Canada: Canada Intends To Become First G7 Nation Allowing Forfeiture Of Sanctioned Persons' Assets To Compensate Victims

On April 26, 2022, Canada's Minister of Foreign Affairs, Mélanie Joly, emphasized Canada's commitment to continuing to "apply maximum pressure on the Putin regime and impose severe costs for this war of choice". As a demonstration of this commitment, the Canadian government has announced yet another round of amendments to the Canadian sanctions regime, this time allowing "for the forfeiture of the assets of sanctioned individuals and entities and [for the compensation of] victims with the proceeds".¹ Notably, according to Minister Joly's statement, Canada's sanctions regime will be the first in the G7 to take this action.

These measures, set out in the Canadian government's Notice of Ways and Means Motion to introduce an Act to implement certain provisions of the budget tabled in Parliament on April 7, 2022 and other measures ("Notice"), will form part of the budget implementation bill. This bill will contain hundreds of legislative amendments from commitments made in the 2022 federal budget and will need to go through the legislative process at the House of Commons and the Senate before it becomes law. The budget implementation bill is expected to pass without issues, in light of the recent agreement made between the Liberal and the NDP governments.

In recent days, Canada has also added an additional 14 oligarchs, close associates of the Russian regime, and members of their families to Schedule 1 of the Special Economic Measures (Russia) Regulations ( effective April 19, 2022) and an additional 11 senior officials and 192 other members of the People's Councils of the so-called Luhansk and Donetsk People's Republics who are complicit in the Russian regime's ongoing violations of Ukraine's sovereignty and territorial integrity to the Special Economic Measures (Ukraine) Regulations ( effective April 26, 2022).

For more details regarding other recent rounds of sanctions measures, please refer to our client alerts from  February 28, 2022,  March 2, 2022,  March 14, 2022,  March 29, 2022, and  April 7, 2022.

Proposed new power to seek forfeiture of sanctioned persons' assets

Currently, the  Special Economic Measures Act ("SEMA") and the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) ("Magnitsky Law") allow the Governor in Council to make orders under certain conditions, such as where a grave breach of international peace of security has occurred or gross and systematic human rights violations have been committed in a foreign state. Such orders may include causing certain property located in Canada to be "seized, frozen, or sequestrated" (or, as proposed in the Notice, "seized or restrained") ("4(1)(b) Order").

The proposed changes allow the Minister to seek a court order (a "Forfeiture Order") from a judge requiring property that is the subject of a (4)(1)(b) Order to be forfeited to the Canadian government if that property is owned by the foreign national or person referred to in that order or is held or controlled, directly or indirectly, by that foreign national or person.

Any costs incurred by the Canadian government in seizing or restraining property subject to a 4(1)(b) Order or disposing of property subject to a Forfeiture Order are a liability of the property owner, which may constitute a debt to the government.

Significantly, the Notice also proposes to expand the definition of property for purposes of both SEMA and the Magnitsky Law so it now covers "any type of property, whether real or personal or immovable or movable, or tangible or intangible or corporeal or incorporeal, and includes money, funds, currency, digital assets and virtual currency".

This expanded definition of property not only applies to the new forfeiture powers, but also the existing prohibitions and obligations under Canadian sanctions regulations, including prohibitions in dealings or facilitation of dealings in sanctioned persons' property as well as obligations to disclose the existence of such property to the Royal Canadian Mounted Police or the Canadian Security Intelligence Service. It is now clear that covered property includes digital assets and virtual currency.

Court orders available to protect property holder interests

Where property is subject to a (4)(1)(b) Order, and accordingly has or may be seized or restrained, the proposed amendments allow a person whose property is the subject of the order to apply in writing to the Minister requesting that the property "cease being the subject" of that order. This application may be made at any time, but must be made before a Forfeiture Order is made.

If the Canadian government wishes to seek a Forfeiture Order, it must provide notice to any individuals who appear to have an interest in or right to the property. The amendments further provide that the court "may hear any such person".

After a Forfeiture Order is made, the proposed amendments generally allow those who claim an interest in or right to the forfeited property to apply to a court for an order "declaring that their interest or right is not affected by the forfeiture, declaring the nature and extent of the interest or right and directing the Minister to pay to the person an amount equal to the value of their interest or right". This written application must be submitted within 30 days of the property being forfeited, so interested parties must move relatively quickly to preserve their interests.

The Canadian government could use the proceeds for Ukraine's recovery

The proposed amendments to SEMA would allow proceeds received from the disposition of forfeited property to be used for the following purposes:

Proceeds seized pursuant to the Magnitsky Law could also be used to compensate victims of the circumstances described in subsection 4(2) of that Act (e.g., if a foreign national is responsible for, or complicit in, extrajudicial killings, torture or other gross violations of internationally recognized human rights).

The proposed amendments also allow the Minister of Foreign Affairs to enter into agreements with international counterparts, permitting funds to be used for these purposes.

Expansion of powers to grant general permits under SEMA

While the Magnitsky Law already explicitly allows for the issuance of general permits, SEMA does not reference general permits. Subsection 4(4) of SEMA allows for the issuance of a permit to any person in Canada or Canadian outside of Canada to carry out a specified activity or transaction or any class thereof that is restricted or prohibited. The proposed amendments now clarify that the Governor in Council will have the ability to issue a "general permit" for such prohibited or restricted activities.

This appears to be more of a housekeeping amendment to align SEMA and the Magnitsky Law and to make it clear that general permits may be issued. On very rare occasions in the past, permits have been issued under SEMA that are available to any persons in Canada or Canadians outside Canada – for example, in 2020 a broad SEMA permit was issued for financial or related services required for Canadians to make travel arrangements to leave Syria in the context of COVID-19 related departures.

The clarified power to issue general permits should be helpful in allowing Global Affairs Canada ("GAC") to deal en masse with many of the inquiries and permit requests it is currently receiving from Canadians and Canadian companies regarding conduct that may constitute a violation of Canada's SEMA sanctions issued in response to Russia's invasion of Ukraine. For example, we may see the issuance of a general permit akin to the U.S. Department of the Treasury's Office of Foreign Assets Control's General License No. 13, which allows U.S. persons to pay taxes, fees, and duties, and purchase or receive permits, licenses, registrations or certifications to the extent they are prohibited and related to transactions involving the Russian Central Bank or Ministry of Finance and provided "such transactions are ordinarily incident and necessary to such persons' day-to-day operations in the Russian Federation". We could also see general permits authorizing the winding down of transactions that violate or pose a risk of violating sanctions laws in particular in respect of dealings with sanctioned Russian banks and other parties, as another example.

General permits can provide much-needed clarity regarding the application of sanctions laws – for which no guidance currently exists in Canada. We also expect to see guidance issued by GAC in the near future.

New powers to compel information

The proposed amendments also contemplate providing the Minister of Foreign Affairs with the power to require "any person" to provide "any information that that Minister believes on reasonable grounds is relevant for the purposes of the making, administration or enforcement" of certain sanctions-related orders or regulations. Recipients would be statutorily obligated to provide the required information within the time and in the form and manner specified in the request.

Presumably, the Minister may rely on this in order to demand information regarding dealings with sanctioned persons and any property of sanctioned persons that is in the possession or control of Canadian banks and other entities. Currently, any person in Canada or Canadian outside Canada who is in possession or control of property owned or controlled directly or indirectly by sanctioned persons (or entities owned or controlled by sanctioned persons) must immediately disclose the existence of that property and information regarding related transactions to the Royal Canadian Mounted Police or the Canadian Security Intelligence Service.

New purpose clause for SEMA

The proposed amendments also contemplate adding the following purpose clause for SEMA:

This purpose clause will be useful for interpreting and making arguments regarding the proper interpretation of this important piece of legislation.

The McCarthy Tétrault International Trade and Investment team will continue to monitor as the situation in Russia and Ukraine continues to evolve, and as these amendments go through review by the House of Commons and the Senate.

It remains essential that Canadian companies remain apprised of the rapidly shifting sanctions landscape, as these measures pose significant risk to business at home and abroad.

Footnote

1 Kanishka Singh, "Canada to alter sanctions law to allow paying compensation from sanctioned assets" (April 26, 2022), Financial Post, online:  https://financialpost.com/pmn/business-pmn/canada-to-alter-sanctions-law-to-allow-paying-compensation-from-sanctioned-assets.

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