The Government of Canada has established additional avenues to administer and enforce Canadian sanctions laws. Specifically, the Government is relying on the existing legislative framework under the Proceeds of Crime, Money Laundering, and Terrorist Financing Act (PCMLTFA) and its administrative agency, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) alongside the Canada Border Services Agency (CBSA) to establish a sanctions civil enforcement regime in the form of mandatory reporting on suspected sanctions evasion for prescribed entities, importers, exporters and those financing import/export transactions. The Government has also amended the Criminal Code, lessening the prosecution’s evidentiary burden when prosecuting money laundering charges (which may be tied to sanctions evasion). Finally, the Government has proposed amendments to expand the PCMLTFA’s terrorist property reporting regime to include reporting on property owned, held or controlled by designated persons.
The amendments to the PCMLTFA and the Criminal Code are outlined in Division 8 of Bill C-59, the Fall Economic Statement Implementation Act (Amendments), some of which will come into force on August 19, 2024. The proposed amendments to the PCMLTFA regulations were published on July 6, 2024 in Part I of the Canada Gazette and they remain open for consultation until August 5, 2024 (Proposed Amendments).
Developing a civil enforcement regime in relation to Canada’s sanctions may be novel, but it is hardly surprising. Canada’s sanctions legislation is penal in nature and therefore subject to criminal prosecution. Violating the Special Economic Measures Act (SEMA) can result in criminal charges and if convicted, imprisonment or large fines. Canada has been largely unsuccessful in investigating, charging and prosecuting sanctions violations under the criminal evidentiary standard of “beyond a reasonable doubt”. To date, there has been one successful prosecution under the United Nations Act. The first SEMA prosecution to go to trial resulted in an acquittal.
Establishing a civil enforcement regime that funnels information to enforcement agencies and permits searches, seizure, forfeiture and financial penalties for non-compliance, will provide Canadian enforcement agencies with a readily available tool to enforce a hard-line approach to a pressing concern of Canada’s allies – sanctions evasion – outside the evidentiary complexities of a criminal prosecution. Establishing this civil enforcement structure within the PCMLTFA makes sense from a legislative and a policy perspective. The PCMLTFA employs a civil and criminal enforcement structure and the Amendments align with Canada’s current focus on combatting money-laundering which is uniquely tied to sanctions evasion.
PCMLTFA Amendments
- Establishing Mandatory Reporting on “sanctions evasion offences” for PCMLTFA Reporting Entities
The Amendments define the concept of a “sanctions evasion offence”, under the PCMLTFA, Canada’s primary money laundering and anti-terrorist financing statute as follows:
- sanctions evasion offence means an offence arising from the contravention of a restriction or prohibition established by an order or a regulation made under the United Nations Act, the Special Economic Measures Act or the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law).
The “sanctions evasion offence” is not a standalone offence akin to a regulatory offence or an offence under the Criminal Code. It is a defined term for the purpose of establishing the reporting regime described below under the PCMLTFA.
The primary compliance requirement is identified under section 7 of the PCMLTFA, which establishes an obligation to report completed and attempted transactions where there are “reasonable grounds to suspect” a transaction is related to commission or attempted commission of a “sanctions evasion offence”. Given that the offence is incorporated under the PCMLTFA, only “Reporting Entities” (e.g. financial entities, money services businesses, securities dealers, real estate brokers, accountants) are required to comply with this new reporting requirement. FINTRAC’s guidance on the sanctions evasion offence is available here. While this new reporting requirement applies to a limited number of entities, we expect that this new compliance obligation will materially increase the information available to Canadian enforcement agencies.
Reporting is completed electronically on FINTRAC’s suspicious transaction reporting mechanism (Web Reporting System and API Report System). Reports should be filed “as soon as practicable” once a Reporting Entity has established that there are “reasonable grounds to suspect”. General FINTRAC guidance on STRs is available here. Note that Reporting Entities will be required to describe the details of the suspected sanctions evasion and the action that they have taken in their STR. Subsequent transactions where the suspicion remains must also be reported and can reference earlier reports; however new information should be reported.
“Reasonable grounds to suspect” is defined by FINTRAC guidance as being “a step above simple suspicion, meaning that there is a possibility that a sanctions evasion offence has occurred.” In order to reach this threshold, a Reporting Entity must have considered the facts, the context, and the relevant indicators evidencing sanctions evasion. FINTRAC suggests that Reporting Entities should rely on its joint financial intelligence advisory on the illegal procurement of dual-use goods by Russian end-users (Advisory) in order to identify the indicators of sanctions evasion. Although the Advisory is specific to Russia and dual-use goods, the contextual and financial indicators are meant to be used as a guide to apply to suspected evasion under any Canadian sanctions statutes.
When FINTRAC reasonably suspects that information would be relevant to investigating or prosecuting sanctions evasion, it must report to the relevant police force and it must disclose information to other government agencies where the information relates to sanctions evasion and falls within the mandate of that agency.
Section 10 of the PCMLTFA extends immunity for criminal and civil proceedings to persons filing STRs in good faith in relation to sanctions evasion. The Amendments also expand the criteria under sections 11.42(4) and 11.49(3) of the PCMLTFA, providing the Government authority to issue directives, impose limitations/prohibitions on financial transactions to safeguard the integrity of the Canadian financial system if there is a risk that a foreign entity or person is facilitating sanctions evasion which could adversely affect the integrity of the Canadian financial system or its reputation.
Non-compliance with the PCMLTFA may result in either civil penalties or criminal charges (but not both against the same issue of non-compliance). FINTRAC has authority to make non-compliance disclosure reports to law enforcement to assist in a criminal investigation. Criminal penalties range from fines of $250,000 to $2,000,000 and/or imprisonment from two years less a day to five years. AMPs range from $1 per violation for minor violations to $500,000 per violation for serious violations. While criminal penalties seek to punish wrongdoing, AMPs are typically proportionate to the administrative violation and seek to provide an incentive to take corrective action without being punitive. Importantly, FINTRAC maintains a voluntary disclosure program (Voluntary Self-Declaration) for unreported transactions.
These amendments come into force on August 19, 2024.
- Establishing Mandatory Importer/Exporter Declarations for Sanctions Evasion
The Amendments target trade-based money laundering and establish a reporting regime for imported and exported goods under the PCMLTFA (see new art 2.1, section 39.02(1)) and not the Customs Act, requiring certain persons to declare to a CBSA officer whether imported/exported goods are (1) being imported/exported are either proceeds of crime or are related to money laundering, financing terrorist activities or to “sanctions evasion”; and (2) whether the goods are actually being imported or exported.
Persons obligated to make declarations to CBSA officers include:
- Persons responsible for reporting goods imported under section 12 of the Customs Act;
- Persons responsible for reporting goods exported under section 95 of the Customs Act; and
- Persons engaging in financing/payment for imported or exported goods.
The person obligated to declare is tied to the method of import/export. For example, goods accompanying a person arriving in or departing from Canada must be reported by that person and goods being imported or exported by courier or as mail by either the exporter or importer of the goods. Persons making a declaration, and those that produce, supply, distribute or consume imported or exported goods, must keep records for up to 6 years.
While the obligation to declare imported or exported goods may be straightforward for those reporting under sections 12 and 95 of the Customs Act, the breadth of the obligation to declare in respect of financing or paying for imported or export goods remains unclear. Declarations must be made for “any financial transaction purporting to pay for goods being imported or exported”. This legislative drafting is broad and may include any financial transaction related to the import or export of the goods.
The CBSA has authority to retain goods until a declaration is made. Failing to make a declaration within a certain timeframe may result in forfeiture. CBSA Officers have authority to conduct personal searches of persons arriving in or leaving from Canada where they suspect on “reasonable grounds” that a declaration was not made, a declaration is not accurate or the person making the declaration has concealed certain goods.
CBSA officers also have authority to seize and forfeit goods when having “reasonable grounds” to believe that goods are proceeds of crime, or related to money laundering, financing terrorist activities or “sanctions evasion”. Note that both the declaration and the CBSA’s authority to seize and forfeit goods refers broadly to “sanctions evasion” and not the PCMLTFA-defined “sanctions evasion offence”. There are limited grounds for recourse if goods are seized; a seizure may be cancelled within 90 days if the government is satisfied there was no contravention. Additionally, the person from whom the goods were seized can make an application to the government to determine whether the goods are in fact proceeds of crime, related to money laundering or the financing of terrorist activities or to “sanctions evasion”. This appeal regime mirrors the existing regime under the Customs Act. The Amendments also set out a process for third party claims in relation to forfeit property.
The CBSA is granted broad authority to disclose information included in a declaration, including to local police, the Canadian Security Intelligence Service, the Department of National Defence and the Canadian Forces, the Canada Revenue Agency, Agence du revenu du Québec, the Competition Bureau, the Minister of Foreign Affairs, and other federal and provincial government bodies. The Government may also choose to disclose information included in a declaration with a government of a foreign state if that information is relevant to prosecution of a money laundering offence, terrorist activity financing offence or a sanctions evasion offence.
Notably, the Amendments provide authority for the Government to establish an administrative monetary penalty regime for failure to comply with declarations.
The Government has yet to specify a date for the coming into force of this novel reporting requirement and there remain many questions as to how importers, exporters and those financing import/export transactions will be expected to comply with the reporting requirement. For example, the Amendments do not specify the information to be included in a declaration and there is no statutory due diligence standard for determining whether goods are implicated in sanctions evasion.
Criminal Code Amendments
- Lowering the Evidentiary Burden for Prosecutors under Section 462.31 of the Criminal Code
The Amendments amend section 462.31 of the Criminal Code, which prohibits laundering proceeds of crime. This offence applies in relation to property or proceeds defined as “any property, benefit or advantage, within or outside Canada, obtained or derived directly or indirectly as a result of the commission in Canada of a designated offence.” Designated offences include indictable offences under the Criminal Code or other Canadian laws, including the SEMA.
Effectively, the Amendments lower a prosecutor’s burden of proof in respect of mens rea when prosecuting charges under section 462.31. A prosecutor is no longer required to prove that an accused “knew, believed they knew or was reckless” to the specific nature of the underlying criminal offence from which the proceeds of crime at issue were derived. A court can now infer that an accused meets the knowledge requirement if satisfied that “the manner in which the accused dealt with the property or its proceeds is markedly unusual or the accused’s dealings are inconsistent with lawful activities typical of the sector in which they take place, including business activities.” However, this lesser burden is only available when an accused is not charged with the underlying designated offence.
In a sanctions evasion context, this lower burden will likely assist prosecutors in pursuing charges under section 462.31 in cases where an accused “sends, transfers the possession of, sends or delivers to any person or place, transports, transmits, alters, disposes of or otherwise deals with” property or proceeds of property that is derived from a violation of the SEMA. For example, if a third party deals with property that was purchased from a Schedule 1 listed person, in violation of a SEMA regulation’s broad dealings prohibition, triggering the offences provision of the SEMA, a prosecutor need only prove a general mens rea showing that the property is proceeds of crime.
- Enhancing Investigative Tools
The Amendments also enhance Canadian enforcement agencies’ ability to conduct investigations by lowering the statutory requirements to obtain warrants for search and seizure of proceeds of crime or orders for restraint of proceeds of crime and by permitting production orders for financial data tied to digital assets (e.g. obtaining names and account numbers of a person where the requesting authority knows a crypto wallet number).
Proposed Expansion of Property Reporting for PCMLTFA Reporting Entities
In addition to the above-noted Amendments, the Government proposed to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations to expand the scope of property subject to FINTRAC reporting requirements. Currently, Reporting Entities must submit “Terrorist Property Reports” (TPR) to FINTRAC for property that is owned, held or controlled by certain terrorist entities, as triggered by obligations under the Criminal Code and the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism to disclose terrorist property to the RCMP and CSIS.
The Proposed Amendments will require Reporting Entities to file TPRs for property owned, held or controlled, and in certain instances, by or on behalf of, persons or entities designated under Canadian sanctions legislation and by certain foreign states. The proposed amendment’s prescribed list is as follows:
- a terrorist group as defined in subsection 83.01(1) of the Criminal Code;
- a person or entity that is the subject of an order or regulation made under the UN Act; or
- a foreign state, as defined in section 2 of the SEMA, that is the subject of an order or regulation made under the UN Act.
- a person or entity that is the subject of an order or regulation made under the SEMA;
- a foreign state, as defined in section 2 of the SEMA, that is the subject of an order or regulation made under that Act or the UN Act; or
- a person who is the subject of an order or regulation made under section 4 of the Justice for Victims of Corrupt Foreign Officials Act (JVCFOA).
This proposed reporting requirement is in addition to the duty to disclose under country-specific SEMA regulations, UN Act regulations, and the JVCFOA for persons in Canada and Canadians outside Canada to immediately disclose property in their possession or control that they have reason to believe is owned or controlled, directly or indirectly, by a designated person or an entity owned or controlled by a designated person.
Property is defined by FINTRAC guidance broadly to included anything “owned or controlled by a person or entity, whether tangible or intangible”. Reporting is not triggered by a transaction or an attempted transaction; it is triggered by the existence of property.
Consultations on these Proposed Amendments are open until August 5, 2024 and concerned parties can comment here.
Business Impact
The Amendments and the Proposed Amendments indicate a sea-change in Canadian sanctions enforcement. As of August 2024, Canada will have a civil penalty regime, which provides authority for FINTRAC to expediently punish trade-based money laundering activity, i.e. sanctions evasion. Although the PCMLTFA-specific amendments will only affect the compliance requirements for Reporting Entities, these entities include an array businesses operating in industries from real estate to finance.
Outside the Reporting Entity context, the new reporting requirements for importers, exporters and those financing import/export transactions will affect Canadian businesses not subject to the PCMLTFA. This new reporting requirement will add compliance costs and the associated business risks flowing from inadequate compliance programs designed to assess sanctions evasion. Importers and exporters will face the discretion of individual CBSA officers making determinations on whether declarations should have been filed in respect of goods subject to import/export, and the resulting risk of goods being detained, seized, and forfeit.
Entities affect by the Amendments and the Proposed Amendments should take note of the respective timelines for their coming-into-force and monitor for additional guidance issued by FINTRAC and the first iteration of guidance issued by the CBSA. Entities should ensure that their existing compliance programs are adapted to address the changes, including reviewing all published guidance to address sanctions evasion red flags.
