For many years, companies have struggled with the issue of whether Canadian economic sanctions prohibit them from engaging in dealings involving entities that are owned or controlled by persons designated or listed by the Canadian government. Unlike their counterparts in the United States, the United Kingdom and the European Union, sanctions authorities in Canada have not released any guidance on this question. Nor have any Canadian courts directly considered this issue, at least not until now.
On October 25, 2022, the Court of King’s Bench of Alberta issued a decision in the case of Angophora Holdings Limited v. Ovsyankin, 2022 ABKB 711 (the “Angophora Decision”) which attempts to tackle this “control question”. The Court in the Angophora Decision found a “strong prima facie case” that the Respondent, Angophora Holdings Limited, was controlled by or acting on behalf of a sanctioned entity and that, as a result, “the distribution of proceeds [of an arbitral award] by [a] Canadian person or entity” to Angophora may risk offending sections 3 and 5 of the Special Economic Measures (Russia) Regulations (the “Russia Regulations”). In this regard, the Court specifically noted that “sanctions should not allow a designated person to circumvent an asset freeze by continuing to have access through non-designated parties that they control.”
This appears to be the first published decision by a Canadian court that interprets the Russia Regulations’ provisions or, for that matter, other Special Economic Measures Act (“SEMA”) regulations that govern dealings with entities owned or controlled by listed or designated entities and individuals (each, a “Sanctioned Person”). Despite the Court’s unwillingness to make a final determination with regards to the issue of control, the Angophora Decision nevertheless provides some indication as to how these provisions might be interpreted with respect to their application to entities held (in whole or in part) by Sanctioned Persons.
Our colleagues Timothy Ellam, Jordan Bierkos and Emily Ward have prepared an analysis of the Angophora’s Decision from the perspective of what the decision means for obtaining stays of recognition and enforcement orders in respect of arbitral awards. You can find that post here.
Canada’s sanctions against Russia
Since Russia’s invasion of Ukraine in February of 2022, Canada has steadily ramped up sanctions against Russia, including by listing or designating over 1,300 individuals and entities as Sanctioned Persons.
Under section 3 of the Russia Regulations, it is prohibited for any person in Canada and any Canadian outside Canada to:
- Deal in any property, wherever situated, that is owned, held, or controlled by or on behalf of a Sanctioned Person;
- Enter into or facilitate, directly or indirectly, any transaction related to a dealing as described above;
- Make available any goods, wherever situated, to a Sanctioned Person or someone acting on their behalf; or
- Provide any financial or other related service in respect of a dealing referred to above or to or for the benefit of a Sanctioned Person.
Section 5 of the Russia Regulations expands on this prohibition, prohibiting any person in Canada, as well as any Canadian outside Canada, from knowingly doing anything that causes, facilitates or assists in, or is intended to cause, facilitate or assist in, any activity prohibited elsewhere in the Russia Regulations, including under section 3.
Dealings with entities owned or controlled by Sanctioned Persons
The frequent and significant expansions of the list of Sanctioned Persons under the Russian Regulations has highlighted some difficulties created by the ambiguous drafting of the Russia Regulations.
Among the most significant challenges is the absence of a definition of the terms “owned” or “controlled” in the regulations or any guidance issued by the Canadian government, such that it is unclear if and when it is prohibited to engage in dealings involving an entity that is owned or controlled, in whole or in part, by a Sanctioned Person. The lack of clarity often forces some Canadian businesses to borrow interpretations from foreign jurisdictions and apply them in relation to internal policies. It also creates a significant disadvantage for Canadian businesses who, unlike their competitors operating in other jurisdictions where guidance is readily available from their sanctions authorities, are hampered in their ability to effectively mitigate sanctions risk. Notably, each of the United States, the United Kingdom and the European Union have provided explicit written guidance on these issues.
The Angophora Decision may provide some helpful guidance in determining whether the Sanctioned Persons prohibitions under the Russia Regulations extend to entities owned or controlled, in whole or in part, by a Sanctioned Person.
The Angophora Decision arose out of an application to stay the enforcement of a recognition and enforcement order granted by the Court of King’s Bench of Alberta on September 10, 2021 (“Order”), recognizing an arbitral award issued on December 15, 2020 by the London Court of International Arbitration (“Award”).
The arbitration proceedings that resulted in the Award pertained to a guarantee given by the Applicant in favour of the Respondent Angophora Holdings Limited (“Angophora”) arising out of a transaction in which Angophora acquired shares in a private company that was beneficially owned and controlled by the Applicant. Angophora was a wholly owned subsidiary of a private equity fund that was jointly owned and operated by two international banks: Intesa Sanpaolo S.p.A (“Intesa”), an Italian bank, and Gazprombank JSC (“Gazprombank”), a Russian bank.
By virtue of the Award and Order, the Applicant was a judgment debtor to Angophora. Both the Award and Order were final, without further avenues for challenge or appeal. Angophora had taken steps to commence enforcement the Order against the Applicant’s assets in Alberta. On February 24, 2022, the Canadian government designated Gazprombank as a Sanctioned Person under Schedule 1 of the Russia Regulations. The Applicant sought a stay of enforcement of the Order on the basis that enforcement action would contravene the Russia Regulations.
Specifically, the Applicant asserted that Angophora “should be considered to be functionally and practically controlled by Gazprombank” because of Gazprombank’s 50% indirect ownership and its involvement in Angophora’s management and operations, and as such, that Angophora’s property should be considered to be “owned, held or controlled by or on behalf of a designated person” and thereby subject to the prohibitions in sections 3 and 5 of the Russia Regulations. As a result, any person in Canada who would facilitate Angophora’s dealings with property in Alberta, including the Alberta civil enforcement agency acting as the agent of sale for the transfer of property seized by Angophora, as well as the Registrar of Land Titles responsible for transferring title to the seized property, would be facilitating transactions for an entity owned, held or controlled by a Sanctioned Person in contravention of sections 3 and 5 of the Russia Regulations.
The Court ultimately refused the Applicant’s request to stay enforcement of the Order, but in doing so, found that there was a “strong prima facie case” that Angophora was controlled by or acting on behalf of Gazprombank, and indicated that dealing with them could be a violation of the Russian Regulations.
The Court’s decision and interpretation of ownership and control The Court considered whether enforcement of the Order would contravene the Russia Regulations in the context of the first stage of the tripartite test for a stay, i.e., whether there is a serious issue to be determined. In the context of this decision, the Court found that the Applicant had to establish that there was a strong prima facie case that the enforcement action would contravene the Russia Regulations. In doing so, the Court considered first whether Angophora was controlled by or on behalf of Gazprombank, and second, whether the sale of seized assets pursuant to the Civil Enforcement Act or the transfer of proceeds of that sale to Angophora would be considered prohibited dealings involving Sanctioned Persons under section 3 of the Russia Regulations or prohibited facilitation of such dealings pursuant to section 5.
The Court began its assessment by invoking the principles of statutory interpretation, emphasizing that the Russia Regulations’ stated objectives are to “demonstrate Canada’s commitment to a policy of non-recognition of Russia’s illegal occupation of Crimea, as well as its ongoing concern with Russia’s violation of Ukraine’s sovereignty and territorial integrity.” It noted that a further goal is to “align Canada’s sanctions with those taken by international partners to underscore continued unity with Canada’s allies and partners in responding to Russia’s actions in Ukraine.”
The Court cited the broad language of sections 3 and 5 of the Russian Regulations as supporting the ultimate goal of “[imposing] an economic cost on Russia, including through entities that are or have engaged in activities that support or contribute to the violation of the sovereignty or territorial integrity of Ukraine.”
The available guidance in foreign jurisdictions
Given the lack of guidance in the regulations or from the Canadian government, the Court reviewed guidance documents issued in the United States, European Union, and United Kingdom dealing with those jurisdictions’ approaches to the question of control in sanctions legislation.
In particular, the Court observed that:
- In the United States, federal guidance states that an entity that is “owned in the aggregate, directly or indirectly, 50 percent or more by one or more [sanctioned] persons” is itself a sanctioned person.
- In the United Kingdom, control is considered to be established if either:
- “The sanctioned entity holds, directly or indirectly, more than 50 percent of the shares or voting rights or holds the right to appoint or remove a majority of the board of directors of the entity at issue; or
- It is reasonable, having regard to all the circumstances, to expect that the sanctioned entity would (if it chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of the entity in question are conducted in accordance with sanctioned entity’s wishes.”
- In the European Union, the EU Commission has developed a functional approach to the question of control, where control can be established where a sanctioned person has de facto control over an entity.
Application to Angophora and Gazprombank
The Court in this case determined that the “unfortunate” ambiguity of the Russia Regulations necessitates that the question of control be answered as a factual issue to be determined by the circumstances (as opposed to a purely legal one).
The Court indicated that the approach taken by the European Union, which focuses on the issue of de facto control, is appropriate in Canada. According to the Court, such a de facto assessment of control is in keeping with the regulatory objectives, including ensuring that Sanctioned Persons cannot circumvent sanctions by retaining access to prohibited property through non-sanctioned parties that they control.
In its assessment in this case, the Court heard evidence that shed light on the functional control structures of Angophora. The Court ultimately concluded that this evidence, including the fact that corporate decision-making required unanimity between the Gazprombank and Intesa nominees (which allows Gazprombank to prevent actions from being taken), and the fact that the corporate structure of Angophora met the US definition of control (i.e., 50% or more of Respondent is indirectly owned by Gazprombank), was sufficient to demonstrate, on its face, that Angophora was controlled by Gazprombank.
In other words, the Court adopted a facts-based analysis to determine functional control, but it considered formal control structures, including the extent to which the entity is held (in terms of percentage ownership interest) by a Sanctioned Person, as a factor to be considered in that assessment.
Despite finding a strong prima facie case that Angophora was controlled by or acting on behalf of Gazprombank, the Court went on to hold that the Applicant had not demonstrated that he would be irreparably harmed by the enforcement of the Order, and that the balance of convenience did not justify granting a stay of enforcement of the Order.
Although the Applicant’s stay application was dismissed, the Court noted that persons in Canada involved in enforcing the Order are at risk of violating the Russia Regulations, stating:
Given the scope of the [Order], and the fact that proceedings under it were pursued in good faith by the civil enforcement agency, in my view, it would not be a breach of the [Russian Regulations] for the [Order] to be enforced through the sale of the seized properties, including payment of the costs of enforcement. However, before distribution of the proceeds, persons in Canada may wish to be satisfied that they are not in breach of the [Russian Regulations] by further action. That, of course, is their decision.
While the Court acknowledged that the Russia Regulations “are not intended to be a tool by which judgment [debtors can] avoid lawful obligations,” it also pointed out that the Russia Regulations could impede access to the proceeds of an enforcement order or award if the ultimate recipient were controlled by or acting on behalf of a designated person. It is unclear how such a Court-ordered dealing could be allowed under the Russia Regulations for a civil enforcement agency or any person in Canada or Canadian outside Canada seeking to collect on enforcement proceeds without first obtaining a permit from the Minister of Foreign Affairs.
The Court finds that Angophora was a “person in Canada”
Though not a core issue in the Angophora Decision, the Court also indicated that the interpretation of a “person in Canada” for the purposes of determining to whom the prohibitions in the Russia Regulations apply may be interpreted fairly broadly.
Specifically, the Court, after noting that Angophora controlled the relevant property pursuant to the Order, found that Angophora, “in seeking enforcement [of the Order] in Alberta is ‘a person in Canada’ subject to the prohibitions” in the Russia Regulations. Importantly, Angophora was not a Canadian company. Though it is unclear whether Angophora had other ties to Canada, it appears that in the Court’s view, the mere act of seeking to enforce the Order in Canada was sufficient to make Angophora a “person in Canada” and therefore subject to the prohibitions in the Russia Regulations.
The Court did not expand on this point at any length. However, this statement indicates that the term “person in Canada” may capture persons who have little to no physical presence in Canada. Undertaking a legal action in Canada may be sufficient.
Implications for Canadian businesses
The Court was clear in this case that the Angophora Decision does not constitute a final finding on the issue of control. However, as this is the first case to provide explicit guidance on the control issue under the Russia Regulations (or SEMA more broadly), it is likely to assist both in directing the practices of businesses operating abroad and in building subsequent jurisprudence on the proper interpretation of the Russia Regulations, as well as other sanctions regulations issued under SEMA. The Angophora Decision, based on its interpretation of the term “persons in Canada”, also provides some insight into the potentially broad scope of application of the Russia Regulations.
The decision helps to solidify at the jurisprudential level what businesses and practitioners have long recognized – namely, that the ambiguity of the language of the Russia Regulations results in attempts, including now by the Court, to fill the vacuum with guidance issued by foreign sanctions authorities. Although the Court’s perspective is certainly helpful, it is not determinative, and the absence of any specific government guidance on this critical issue continues to put Canadian businesses at a disadvantage to their competitors in other jurisdictions that have issued clear guidance.
Moving forward, businesses should continue to conduct thorough and comprehensive due diligence before transacting with entities having a nexus in or with Russia or other countries and regions that are the target of economic sanctions. They should seek to keep up-to-date internal policies and screening mechanisms, and in light of the Angophora Decision, they should ensure that those screening mechanisms are sufficiently comprehensive to flag entities who may be de facto controlled by Sanctioned Persons. This includes a rigorous review of all entities and individuals that may own or control, in whole or in part and directly or indirectly, your counterparties.
Additionally, businesses should be wary of taking the position that the Russian Regulations (or SEMA more broadly) do not apply to them based solely on their limited physical presence in Canada. Should they be party to an enforcement order or award, they should seek legal advice to ensure that they are not in breach of the Russia Regulations, including by considering whether it is necessary to obtain a sanctions permit. Finally, they should continue to monitor developments closely to ensure that they are aware of any new sanctions or guidance, jurisprudential or otherwise, on the question of ownership or control as it relates to Sanctioned Persons.