Canada: Recent Prosecution For Contravention Of Iran Sanctions

Alberta-based Lee Specialities Ltd. ("Lee") recently pleaded guilty to a charge of exporting controlled goods to Iran, in contravention of the Special Economic Measures (Iran) Regulations (the "Iran Regulations" or "Regulations") adopted under the Special Economic Measures Act ("SEMA"). This is the first time that a conviction has been obtained pursuant to SEMA.

In an agreed statement of facts filed with the Provincial Court of Alberta on April 14, 2014, Lee admitted liability under the Regulations for having attempted to ship certain controlled goods to Iran without a Ministerial permit. Pursuant to a plea bargain, Lee will pay a fine of $90,000. 

This alert provides a brief overview of the facts surrounding the conviction, an overview of the sanctions, and lessons for Canadian companies.

Facts

Lee is an oilfield equipment company. In January 2012, officers of the Canada Border Services Agency (CBSA) stationed at the Calgary International Airport inspected a shipment from Lee that was destined for Iran and discovered that 50 Viton O-Rings were part of the cargo. The O-rings were intercepted and seized by the CBSA. 

The seemingly innocuous products in question are made with Viton, a form of synthetic rubber that can withstand high temperatures, chemical reactions and radiation. This makes them useful in both oilfield and nuclear applications, among other things. Viton O-rings are low-priced, high volume items that are readily available at many industrial supply outlets in Canada and the U.S..

Lee has maintained that the attempted shipment of the O-rings to Iran was the result of an innocent internal logistical error. Lee explained that the recipient company had offices in Dubai and Iran, and that Lee had intended to ship the O-rings to the Dubai location. The total value of the intercepted shipment was apparently $15. Nevertheless, the CBSA and the RCMP executed three search warrants against Lee in February 2013, following which Lee was formally charged with making a false statement under the Customs Act and contravening or failing to comply with both SEMA and the United Nations Acts. The Customs Act and United Nations Act charges were apparently withdrawn in connection with the plea bargain.

Sanctions regime

The Regulations were first enacted under SEMA in 2010, but have since been amended and expanded several times.  These unilateral measures built on existing economic sanctions against Iran enacted under the United Nations Act (which is the legislative tool for the implementation by Canada of U.N. Security Council resolutions).

The Regulations severely restrict trade between anyone in Canada or any Canadian outside of Canada and an extensive list of Iranian-based entities and individuals.  Specifically, section 4 of the Regulations prohibits the exportation, sale, supply or shipment of any goods to Iran or to any other location for the purposes of a business that is carried on or operated from Iran, with certain exceptions. Schedule 2 to the Regulations lists certain goods to which no exceptions apply, and seals and gaskets that are made of Viton or other fluoro-elastomers appear in paragraph 28 of that schedule. 

In addition to SEMA and the United Nations Act, the Canadian government is also authorized to impose sanctions and other restrictions on international trade and trade with designated individuals and entities pursuant to the Export and Import Permits Act, the Criminal Code and the Freezing Assets of Corrupt Foreign Officials Act. Currently, Canada imposes economic controls of varying degrees on the following countries: Belarus, Burma, Cote d'Ivoire, the Democratic Republic of the Congo, Eritrea, Guinea-Bissau, Iran, Iraq, Lebanon, Libya, Liberia, North Korea, Russia, Somalia, Sudan, Syria, Tunisia and Egypt, Ukraine, and Zimbabwe.

Lessons from the Lee conviction

Although charges and convictions under Canadian sanctions laws are uncommon, the Lee case indicates that Canadian authorities are monitoring exports destined for sanctioned countries and are prepared to enforce sanctions even in respect of seemingly minor infractions. Lee was subjected to a $90,000 fine even though it was apparently a first-time offender, the shipment was inadvertent and the O-rings in question represented a $15 component of an otherwise-legitimate $6,000 shipment to an Iranian-based company. The nature of the goods under scrutiny and not their value appears to have been the most relevant factor considered by the authorities in determining whether to prosecute and seek a penalty under the Regulations. 

It is also important to note that Canadian exporters are at risk of liability where they knowingly facilitate or turn a blind eye to efforts by their customers to circumvent sanctions. Section 8 of the Regulations, for instance, contains anti-circumvention language that prohibits "causing, assisting or promoting" or intending to "cause, assist or promote" the shipment of controlled goods to Iran or to designated Iranian persons. For example, shipment of controlled goods to a third-country subsidiary or intermediary, where the Canadian exporter knows or is wilfully blind to the possibility that the goods may be transhipped to a sanctioned country or party, may attract liability under the Regulations or other sanctions provisions.

More generally, the Lee conviction serves as a reminder to exporters of the importance of implementing robust export controls and sanctions compliance programs. At a minimum, such a program should involve measures to diligently verify the ultimate destination of exported products and the bona fides of their intended recipients. To further protect exporters, appropriate representations and warranties should also be incorporated in all export sales agreements, purchase orders, foreign sales and buying agent agreements making it clear that the exporter will not tolerate violations of applicable export controls and sanctions laws. 

The sanctions landscape is rapidly evolving and becoming more complex for Canadian exporters as the Canadian government adapts its foreign policy to world events. Dentons' international trade professionals can assist you to navigate this landscape to make the most of international business opportunities while reducing the risks.

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Dentons is a global firm driven to provide you with the competitive edge in an increasingly complex and interconnected marketplace. We were formed by the March 2013 combination of international law firm Salans LLP, Canadian law firm Fraser Milner Casgrain LLP (FMC) and international law firm SNR Denton.

Dentons is built on the solid foundations of three highly regarded law firms. Each built its outstanding reputation and valued clientele by responding to the local, regional and national needs of a broad spectrum of clients of all sizes – individuals; entrepreneurs; small businesses and start-ups; local, regional and national governments and government agencies; and mid-sized and larger private and public corporations, including international and global entities.

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