Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on International Trade & Investment, June 2011
Canadian laws governing international trade are becoming increasingly complex, a trend that is showing no sign of changing. Recently, the Government of Canada has adopted economic sanctions on certain types of exports to Syria, and has also made amendments to the Export Control List allowing for new scrutiny and control of exports. These changes have imposed a new layer of regulatory diligence that ought to be considered as part of any Canadian export transaction.
This bulletin examines these new developments. Given the risk of penalties for violating the terms of these regulations, prudence indicates that companies should consider reviewing their compliance mechanisms and policies to update them in light of these developments to ensure that they are current and robust.
Canada Enacts Economic Sanctions Against Syria
On May 24, 2011, Prime Minister Stephen Harper announced that he would be enacting various measures aimed at pushing for democratic reform in Syria. Included in these measures are economic sanctions enacted under the Special Economic Measures Act (SEMA) against the Government of Syria and associated entities involved in security and military operations.
Under SEMA, the Governor in Council may make orders or regulations which restrict or prohibit a person's ability to engage in certain activities with foreign states. These orders or regulations can be made in order to implement decisions, resolutions or recommendations of international organizations to which Canada is a member or in response to a foreign state's grave breach of international peace and security which could result in an international crisis.
With the Prime Minister's announcement, the Special Economic Measures (Syria) Regulations (the Regulations) came into force. The Regulations were enacted in response to the political turmoil in Syria. The Government of Canada believes that the Government of Syria's violent actions in response to peaceful protests are a grave breach of international peace and security which could result in an international crisis.
The Regulations impose economic sanctions against certain "designated persons" associated with the Government of Syria. The Regulations prohibit any person in Canada or any Canadian outside Canada from engaging in certain activities with designated persons. In addition, duties to determine and disclose property dealings with designated persons are outlined in the Regulations.
A designated person is defined as a person who is in Syria, or is a national of Syria who does not normally reside in Canada, and is listed in the schedule attached to the Regulations. The schedule organizes designated persons into the following two categories:
- Individuals believed to be former or current senior officials of the Government of Syria, including their associates and family members. This notably includes members of the Assad family; and
- Entities believed to be owned or controlled by the above-mentioned individuals or the Government of Syria. An example of such an entity is the General Intelligence Directorate.
If a person falls under the definition of a designated person, the Regulations prohibit a person in Canada or a Canadian outside Canada from engaging in certain activities with them. The list of prohibited activities includes providing goods to a designated person, dealing in property of a designated person, engaging in transactions with or providing financial service to a designated persons.
Nevertheless, the Regulations provide for several exclusions to the above-mentioned general prohibitions. An activity engaged in under an agreement between Canada and Syria, such as agreements by the Government of Canada to provide financial or other support will not violate the Regulations. Also exempted are payments made by a designated person under a contract entered into before the person became a designated person, provided that the payment is not made to or for the benefit of the designated person. Finally, any goods or services provided to certain organizations for the purpose of providing humanitarian relief will generally not violate the Regulations.
These exclusions seek to limit the detrimental effects of the economic sanctions to officials of the Government of Syria rather than Syrian civilians.
Duty to Determine
In addition to the general prohibitions, the Regulations impose a duty on certain financial institutions and insurance companies to determine on a continuing basis whether they are in possession of a designated person's property.
Furthermore, every person in Canada or every Canadian outside Canada must disclose without delay to the Royal Canadian Mounted Police: 1) the existence of property in their possession that they believe is a designated person's property; and 2) information of a transaction in respect of a designated person's property.
As long as disclosures are made in good faith then the disclosure obligations will always be satisfied.
Application to the Minister
The Regulations provide that a person may apply to the Minister of Foreign Affairs to be removed from the list of designated persons. In addition, a person claiming not to be a designated person can apply to the Minister for a certificate stating that the person is not a designated person as defined in the Regulations. Any decisions made concerning removal from the list or certificate of non-designation are made at the Minister's discretion.
Finally, persons may apply to the Minister for a permit allowing an activity that would otherwise be prohibited by the Regulations.
Canada's Export Control List Amended to Enhance Ministerial Discretion to Restrict Exports
Canadian exporters should be aware of a recent amendment to Canada's Export Control List.
Certain goods and technologies may not be exported from Canada without an export permit. The primary source of such controls is the Export Control List, established under the Export and Import Permits Act. These restrictions arise largely from international commitments made by Canada to control the proliferation of conventional arms, nuclear technologies, missiles, chemical and biological weapons, and "dual-use" items (items that have both civilian and military uses). The Export Control List is a lengthy and specific document, identifying listed items to a high level of technical precision. However, it also contains general controls, one of which is Item 5505, a "catch-all" provision originally intended to restrict exports of goods and technologies that could be used in connection with weapons of mass destruction. This Item was recently amended. The changes to Item 5505 give the Minister of Foreign Affairs broad new powers to scrutinize and control exports of goods or technologies.
There are two basic aspects to the amended Item 5505. First, the item now gives the Minister of Foreign Affairs broad authority to restrict exports if the Minister believes that the good or technology is likely to be used in the "development, production, handling, operation, maintenance, storage, detection, identification or dissemination" of chemical, biological, or nuclear weapons, or materials or equipment that could be used in such weapons. The Minister may also restrict exports of goods and technologies used in connection with missiles or other delivery systems for such weapons, related materials, or destined for use in a facility at which such weapons, systems and materials are produced, handled, etc.
The Minister must base this determination on the properties of the goods or technology, and any information as to the intended end-use or identities of the final and/or intermediate consignees. If the Minister makes such a determination, the restriction will apply to all export destinations. Even if a good is not covered elsewhere on the Export Control List, and even if nothing would lead the exporter to reasonably conclude that the good could have a prohibited use, the Minister may still prohibit its export. It is evident that this broad power has potentially serious ramifications for exporters of goods, particularly industrial manufacturing parts, technology and systems.
The government has indicated that the Minister will not publish a list of goods and technologies covered by Item 5505. Rather, the Minister (through the Department of Foreign Affairs and International Trade) will inform the exporter directly that a permit will be required for a given export. Generally, the government expects that the Ministerial determination will be made after goods have been detained at the border. As a result, the exporter may not learn that a permit is required until well after the shipment has been initiated.
Item 5505 also restricts exports if a "reasonable person" would suspect that the good or technology will be used for any of the restricted purposes or in any of the facilities discussed above. This restriction applies automatically: there is no need for a Ministerial decision. To be lawful, any export of such an item will require a permit. There is no requirement, however, to apply for a permit when the export is to one of 29 countries, including many of Canada's major trading partners. However, if the exporter believes that the goods or technology may be used in connection with weapons of mass destruction, the exporter may wish to apply for a permit even when the destination country is on this list, given the possibility that the Minister may later require a permit.
The original version of Item 5505 did not indicate the basis on which an exporter could have "reasonable grounds to suspect" that a good would be used in connection with a restricted purpose. The amendment has clarified that the grounds to suspect only arise from the properties of the goods or technology and any information that has been provided to the exporter. As such, the amended Item has helped to clarify the scope of an exporter's due diligence.
While Item 5505 has been clarified in this respect, the regulatory controls now enable the Minister to prohibit the export of nearly any goods or technology. Before stopping the export, the Minister must have reasonable grounds to suspect the goods or technology will likely be put to a prohibited purpose, but can do so even where the exporter does not have any information that would reasonably create suspicion about the use of the export. Thus, an export may be blocked even where the exporter had no reason to believe that a permit was required. Given these new powers and resulting uncertainty over permit requirements, exporters should keep detailed records of all exports, including to whom the goods and technologies are delivered (including, if known, any subsequent purchasers) and for what purpose. Exporters must also be aware of the additional level of potential uncertainty regarding completion and estimated delivery times for exports.
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.