On June 22, 2023, the Budget Implementation Act, 2023, No. 1 received Royal Assent. The new legislation enacted several key amendments to Canadian sanctions legislation, which impact regulated financial institutions and businesses operating in and outside Canada. This bulletin provides an overview of key new requirements:
- A new control test for list-based prohibitions under Canada's sanctions legislation.
- A new requirement to report property of designated persons to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
- Sanctions enforcement by the Canadian government, with the seizure of a Russian cargo plane at Toronto Pearson Airport.
- Several amendments to other existing jurisdiction-specific regulations.
New Control Test for List-Based Canadian Sanctions
Effective June 22, 2023, a new control test applies for
list-based prohibitions under Canada's principal sanctions
legislation, the Special Economic Measures Act (SEMA) and
the Justice for Victims of Corrupt Foreign Officials Act
(Sergei Magnitsky Law) (SML). Specifically, when the
Government of Canada designates a person under these Acts, it is
generally prohibited to deal in any property that is owned, held or
controlled by or on behalf of the designated person. A new deeming
provision added to the legislation now provides that if a
designated person controls another entity, any property of that
entity is deemed to be owned by the designated person. As a result,
the entity the designated person controls is subject to the same
dealing prohibition that applies to the designated person.
The legislation also introduces a new control test. Specifically, a
designated person will be deemed to control an entity if
one of the following three conditions is met:
- 50% Rule. The designated person directly or indirectly holds 50% or more of the shares or ownership interests in the entity, or 50% or more of the voting rights in the entity. Similar to the equivalent rule under United States law, the control threshold is at 50% rather than a majority of shares or ownership interest.
- Board Composition or Powers Rule. The designated person is able to change the composition or powers of the entity's board of directors directly or indirectly. This condition is very broadly drafted and, unlike other jurisdictions that have a similar control test, does not specify a minimum number or percentage of board members that a designated person may appoint.
- Ability to Direct Rule. It is reasonable to conclude, having regard to all the circumstances, that the designated person is able to direct the entity's activities directly or indirectly and through any means.
The control test does not apply in respect of control of a
foreign state by designated persons. This exclusion ensures that
the designation of senior government officials does not
automatically extend to the foreign government as a whole. The new
control test under sanctions legislation also does not address
scenarios where multiple designated persons are involved in the
ownership and management of an entity. In addition, the control
test is not incorporated into the other Canadian sanctions
statutes, such as the United Nations Act, the Freezing
Assets of Corrupt Foreign Officials Act or the Criminal
Code.
The new definition of control is a welcome step towards clarifying
an important threshold issue for Canadian sanctions compliance.
However, the second and third elements of this new test will raise
practical compliance challenges. Specifically, these elements
require deeper and more nuanced scrutiny to determine control than
simply tracing the ultimate beneficial ownership of a counterparty.
Companies should carefully consider how to incorporate this broad
and nuanced definition into their sanctions compliance programs and
on a case-by-case basis where due diligence identifies a designated
person with a connection to a proposed transaction or
engagement.
While the new control test reflects in many respects similar rules
in other jurisdictions, such as the United Kingdom and European
Union, these jurisdictions have issued regulatory guidance on how
the qualitative elements of the control test are to be applied. No
guidance has been issued by Global Affairs Canada in respect of the
newly enacted control test. In this respect, it may be helpful for
Canadian businesses to refer to the Advisory that Canada's federal financial
institutions regulator, the Office of the Superintendent of
Financial Institutions (OSFI) issued. The Advisory provides
guidance on the application of the control in fact test under
federal financial institutions statutes. It is important to keep in
mind, however, that the control definition under federal financial
institutions legislation is different from the control test under
SEMA and SML. Therefore, not all aspects of the OSFI Advisory will
be appropriate in the context of sanctions legislation.
As noted, the new control test under SEMA and SML is in effect as
of June 22, 2023.
Sanctions Reporting Under FINTRAC
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) — Canada's federal anti-money laundering legislation — has also been amended to require regulated financial institutions and other reporting entities subject to the PCMLTFA to report to FINTRAC any property they hold that is owned or controlled by a person designated under SEMA or SML, in addition to the current terrorist property reporting requirement. This new reporting requirement is not in force yet and will take effect by an order of the federal government. It is expected that FINTRAC will issue guidance and reporting instructions once the new requirement takes effect.
Sanctions Enforcement
The continued conflict in Ukraine has allowed the federal government to use sanctions legislation as a tool to pressure Russia to cease its aggression against Ukraine. 2022 amendments to SEMA grant the federal government powers to seize, forfeit, dispose and redistribute assets owned by persons designated under SEMA or SML. The first two enforcement actions under SEMA occurred on December 19, 2022, and June 10, 2023, respectively. The December enforcement action, made under an Order in Council, restrained US$26-million from a company the federal government concluded was owned by a designated person. The second, more recent enforcement action, occurred on June 10, 2023, when the federal government seized a Russian cargo jet located at Toronto's Pearson Airport. This was the first example of a physical asset seizure under the revised SEMA enforcement provisions.
Other Sanctions Developments
In May 2023, the Government of Canada enacted new Special
Economic Measures (Moldova) Regulations designating several
persons due to their connections with Russia.
In June 2023, the Government of Canada made several new
designations under the Special Economic Measures (Haiti)
Regulations and the Special Economic Measures (Iran)
Regulations.
Effective June 19, 2023, the Government of Canada enacted the
Regulations Amending Certain Regulations Made Under the United
Nations Act. This regulation amends 14 existing regulations
made under Canada's United Nations Act to remove the
need for humanitarian organizations to apply for ministerial
authorizations in line with recently adopted United Nations
Security Council Resolutions. Amendments were also made to the
Criminal Code provisions under Bill C-41 to address humanitarian assistance
involving Afghanistan.
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