schedules 2 and 3 of the Regulations.
The revised sanctions prohibit any person in Canada or any Canadians abroad from transacting in, providing or dealing in a loan, bond or debenture of longer than 90 days maturity with the designated persons listed on Schedules 2 and 3, or with their property or any interests or rights in their property. Persons in Canada or any Canadians abroad are also blocked from transacting in, providing or otherwise dealing in capital funding through the transaction of shares in exchange for an ownership interest in relation to Schedule 2 designated persons, their property, or interests or rights in their property. These sanctions apply on a go-forward basis to bonds or debentures issued as of the date the designated person is listed in the Regulations.
Fourteen individuals and six entities were then added to the list of designated persons on August 6, 2014.
On September 17, 2014, the Canadian government added four senior officials of the Russian armed forces to the Regulations, as well as five entities involved in military hardware manufacturing (Mitischinskii Machine-Building Plant OAO, JSC Kalinin Machine-Building Plant), weaponry control systems (V. Tikhomirov Scientific Research Institute of Instrument Design), air defense manufacturing (OJSC Dolgoprudny Research Production Enterprise), and missile systems and radar development (Altair Marine Scientific Research Institute of Radioelectronics). Significantly, the government also added Sberbank, the largest Russian lender, to Schedule 2 – the list of designated persons subject to the debt and equity financing restrictions outlined above.
The September amendments also tightened the debt restrictions outlined above by prohibiting Schedule 2 entities from receiving any loans, or issuing any bonds and debentures that have a maturity longer than 30 days instead of 90 days. The 90-day or longer maturity date remains in place for Schedule 3 entities, which as of today lists only the natural gas producer OAO Novatek.
It can be expected that further sanctions against Russia will be implemented unless there is improvement in the current crisis in Ukraine.
The latest amendments, however, also removed two Russian banks (Expobank and Rosenergobank1) that had been added to the Regulations as designated persons on April 28, 2014. These banks were determined by the Canadian government to be unconnected to the Russian involvement in Ukraine. Individuals and businesses can now engage in business with these two entities.
Compliance Obligations and Risk Mitigation
Canadian companies and nationals 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. It is critical that all Canadian businesses that operate abroad put into place trade compliance programs and screening procedures, and continue to stay up to date on such regulatory developments.
The Canadian government has appeared increasingly willing 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.