Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Financial Services Regulatory/International Trade & Investment/White Collar Crime, April 2011
On March 23, 2011, the Freezing Assets of Corrupt Foreign Officials Act received Royal Assent and came into force in Canada. The same day, the Governor-in-Council promulgated regulations under the new legislation in respect of the assets of certain individuals connected to Tunisia and Egypt. This new legislation serves as a reminder that all persons (including individuals and legal entities) in Canada and all Canadians wherever situated (including individuals and corporations incorporated or continued under the laws of Canada or a province) should be aware of Canadian sanctions legislation.
This bulletin summarizes the developments in this area implemented since our last bulletin on the subject, published on May 7, 2009, entitled Canadian Sanctions Laws – How It Impacts Your Business, and includes the matters addressed in that bulletin for ease of reference.
What Is Sanctions Legislation?
Canada has enacted legislation that implements economic and other sanctions intended to apply pressure on a country, group or individual to comply with international objectives relating to peace and security (Canadian Sanctions Laws). These sanctions comprise a wide variety of measures, from travel bans to the imposition of legal restrictions and prohibitions on trade or other economic activity between Canada and the target state.
Unlike the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which applies to specific industries, generally Canadian Sanctions Laws apply to all persons (including individuals and legal entities) in Canada and all Canadians wherever situated (including individuals and corporations incorporated or continued under the laws of Canada or a province), so they may directly impact your business. It is also of critical importance that the concerns addressed by Canadian Sanctions Laws be considered in the context of mergers and acquisitions and, in particular, during the due diligence process, so as to avoid unwittingly becoming subject to liability for previous contraventions following an acquisition.
There are six principal statutes that comprise Canadian Sanctions Laws:
1. Criminal Code. The Criminal Code (the Code), which prohibits every person in Canada and every Canadian outside Canada from dealing with property of certain entities identified in the Regulations Establishing a List of Entities and imposes specific reporting requirements 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 implements enforcement measures taken by the United Nations Security Council to maintain or restore international peace and security through the United Nations Act. These measures are introduced into domestic law through regulations under the United Nations Act (the U.N. Regulations) and target specific countries, persons and groups identified by the United Nations Security Council. Currently, there are U.N. Regulations against Iran, the Democratic People's Republic of Korea (North Korea), Lebanon, the Sudan and several other countries. Since our last bulletin, sanctions under this Act have also been introduced against Libya, Eritrea, Somalia and, as of March 31, 2011, Côte d'Ivoire. While the subject matter of the sanctions imposed by the U.N. Regulations varies depending on the subject matter or target of the sanctions, generally they include comprehensive trade sanctions and more targeted measures such as arms embargoes, prohibitions against dealing with property of certain persons, the provision of financial services and reporting requirements.
3. Special Economic Measures Act. Absent a United Nations Security Council resolution, the Canadian government has the authority to impose sanctions with respect to foreign countries pursuant to the Special Economic Measures Act (SEMA). SEMA gives the Governor-in-Council the authority to make orders and regulations that restrict or prohibit certain activities in relation to a foreign state for the purpose of implementing a decision, resolution or recommendation of an international organization of states of which Canada is a member, or where the Governor-in-Council is of the opinion that a grave breach of international peace and security has occurred that has resulted or is likely to result in a serious international crisis. Currently, the Governor-in-Council has used the authority under SEMA to enact regulations in response to the humanitarian crisis situations in Burma (Myanmar) and Zimbabwe and, more recently, in respect of Iran and Libya. The sanctions imposed in respect of Libya extend beyond those imposed under the United Nations Act.
4. Foreign Extra-Territorial Measures Act. The Foreign Extra-Territorial 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 (the FEMA Order), issued in response to U.S. sanctions against Cuba. The FEMA Order makes specific reference to the Cuban Assets Control Regulations in the United States and other laws having a similar purpose. It 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.
5. Freezing Assets of Corrupt Foreign Officials Act. The Freezing Assets of Corrupt Foreign Officials Act, the newest piece of Canadian Sanctions Laws, permits the Governor-in-Council to make orders directing that the property (whether real or personal), situated in Canada, of a "politically exposed foreign person" be seized, frozen or sequestered where there is internal turmoil or an uncertain political situation in a foreign state. The Act also allows the Governor-in-Council to make orders restricting the dealings that any person in Canada or any Canadian anywhere in the world may have with such a "politically exposed foreign person".
Under this statute, the Governor-in-Council, on the advice of the foreign state involved, makes orders and regulations listing the "politically exposed foreign persons" in respect of which the Act will apply. As of this date, the only such regulation in effect is in respect of individuals associated with the recent turmoil 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.
Additionally, the Act imposes on certain types of entities an obligation to determine, on a continuous basis, whether they have any property of a "politically exposed foreign person" listed in an order or regulation in their possession or control.
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 (the ACL);
- the Export Control List (the ECL); and
- the Import Control List (the ICL).
The ACL is a list of countries to which the Governor-in-Council has deemed it necessary to control the export of any goods. Currently, the only countries on the ACL are Burma (Myanmar), North Korea, and Belarus. You will require a permit to export goods to these countries.
Both the ECL and the ICL are lists of goods that the Governor-in-Council 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 United Nations Security Council sanctions. If you are exporting or importing goods identified on the ECL or ICL, respectively, you will require a permit to do so.
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.
In June 2010, the Office of the Superintendent of Financial Institutions (OSFI) published an Instruction Guide in respect of Designated Persons Listings and Canadian Sanctions Laws (the Guide). The Guide, which can be found here, sets out OSFI's expectations regarding compliance by OSFI-regulated financial institutions with Canadian Sanctions Laws (with the notable exception of the Freezing of Assets of Corrupt Foreign Officials Act, enacted after the date of publication of the Guide).
Generally, the Guide outlines procedures for compliance with the "duty to determine" and reporting requirements that arise when Canadians (including Canadians outside Canada) have in their possession or otherwise deal with the property of designated persons under Canadian Sanctions Laws. The Guide is targeted towards users who are federally regulated financial institutions, but provides information that may be useful for many different types of Canadian businesses.
Lists of Designated Persons
How do you know whether or not you are dealing with property of a designated person? OSFI and the Department of Foreign Affairs and International Trade (DFAIT) each maintain lists (the OSFI Lists and the DFAIT Lists) of individuals and entities designated under Canadian Sanctions Laws. Click here to view the current OSFI Lists. Click here to view the current DFAIT Lists. 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. This service also provides notices of de-listing of designated persons under Canadian Sanctions Laws, however, it is important to note that the OSFI Lists and the DFAIT Lists must all be checked, as none of them covers all Canadian Sanctions Laws.
On March 23, 2011, OSFI released a list of individuals designated under the Freezing of Assets of Corrupt Foreign Officials (Tunisia and Egypt) Regulations. This list is now included with the OSFI Lists.
How Sanctions Legislations Affects Your Business
As noted above, generally Canadian Sanctions Laws apply to every person in Canada and every Canadian outside Canada. The requirements under Canadian Sanctions Laws will vary depending on the nature of your business and may include:
- Trade prohibitions, including prohibitions against providing brokerage services, financial services or entering into financial transactions relating to property owned or controlled by a designated person – this prohibition applies to services provided directly or indirectly and is very broad in scope.
- A requirement to seize or freeze property (including money) of designated persons that may be in your possession, and to only "unfreeze" those assets in connection with a properly issued government certificate.
- A requirement to obtain a Ministerial permit to carry out a specified activity or transaction or any class of activity or transaction that is otherwise restricted or prohibited.
- Disclosure obligations to the Royal Canadian Mounted Police, and in some cases, to the Canadian Security Intelligence Service and to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
- A requirement to determine, on a continuous basis (which OSFI interprets as being as often as reasonably possible, or at least weekly), whether you are in possession or control of property belonging to a designated person and submit monthly reports to your primary regulator (applies to certain entities only).
- A requirement to notify the Attorney General of Canada if you receive any communications relating to an extraterritorial measure of the United States in respect of any trade or commerce between Canada and Cuba from a person who is in a position to direct or influence the policies of your business in Canada (applies to Canadian corporations and entities registered in Canada only).
To determine whether you are dealing with property of a designated person, you may want to consider the following steps:
- Before accepting a new customer or doing a transaction with or on behalf of a customer, check the OSFI Lists and the DFAIT 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 Lists and the DFAIT Lists on a regular basis – for example, on a weekly basis – and whenever your customer database, the OSFI Lists or the DFAIT Lists are updated. You can consider obtaining software to do this automatically, depending on the size of your business.
- Any property – including any money – which you are holding on behalf of a customer whose name appears on one of the OSFI Lists or DFAIT 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 Lists and the DFAIT 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 Proceeds of Crime (Money Laundering) and Terrorist Financing Act may also want to rate customers located in countries subject to Canadian Sanctions Laws at a higher risk for money laundering and/or terrorist financing activities.
You should be aware of the following consequences for complying or failing to comply with the applicable requirements of Canadian Sanctions Laws:
- In some cases, the applicable Canadian Sanctions Laws specifically provides that there is no civil liability for freezing assets of a terrorist person or group.
- In some cases, there is criminal, or criminal and civil, immunity for good faith disclosure or reporting. However, where the legislation does not provide such immunity, your compliance with asset freeze orders or disclosure and reporting requirements may result in an allegation that you have breached a contract with your customer. You may wish to draft your contracts with these requirements in mind to protect yourself, rather than rely on a "required by applicable law" provision or defence.
- Of course, failure to comply with the applicable requirements under Canadian Sanctions Laws is an offence which can result in fines or imprisonment or both.
- Any publicity on this issue, but particularly related to non-compliance, is likely to have reputational risk.
Finally, it is important to keep in mind that indemnities are not a complete solution in these circumstances, as they cannot be expected to insure against damages resulting from a conviction or damage to reputation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.