Canada: What Does Trump's Withdrawal From The Iran JCPOA deal mean for Canadian companies and trusts?

Last Updated: May 10 2018
Article by Cyndee Todgham Cherniak

 On May 8, 2018, U.S. President Donald Trump announced that the United States ("U.S.") will withdraw from the Joint Comprehensive Plan of Action ("JCPOA") with Iran. Canada was not a party to the JCPOA.  So, the U.S. being in or out of the JCPOA does not affect Canada directly.

That being said, President Trump's has directed the U.S. Administration to immediately start the process to re-impose economic sanctions against Iran.  Whether this means the Trump Administration will re-impose the pre-JCPOA sanctions or develop a new and improved/revised list that comprises old and new sanctions against key sectors of the Iranian economy (e.g., energy/oil, airlines, financial sectors) is anyone's guess.  What we do know is that new U.S. economic sanctions and trade restrictions against Iran are imminent and will be meant to punish Iran.

What does this mean for Canadian Companies and Trusts?

The short answer is that some Canadian businesses will not be able to engage in certain business activities with Iran or Iranian persons.  What is currently legal may become illegal or restricted under U.S. law.  This change can happen quickly.

Canadian companies (including subsidiaries of U.S. companies, affiliates of U.S. companies, and trusts) should undertake a risk assessment as soon as possible to determine whether any aspect of their business will be affected by the new U.S. economic sanctions against Iran.  The time to ask the questions is now.

First Question: Is there exposure?

Canadian companies, Canadian subsidiaries of U.S. companies, Canadian branches of U.S. companies and Canadian companies that purchase business inputs from the United States need to ask questions to define their exposure, such as:

  • Does the company/branch have any dealings with Iran or Iranian persons?
  • Are any existing contracts with Iran or Iranian persons?

If the answer is "yes" to either of these questions, it will be necessary to ask more questions. If the answer is "no", then there is little to worry about with respect to the new U.S. economic sanctions and trade restrictions against Iran.

U.S. sanctions can and do reach subsidiaries and branches of U.S. companies that are located in Canada. U.S. subsidiaries and branches will need to consider whether certain future transactions (or completion of existing transactions) will be prohibited by the re-imposition of sanctions by the Trump Administration.  We will talk about the exposure of wholly owned Canadian companies below in the section "Canadian Export Permits".

Second Area of Inquiry: Employees/Officers/Directors

For Canadian companies and multi-nationals in Canada (we assume that U.S. subsidiaries and branches will have Americans in the organization), an important question is whether decision makers are Americans.  U.S. law applies to Americans in the U.S. and outside the U.S.  If there are American individuals in the company, it may be that the decision tree within the organization may need to be adjusted to remove Americans from decisions on business with Iran and/or you may need to take further steps to ensure they are not in violation of U.S. sanctions.

Third Area of Inquiry - the Goods Sold to Iran

If there is business with Iran, what is the status of that business? Will there be deliverables after the re-imposition of US sanctions.  Will the Canadian company need to apply for a U.S. export permit or OFAC approval before completing a contract or fulfilling an existing contract?

We do not yet know the details about what is to be covered by the new economic sanctions.  In the meantime, each Canadian company with business in Iran needs to identify the contracts with Iran and what goods will be delivered and to whom.  Canadian companies need to be ready to stop certain export transactions. Even though the transaction may not be prohibited under Canadian economic sanctions, the U.S. economic sanctions and trade restrictions may apply

Canadian Export Permits

Canada controls the export from Canada of goods and technology that originates in the United States.  As a general rule (and pursuant to item 5400 of the Export Control List), exporters from Canada must obtain an individual export permit from Global Affairs Canada for U.S. origin goods and technology.  ECL Item 5400 covers:

"All goods and technology of United States origin, unless they are included elsewhere in this List, whether in bond or cleared by the Canada Border Services Agency, other than goods or technology that have been further processed or manufactured outside the United States so as to result in a substantial change in value, form or use of the goods or technology or in the production of new goods or technology."

Canadian companies who export goods and/or technology to Iran must obtain a Canadian Individual Export Permit for each shipment.  Global Affairs Canada will require a copy of a U.S. export permit.  If the new U.S. sanctions cover the goods in question, it is unlikely the Trump Administration will grant the U.S. export permit required by Global Affairs Canada.

There is an important clarification to the above rule.  Goods and technology that "have been further processed or manufactured outside the United States so as to result in a substantial change in value, form or use of the goods or in the production of new goods" are excluded from the controls is item 5400.  There is no written guidance on what "significant change" means.  While, as a rule of thumb, a "significant change" normally is normally around 50% of the regional value content in Canada, there are no rules for the calculation of regional value content in the context of Item 5400.  Other factors and considerations come into play.

When conducting the analysis, it is important to prepare a bill of materials for the finished product to be exported from Canada and identify which inputs are of U.S. origin. You will need to include the B3 customs documentation relating to the imports of the U.S. origin goods or the invoice received from a distributor or seller in Canada.  This is a starting point and the result can be influenced by the role of particular inputs in the finished product. For example, if the essential character of a finished product is derived from U.S origin goods, it can be that the finished good is controlled.

Canadian companies and trusts that sell Canadian manufactured goods to Iran will need to undertake a compliance review with respect to goods made from U.S. inputs and revisit their analysis.

Getting Paid

If the U.S. re-imposes economic sanctions on Iranian financial institutions, Canadian companies may find it more difficult to get paid.  Most business is conducted in U.S. dollars.  Many USD payments go through U.S.-based financial institutions.  If U.S. financial institutions cannot deal with certain Iranian banks, Canadian companies may run into difficulties getting paid too.

Canadian companies doing business with Iran should review the financial arrangements in contracts and restructure payment arrangements as needed.

Review Existing Lines of Credit and Loan Documentation

Canadian companies and trusts that do business with Iran should review all existing credit facility and loan agreements.  Many contracts contain representation and warranty provisions and covenants to comply with all laws, including U.S. economic sanctions laws.  Some agreements specify compliance with U.S. economic sanctions laws.  It is possible that a Canadian business will have to report certain business to their financial institutions under the credit facility and loan contracts and that activities relating to Iran would put those agreements in jeopardy.

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.

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