In response to recent events in North Africa, Canada has imposed economic sanctions on Libya and certain controls in respect of designated individuals in Tunisia and Egypt.
On February 27, 2011 Canada passed Regulations Implementing the United Nations Resolution on Libya and Taking Special Economic Measures (the "Libya Regulations"), which implement United Nations Security Council (the "UN") Resolution 1970 (February 26, 2011). In addition, as was previously the case in respect of Iran, Canada imposed measures under the Special Economic Measures Act ("SEMA") beyond those initially required by the UN. Subsequent to Canada passing the Libya Regulations, the UN also passed Resolution 1973 (March 17, 2011). This latter Resolution authorized the No‐Fly Zone and also amended Resolution 1970 to expand the scope of the original asset freeze.
On March 23, 2011, under the authority of recently passed legislation and on the advice of both Egypt and Tunisia, Canada promulgated the Freezing Assets of Corrupt Foreign Officials (Tunisia & Egypt) Regulations, (the "Tunisia and Egypt Regulations") imposing an asset freeze against certain public officials associated with the failed regimes in those countries.
These new regulations should become part of the export compliance and screening protocols of Canadian companies who do business not just in and around the countries involved, but in international business more generally.
Non-Canadians in Canada may also be affected. Moreover, due to the freezing of foreign assets in Canada, the sanctions may also have implications for Canadian companies doing business at home.
Finally, as is increasingly the case with Canadian sanction regimes, financial institutions also have special obligations of self‐monitoring and reporting under both Regulations.
Measures and Sanctions Involving Libya
The measures contemplated by the Libya Regulations include the following:
1. Prohibitions against the export, sale, shipment and other provision of arms and related materials to Libya.
2. Prohibitions against the provision of technical, financial, and other assistance related to military activities or the use of arms and related material.
3. An asset freeze that forbids Canadians from dealing with designated individuals and entities (and the property of same) including Libyan government entities and institutions.
4. Monitoring and reporting obligations for financial institutions.
This alert addresses items 3 and 4 in further detail.
a) Designated Persons
UN Resolution 1970 designates a number of Libyan individuals and entities, including Colonel Muammar Gaddafi and members of his family, as subject to sanctions. Canada's implementation of Resolution 1970 means that persons in Canada and Canadians outside Canada are essentially prohibited from entering into any transaction with, or providing any service or benefit to, these designated individuals. More specifically, Canadians or persons in Canada are prohibited from dealing directly or indirectly with any property in Canada that is owned or controlled by designated persons or by a person acting on behalf of, or owned or controlled by, a designated person, or entering into or indirectly facilitating any dealings in respect of such property.
In addition, Canadians or persons in Canada may not directly or indirectly provide any property, financial, or other related services to a UN‐designated person or their agent.
b) Libyan Government Departments, Institutions and Agencies
Canada's sanctions as authorized under SEMA also impose an asset freeze on Libya itself, which is to say the government of Libya, any of its political subdivisions, and any of its departments, institutions or agencies, all of which are considered "designated persons" for the purposes of section 8 of the Libya Regulations.
This freeze forbids Canadians and persons in Canada from engaging in any of the following:
1. dealing in any property, wherever located, held by or on behalf of a designated person, or entering into or facilitating any transaction or providing any financial or other related service in respect of such dealings;
2. making any goods, wherever located, available to a designated person; and
3. providing any financial or financial‐related service to or for the benefit of a designated person.
Resolution 1973, passed subsequent to the Libya Regulations on March 17, 2011, extended the Resolution 1970 asset freeze to include some of the main Libyan entities captured by Canada's unilateral sanctions. As a result, both sections 7 and 8 of the Libya Regulations now apply to the Central Bank of Libya, the Libyan Investment Authority, the Libyan Foreign Bank, the Libyan Africa Investment Portfolio and the Libyan National Oil Corporation. As these are entities that are doing business globally, Canadian companies must look closely at who their customers really are, even where transactions occur outside Canada or Libya.
c) Other Obligations
Every person in Canada, and every Canadian outside of Canada, is required to immediately disclose to the Royal Canadian Mounted Police and to the Canadian Security Intelligence Service the existence of property in their possession and control where there is reason to believe such property is owned or controlled by a designated person or an agent. Actual or proposed transactions related to such property must also be disclosed.
As with all economic measures of this sort, financial institutions have an additional and continuing duty to monitor, assess and disclose whether they are in possession or control of any property owned or controlled by or on behalf of a designated person. The Superintendent of Financial Institutions' June 2010 Instruction Guide: Designated Persons Listings and Sanctions Laws and more recent Notice respecting the Libya Regulations provide guidance for Canadian financial institutions subject to these sanctions.
The sanctions in place against Libya do not constitute a ban on all financial dealings to or from Libya; transactions are permitted provided that they do not infringe any of the prohibitions in sections 7 and 8 of the Libya Regulations. To recap, transactions are prohibited if they involve designated persons or their property, or are being conducted on behalf or for the benefit of a designated person. Each transaction must be assessed individually, and reflecting this relative uncertainty and the pervasiveness of the Central Bank of Libya (a designated entity) in the Libyan marketplace, at least some large Canadian financial institutions have decided to err on the side of caution by freezing all or most transactions involving Libya. Consequently, some Canadian firms are already experiencing significant complications and interruptions in their legitimate transactions involving Libya.
Measures Involving Tunisia and Egypt
Canadian measures involving Tunisia and Egypt are more focused but nevertheless merit the attention of Canadian companies. On March 23, 2011, Bill C‐61, the Freezing Assets of Corrupt Foreign Officials Act (the "Act") came into effect. The Act allows Canada, upon request by the relevant country, to freeze the assets of "politically exposed foreign persons" ("PEFP") in cases where the PEFP has allegedly misappropriated the property of a foreign state or inappropriately acquired property by virtue of official, personal or business relationships. Targeted persons can include high‐ranking officials in government and the military, directors of state‐owned businesses, diplomats, judges and so on. The intent of the legislation is to prevent the safekeeping in Canada of looted or embezzled foreign assets.
The Tunisia and Egypt Regulations were published contemporaneously with the Act and prohibit the following activities by anyone in Canada in respect of 69 (at the date of publication) listed PEFPs in Tunisia and Egypt:
- dealing, directly or indirectly, in any property of a listed person located anywhere in the world, or entering into financial transactions related to such property; and
- providing financial services or other related services in respect of any property of a listed person.
For the purposes of the Act, property of a PEFP includes property controlled directly or indirectly by that person.
As with the Libya Regulations, the Act imposes continuing searching, freezing, monitoring, disclosure and due diligence obligations on Canadian financial institutions. Implementation of the Tunisia and Egypt Regulations requires financial institutions to identify financial assets to which the asset freeze applies. Financial institutions are also required to identify prohibited financial transactions to ensure that transactions and/or financial services provided to designated PEFPs are blocked and reported as appropriate, including at any branches of financial institutions outside Canada.
The prohibition on financial services applies to property services such as asset management, lending (including mortgage lending), the provision of property insurance and other insurance policies and services, and other financial services. The Superintendent of Financial Institutions has also provided guidance on these duties.
Further, every Canadian has an obligation to immediately report to the RCMP the existence of property in their possession or control that they have reason to believe is the property of listed person, a person or entity owned or controlled by a listed person, by someone acting on a listed person's behalf, or by a person owned or controlled by them. Canadians are also required to disclose any information about any actual or proposed transaction related to such property.
As with the Libya Regulations, Canadian businesses may well discover that some legitimate transactions with individuals and entities in Egypt and Tunisia are interrupted by cautious financial institutions who are still seeking clarification on the scope and operation of the new Regulations.
Action Items for Ensuring Compliance
Canada increasingly uses trade controls and economic sanctions against failed or failing regimes as a mechanism to create pressure to change the conduct of those regimes. What this means to business is that an activity that was legal one day may become illegal or prohibited the next. Well designed and continuously‐monitored internal controls are necessary to react effectively to such changes in the law.
Apart from reducing the risk of liability and penalties imposed by legislation, an effective internal compliance regime has a role to play in minimizing business interruptions, informing transactional due diligence, and upholding contractual representations and warranties. Depending upon the nature of your business and clientele, as well as the comprehensiveness of your existing internal compliance protocols, the following steps may be appropriate:
- development or revision of export security plans and other internal compliance strategies to ensure proper identification and screening of sanctioned countries and individuals among existing and future customers;
- awareness training for employees and directors who are responsible for business development, sales, and regulatory compliance in general;
- review and possible revision of licences, standard sales agreements, supplier or service contracts, real estate leases and financial services and payment arrangements;
- review of in-process or contemplated M&A transactions, including asset purchases;
- screening of property, including intellectual property, in the company's possession or control which may be owned or controlled, directly or indirectly, by a sanctioned person or entity; and
- for financial institutions, deployment and continuous updating of systems for ongoing searching, monitoring and disclosure of suspect transactions so as to comply with the "duty to determine" imposed by sanctions legislation.
Canadian companies are also reminded that Canada's imposition of new sanctions and controls on trade will generally supersede, or place new limits on, any import or export permits which may have been granted prior to the sanctions taking effect. Certain exceptions or special permits may be available, but access to these should not be taken for granted.
As noted above, awareness by sales and business development personnel is a key guarantor of regulatory compliance. Guidance from the Export Controls Division of the Department of Foreign Affairs recommends that Canadian companies consider the following questions in performing their due diligence with respect to international transactions. While this screening tool was developed to foster compliance in the export of controlled goods, it is also a good starting point for evaluating foreign business interests against the prohibitions imposed by Canadian economic sanctions regimes.
- How well do you know the foreign customer? Is it difficult to obtain information about that company or entity?
- Is the customer reluctant to provide an end‐use assurance document for an exported product, or is information not forthcoming in comparison to past experiences with other customers?
- If you have done business with the customer before, is this an unusual request for him/her to make?
- Does the customer reject the customary installation, training, or maintenance services provided?
- Is unusual packaging and labelling required?
- Is the shipping route unusual?
- Is the customer offering unusually profitable payment terms, such as a much higher price than normal? Is the customer offering to pay in cash where the terms of sale would normally call for financing?
- Is the customer or the end‐user tied to the military or the defence industry, or to any governmental body?
Affirmative answers to any of these queries will indicate the need for further scrutiny of the contemplated transaction, and it may be prudent to seek professional advice before proceeding.
We would note in closing that Canada has also established controls on Canadian activities involving a number of other countries: Belarus, Burma (Myanmar), Cote d'Ivoire, Cuba, Democratic Republic of the Congo, Eritrea, Guinea, Iran, Iraq, Lebanon, Liberia, North Korea, Syria, Pakistan, Sierra Leone, Somalia, Sudan and Zimbabwe. Further, controls imposed by other countries, mainly the U.S., may effectively apply to exports by Canadian firms.
Our International Trade Group can assist you in creating or updating your compliance regimes to take account of these various measures and to ensure that your internal controls are adaptable to the inevitable issuance of new controls and sanctions in respect of other countries. As well, we have already advised and assisted clients in accessing statutory exemptions to the new measures set out above and in obtaining permits for otherwise restricted or prohibited activities or transactions.
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