Worldwide: Canada Marks Second Year Anniversary Of Russia's Further Invasion Of Ukraine With Wave Of New Sanctions And Related Measures

Canada has marked the two year anniversary of Russia's full-scale invasion of Ukraine with the implementation of new sanctions and related measures. These include additional sanctions listings, FINTRAC guidance related to the Ministerial directive on financial transactions associated with Russia, a joint financial intelligence advisory on the procurement of dual-use goods by Russian end-users, and an oil price cap compliance and enforcement alert.

New Rounds Of Sanctions

On February 21, 2024, Canada implemented a fresh wave of sanctions through the Regulations Amending the Special Economic Measures (Russia) Regulations ("SEMA Russia Regulations") by adding 153 entities and 10 individuals to Schedule 1 of the SEMA Russian Regulations. This is the largest expansion of the Canada's Russia sanctions list since February 2023. The newly listed persons are alleged to be directly or indirectly supporting the Russian military or oil sector, or working on agreements with Iran to evade sanctions.¹

Notably, among those listed is VSMPO-AVISMA Corporation, recognized as the world's largest titanium metal producer and a key supplier to the manufacturing sector, and in particular, the aerospace supply chain. Canada is currently the only Western country to impose full sanctions against VSMPO.

In this latest round of sanctions Canada also listed several Cyprus-registered companies considered to be the "nodes of direct and indirect support" of the Russian aggression. This became possible as a result of the June 22, 2023 amendments to subsection 4(2) of the Special Economic Measures Act ("SEMA") that now allows the Canadian government to list non-Canadians in third countries.

Schedule 1 was further expanded on February 29, 2024, with the addition of six individuals involved in the ill-treatment and death of Alexei Navalny.

In addition to these measures, Canada significantly expanded the list of items prohibited for export, sale, supply, or shipment to Russia under Schedule 7 to the SEMA Russia Regulations because they could be used in the manufacture of weapons.

Canada has also implemented another potentially far-reaching sanctions measure by introducing two diamond-related bans. The first prohibits the acquisition or import from Russia of various diamonds, including unsorted, non-industrial, synthetic and reconstructed diamonds, and articles of precious metals and metal clad incorporating diamonds. The second prohibits the acquisition or import from anywhere in the world of Russian unsorted and non-industrial diamonds. These measures could have a significant impact on several Canadian industries, including automotive, electronics and technology, aerospace and defence, optics, mining, oil and gas.

FINTRAC guidance related to the Ministerial Directive on Financial Transactions Associated with Russia

On February 24, 2024, Canada's Finance Minister issued the Ministerial Directive in reaction to Russia's "insufficient" anti-money laundering and anti-terrorist financing measures. This move was prompted by concerns that Russia's actions could pose a risk to Canada's security by adversely impacting the Canadian financial system.

The Ministerial Directive mandates that all individuals or entities specified in section 5 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act ("PCMLTFA") ("Reporting Entities") must comply with the following requirements:

• Treat every financial transaction originating from or bound for Russia, irrespective of their value as a high-risk transaction for the purposes of subsection 9.6(3) of the Act;
• Verify the identity of any client, individual or entity involved in or benefiting from such transaction;
• Conduct thorough customer due diligence for each transaction, including verifying the source of funds or virtual currency, understanding the transaction's purpose, and determining the beneficial ownership or control of any involved entity; and
• Maintain and preserve a record of every transaction, adhering to the guidelines outlined in the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, without consideration of the monetary thresholds specified in those regulations.

In relation to this directive, new FINTRAC guidance introduces additional requirements for financial institutions and other Reporting Entities under the PCMLTFA for identifying, verifying, and recording funds of any transactions associated with Russia.

Determining that a transaction originated from or is bound for Russia

To identify transactions subject to the Ministerial Directive regarding Russia, Reporting Entities need to assess the transaction details. The guidance provides the following examples:

• A client in Canada with a Russian address requests funds to be sent to a beneficiary outside Russia. If additional information demonstrates a Russian connection, like beneficiary account details, then the transaction should be treated as bound for Russia.
• A client in Canada with a Russian address requests funds to be sent to a beneficiary outside Russia and no further indicators suggest a Russian connection. This transaction falls outside the scope of the Ministerial Directive.
• A client receives funds into their account from a sending account outside Russia, but with additional indications linking it to Russia. In this case, the transaction is treated as originating from Russia.

Verifying the identity of every client involved in transactions originating from or bound for Russia

The guidance specifies that Reporting Entities, in line with the Ministerial Directive, must verify the identity of every client, including those with existing business relationships, engaged in transactions related to Russia, irrespective of the transaction amount. This verification process should follow the procedures outlined in the PCMLTFA. Additionally, enhanced measures, such as gathering supplementary documents or data and considering factors like occupation, asset volume, and information from public databases or the internet, are required to confirm the identity of each client.

Additional measures required

Reporting Entities must treat all transactions originating from or bound for Russia as high risk and must assess client information to detect potential money laundering or terrorist financing activities and report any suspicions to FINTRAC through appropriate channels. Enhanced measures must be applied to every client meeting the identification threshold for these transactions. Additionally, information must be obtained regarding the purpose and source of funds or virtual currency for such transactions, as well as beneficial ownership or control details of any entity involved in the transaction.

FINTRAC emphasizes that regardless of their value, transactions such as electronic funds transfers, virtual currency transfers, receipt of funds or virtual currency, and issuance or redemption of other negotiable instruments must be recorded. There is no minimum amount specified for these transactions.

FINTRAC's Joint financial intelligence advisory: illegal procurement of dual-use goods by Russian end-users

Following the invasion of Ukraine by Russia, FINTRAC, as well as the financial intelligence units ("FIUs") of the Netherlands, and Germany have received reports indicating suspected illegal export or attempted export of dual-use goods to Russian end-users in breach of current sanctions and export control laws. Consequently, a joint advisory ("Advisory") has been developed by these countries, in consultation with the United States' Financial Crimes Enforcement Network. This Advisory aims to assist Reporting Entities in identifying financial transactions and activities linked to the illicit purchase of dual-use goods and laundering criminal proceeds.

The Advisory focuses on sensitive items which Russia is using in its weapon systems. Such items are identified in the Guidance published on September 26th, 2023 by the "Export Enforcement Five", including Australia, Canada, New Zealand, the United Kingdom, and the United States, as well as in the country-specific lists. In Canada, these sensitive items are listed in the Russia SEMA Regulations, as well as in the Restricted Goods and Technologies List.

Reporting Entities are encouraged to perform enhanced client risk assessments, which could include the following:

• Verification on whether the transactions are related to trade in goods restricted under the above lists;
• Matching the flow of goods with the flow of funds;
• Staying updated on current export exceptions;
• Obtaining supporting evidence from customers (e.g. invoices, contracts, bills-of-lading, customs declarations);
• Validation of the information provided by customers with the documentary standards that customers are required to meet.

The Advisory also notes that identification of actors involved in dual-use procurement channels is crucial, along with the identification of the dual-use goods related to sanctions evasion. Such detection could entail the following measures:

• Targeting individuals or entities designated as Russian military end-users, known for their involvement in procuring dual-use items for Russia. Methods for actor-based detection include cross-referencing customer databases with sanction lists such as those maintained by the European Union, the United States, and Canada. This includes monitoring for hits with Russian military end-users, and checking these lists prior to engaging with entities involved in the trade of dual-use goods.
• Considering larger company structures during client risk assessments to determine whether the Reporting Entities' clients might engage in trade with sanctioned parties.
• Analyzing various contextual person- and entity - based indicators, such as the use of dormant companies, sudden increases in transaction activity, changes in ownership and control structures.
• Analyzing various financial indicators, as well as transaction patterns. These include, among other things, the use non-resident accounts or accounts of newly established or acquired companies in certain countries, the use of backdated invoices, instances of routing payments for deals with sanctioned jurisdictions through specific accounts, the use of third-party payment processing independent of trade transactions, and the shipment of goods through sanctioned jurisdictions using fictitious end-users in other countries.

Oil Price Cap Compliance and Enforcement Alert

In an effort to combat the circumvention of the oil price cap measure ("OPC") introduced by the G7+ Coalition in December 2022, Canada has released a Compliance and Enforcement Alert in February 2024. This is a joint effort of Canada, the EU, and Australia to provide further guidance on the key OPC evasion methods, as well as the recommendations aimed to strengthen compliance with the OPC. The Compliance and Enforcement Alert builds on the previous advisory on the issue, including the Statement on Price Cap Rule Updates for Russian-Origin Oil and Petroleum Products and the Advisory for the Maritime Oil Industry and Related Sectors.

The key evasion methods the G7+ Coalition identifies include the following:

• Falsified documentations and attestations;
• Opaque shipping and ancillary costs;
• Third country supply chain intermediaries;
• Complex and irregular corporate structures;
• Flagging;
• The "shadow fleet"; and
• Voyage irregularities.

To mitigate these risks, industry stakeholders are urged to conduct enhanced due diligence on customers and counterparties involved in trading Russian oil and oil products. They are also expected to notify the relevant authorities of instances, where business intelligence, information, or market assessments indicate that Russian oil or oil product prices exceed the OPC. In Canada, any such potential violations of the OPC should be reported to the RCMP.

Given the factors mentioned above, it is crucial for organizations with any possible connection to the region to stay updated on any developments. The McCarthy Tétrault International Trade and Investment team will continue to monitor these developments and shifting economic policies in response to the ongoing Russian invasion of Ukraine.

Thanks to Zainab Adewusi for her assistance in preparing this client alert.

Footnote

1. See News Release Minister Joly announces additional sanctions in response to Russia's full-scale invasion of Ukraine.

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