Canada’s trade, financing and transaction sanctions against Russian incursions into Ukraine, while modest in their beginning, have grown increasingly more encompassing in the kinds of dealings and transactions they capture and the companies, banks and persons they sanction. Acting in coordination with the United States and the European Union, the Canadian government determined early in March 2014 that the several actions of Russia in relation to the Ukraine constituted a grave breach of international peace and security that has resulted in a serious international crisis. The result has been the passage of the Special Economic Measures (Russia) Regulations (“Russia Regulations” or “Regulations”). View our previous bulletin on this matter.
While the Canadian government coordinates its policy on sanctions with the United States (“US”) and the European Union (“EU”), it makes clear that its sanctions law are not an exact match to those passed by either the US or the EU. This article examines the core of the Canadian sanctions response, and significant new expansions to its legal reach.
The Core Sanctions
The Regulations list sanctioned companies and individuals, called ‘Designated Persons’, which are sanctioned because Canada considers there are reasonable grounds to believe that they are connected with the conflict in Ukraine. The list, included in a Schedule 1, is a diverse array of banks, investment firms, technology companies and manufacturers such as Bank Rossiya; ExpoBank; RosEnergoBank; Volga Group; Radio-Electronic Technologies and United Shipbuilding Corporation, to name a few.
The Russia Regulations prohibit any person in Canada and any Canadian outside Canada from dealing with these sanctioned persons, including (i) dealing in any property, wherever situated, held by or on behalf of such Designated Person; and (ii) providing any financial or related service to or for the benefit of such a Schedule 1 Designated Person.
These broad prohibitions are subject to a limited number of exemptions including dealings necessary for a Canadian to transfer to a non-sanctioned bank any accounts, funds or investments held by a sanctioned bank.
Broadening the Reach of the Sanctions
Very recently, this net of sanctioned activity was cast wider to cover an additional array of transactions and sanctioned companies and banks. These sanctioned persons, found in new Schedules 2 and 3, are comprised of different banks and companies including Gazprombank; VTB Bank and Novatek, Russia’s largest non-state gas producer. Under these broadened Russia Regulations, and depending on whether the sanctioned person is listed in Schedule 2 or 3, no one in Canada or Canadian outside Canada can transact in a loan, bond or debenture that is longer than either 30 or 90 days maturity, in relation to such a Designated Person; (ii) the property of such a Designated Person; and (iii) the interests of such a Designated Person unless the loan or bond or debenture was issued prior to the Designated Person becoming a sanctioned entity. Similar prohibitions apply to equity (share acquisition) financing in relation to such a Designated Person or its property or interests unless the equity financing occurred before the Designated Person’s sanctions listing. The reach of these prohibitions is broad.
Diligent Compliance Is Crucial to Avoid Aggressive Enforcement
Canada’s sanctions regulations are enforced by the Royal Canadian Mounted Police (“RCMP”) and the Canada Border Services Agency. Every person who wilfully contravenes these Regulations can be liable to imprisonment for up to five years or to fines in any amount at the discretion of the court. The Regulations not only prohibit direct dealings, but also any one in Canada or Canadians outside Canada is prohibited from doing anything that causes, assists or promotes, or is intended to cause, assist or promote, any of the prohibited transactions. On their face, these are words of broad formulation. This is important because recent prosecution activity by the RCMP indicates that the Canadian government is prepared to aggressively investigate and prosecute those acting in alleged violation of Canadian sanctions law and will continue to do so.
While Canada’s sanctions response is similar to the US sanctions language regarding Russia, it is not the same, and this has legal consequences in terms of scope and coverage. In addition, Canada frequently adds persons and entities to these three Schedules that may not be mirrored in either US or EU sanctions. Also, should the situation in the Ukraine deteriorate further, it may well be that Canada, unlike the US or the EU, will amend the Russia Regulations to not only increase the number of persons listed in the three Schedules, but to prohibit activities, such as investments in certain industries, regardless of whether a Designated Person is involved in the activity.
In consequence, we strongly advise banks, insurance companies and other companies to avoid assuming that compliance with Canada’s Russia Regulations can be obtained by complying with the US or EU sanctions. There are important differences in scope.
Canadian regulators have been vigilant in applying their jurisdiction and enforcement authority. A prudent corporate approach is one that pays equal vigilance to the language of the Canadian sanctions to understand their increasingly complex coverage.