Global Affairs Canada (GAC) recently released the first formal guidance (Guidance) on compliance with and enforcement of Canada’s economic sanctions regime. This Guidance was issued alongside further updates to GAC’s Frequently Asked Questions. While the Canadian business community has long awaited formal guidance, many interpretive issues remain unresolved.
Background
Amendments to Canada’s Special Economic Measures Act (SEMA) and Justice for Victims of Corrupt Foreign Officials Act were adopted in 2022 and 2023, which introduced an asset forfeiture regime, a deeming provision (expanding the scope of prohibited dealings under all country-specific sanctions regulations), and a secondary sanctions authority. This rapid expansion of the Government of Canada’s legal authority was driven, in large part, by a need for an aggressive foreign policy tool to respond to Russia’s war in Ukraine. While historically GAC has provided limited high-level FAQs, the legislative amendments underlined the business community’s need for substantive guidance.
The Guidance follows an internal evaluation of GAC’s Sanctions Bureau, which noted the Bureau’s post 2022 operational limitations as it grew (and continues to grow) into a formal regulatory agency. One recommendation flowing from the evaluation was to “formalize and publish comprehensive written guidance for the public and private sector” as the lack of guidance was out of step with the Cabinet Directive on Regulation.
The Guidance
The Guidance is structured into several sections:
- Essential Information – Provides an overview of sanctions legislation and its implementation, measures, permits, and enforcement processes and explains how GAC collaborates with CBSA, RCMP, and FINTRAC.
- Compliance Program Implementation – Lists common weaknesses resulting in sanctions violations and outlines GAC’s expectations for a robust sanctions compliance program: senior management commitment; risk assessment; internal controls; policies and procedures; testing and auditing; and training. Importantly, the Guidance includes examples of what GAC refers to as “reasonable due diligence” and emphasizes record keeping to codify due diligence procedures. This may illustrate scenarios where entities making voluntary disclosures due to inadvertent sanctions violations will not be criminally charged under the SEMA; however, the Guidance does not make representations on voluntary disclosures.
- Due Diligence – Includes a non-exhaustive list of red flags, which should trigger a detailed review of whether the facts at hand amount to sanctions circumvention. The red flags are organized into categories: business changes and ownership; links to designated persons; dual-use/high risk goods; end-user or end use of goods; location; financial; and shipping.
- Sectors – Provides industry-specific guidance for 4 sectors, including guiding questions to determine whether a proposed activity will result in a sanctions violation as well as a sampling of fact-based scenarios that might arise in each sector:
- Financial sector: Outlines obligations under the SEMA and the PCMLTFA and offers additional risk mitigation strategies in respect of cryptocurrency exchanges.
- Real estate sector: Highlights the unique risk of money laundering, including funds derived from sanctions evasion through real estate purchases and outlined obligations under the SEMA and the PCMLTFA.
- Academic and research sector: Highlights the unique risk of sanctions circumvention under the guise of academic collaboration providing access to university networks for purposes of surveillance (e.g. risk of data theft).
- Humanitarian sector: Tailored to Canadian charities and not-for-profits to manage sanctions risks, including in the delivery of humanitarian assistance.
While the Guidance provides high level interpretations of sanctions statutes, illustrative case studies, and sets expectations for compliance, it lacks the detail found in guidance issued by Canada’s allies (e.g. the U.S. Office of Foreign Assets Control (OFAC) and the U.K.’s Office of Financial Sanctions Implementation (OFSI). Additionally, interpretive gaps remain (e.g. the Guidance does not address the application of the unique services prohibitions included under the Russia Regulations, nor the application of secondary sanctions under the SEMA) and it does not provide insight into the RCMP’s voluntary disclosure process with respect to sanctions violations (i.e. factors to determine whether charges will be laid). Accordingly, obtaining certainty on the application of Canada’s economic sanctions to a particular transaction, absent a permit, may remain elusive.
Amended FAQs
The FAQs were reorganized into 4 sub-headings: (1) general sanctions information; (2) compliance and enforcement; (3) Russia Regulations; and (4) sanctions and academic institutions. While the March 2024 FAQs provided more substantive guidance that this latest round of amendments, the latest FAQs do clarify the compliance obligations of Canadian persons employed outside Canada by a foreign employer. The FAQs state that exerting control of a foreign incorporated entity’s decision making that directly or indirectly violates Canadian sanctions puts a Canadian person at risk of violating Canadian sanctions. Unfortunately, the FAQs do not provide further guidance on the application of the deeming provision and how to assess ownership and control, nor do they address the Russia Regulation’s services prohibition.
Business take-aways
1. Canada’s sanctions landscape continues to develop – Canada’s sanctions regime continues to expand in scope and complexity. Canadian persons are now subject to parallel criminal and civil statutory regimes and an ever expanding list of designated persons with a novel deeming provision. The Guidance provides, for the first time, an overview of a sanctions compliance program, which signals GAC’s expectations for the required due diligence before undertaking transactions.
2. Review the guidance – Businesses should review the Guidance’s compliance suggestions and conduct a gap assessment against their current procedures. Key areas to evaluate include:
- Governance: Is senior leadership formally endorsing sanctions compliance?
- Risk Assessment: Are sanctions risks identified and documented?
- Screening & Monitoring: Are counterparties and transactions screened effectively, including beneficial owners?
- Training: Is staff training tailored to sanctions risks?
- Record-Keeping: Are risk assessments and due diligence retained appropriately—and do they attract legal privilege?
While GAC does not audit compliance programs (unlike FINTRAC for reporting entities), a robust policy may provide leverage in negotiating a non-trial resolution in the event of a violation.
3. Seek out views of legal counsel – Legal advice is critical to:
- Consider how to conduct sanctions risk assessments and whether compliance records are protected by legal privilege.
- Structure compliance programs to align with GAC guidance and to minimize risk.
- Advise on due diligence measures.
- Address interpretive gaps in the guidance.
- Navigate potential non-compliance triggering an internal investigation.
