The Government of Canada recently introduced Part 1 of the budget implementation bill (Bill C-47), which completed its second reading before the House of Commons and has been referred to the Standing Committee on Finance. The Bill proposes novel amendments, including “deemed ownership” provisions (the “Deeming Provisions“) to the Special Economic Measures Act (“SEMA“) and the Justice for Victims of Corrupt Foreign Officials Act (the “Sanctions Laws“) and it demonstrates that the Government intends to rely on existing anti-money laundering (“AML“) enforcement regimes to eliminate sanctions circumvention and enforce sanctions compliance. Additionally, the Bill seeks to expand the Government’s authority to prohibit activities with specific persons under the SEMA.
This article discusses the proposed amendments and business considerations going forward. Our previous article on Canadian economic sanctions enforcement developments is available here and our recent webinar focusing on economic sanctions enforcement in the US, UK, EU, Canada, Turkey and the Gulf region is available here.
The Canadian Dealings Prohibition: Property, Ownership & Control
Determining whether property is owned or controlled by a designated person is a fundamental component of compliance with Canadian sanctions legislation. Under the Sanctions Laws, Canadian persons are prohibited, amongst other acts, from dealing in “property” that is owned, held or “controlled” by or on behalf of a designated person (the “Dealings Prohibition“). In June 2022, the Government clarified the definition of property under the Sanctions Laws, broadening its scope to include: “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”.
To date, the Government has not provided any guidance as to what constitutes “control” for the purposes of the dealings prohibition, and there remains no binding jurisprudence on this issue from Canadian courts. Additionally, unlike certain of its allies, the U.S. and the UK, Canada has not yet published guidance on determining when entities owned or controlled by designated person(s) are themselves also “blocked”.
- The U.S. Office of Foreign Assets Control (“OFAC“) published guidance on the application of its 50% Rule focused on ownership, and not control, which is described by the U.S. Department of the Treasury as follows: “any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed…Accordingly, a U.S. person generally may not engage in any transactions with such an entity, unless authorized by OFAC.” The OFAC guidance is clear: entities that are owned 50% or more by a designated person(s) are treated as designated persons.
- Under the UK sanctions framework, entities are deemed to be owned or controlled by a Designated Person when any of three criteria are met: (1) the Designated Person holds more than 50 percent of the shares or voting rights in an entity; (2) the Designated Person can appoint or remove a majority of the board of directors of the entity; (3) or it is reasonable to expect that the Designated Person can “ensure the affairs of the entity are conducted in accordance with the person’s wishes” (with the UK government having published guidance setting out a range of factors that should be considered as part of this assessment). The UK position is clear: when one of the three criteria is met, a Designated Person will be deemed to own or control another entity, and financial sanctions also apply to that owned / controlled entity in their entirety.
The Effect of the Proposed Amendments: The Deeming Provisions
As drafted, the Deeming Provisions establish when a designated person who controls an entity is deemed to own the property of that entity. In practice, this expands the scope of the Dealings Prohibition to apply to property of entities deemed to be controlled by a designated person. What remains less clear is whether the “entity” that is deemed to be controlled by a designated person should, akin to the U.S. and UK approaches, also be treated as a designated person. In other words, the Deeming Provisions do not specify whether an “entity” is considered “property” for the purposes of the Dealings Prohibition.
As noted above, the Dealings Prohibition only applies to “property” of designated persons. Although the definition of “property” is broad, meaning any type of property, including tangible and intangible, it does not refer to an “entity”, which is also defined under the SEMA as: “a body corporate, trust, partnership, fund, an unincorporated association or organization or a foreign state”. Despite the lack of clarity in the drafting of the Deeming Provisions, i.e. the apparent disconnect between “entity” and “property”, the Government may intend to replicate the deeming provisions of its allies and to treat entities that are controlled by a designated person, as a designated person. In essence, the Dealings Prohibition could apply directly to entities controlled by a designated person.
Establishing Control Pursuant to The Deeming Provisions
The Deeming Provisions deem a designated person to “control” an entity (except a foreign state) if one of three thresholds are met:
- The designated person holds, directly or indirectly, 50% or more of the shares or ownership interests in the entity or 50% or more of the voting rights in the entity (“50% Holdings Threshold“);
- The person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors (“Board Composition Threshold“); or
- It is reasonable to conclude, having regard to all the circumstances, that the sanctioned person is able, directly or indirectly and through any means, to direct the entity’s activities (“Unilateral Action Threshold“).
Although the Deeming Provisions do provide some insight into the applicable criteria to assess “control”, the Board Composition Threshold and the Unilateral Action Threshold are so broad that they fail to provide meaningful guidance on complying with the Sanctions Laws. As a result, the Deeming Provisions will apply broadly to a range of corporate structures and factual circumstances, which may in fact be the Government’s intended result.
50% Holdings Threshold
As drafted, it is unclear whether a single designated person must hold 50% or more of the shares, ownership interests or voting rights in an entity for the deeming provisions to apply or whether multiple designated persons, each holding less than 50% of the shares, ownership interests or voting rights in an entity, but collectively will meet the 50% Holdings Threshold. Should the Deeming Provisions come into force as drafted, a conservative approach would assume that Sanctions Laws block an entity where multiple designated persons holdings collectively meet the 50% Holdings Threshold.
Board Composition Threshold
As drafted, this threshold provides that a designated person with an insignificant shareholding could be deemed to control an entity where that designated person has a right to appoint or remove a singular member of the Board of Directors (not a majority, like the UK provision noted above) or amend the by-laws of an entity. This threshold could create a complex compliance burden on Canadian persons conducting sanctions due diligence on proposed transaction involving a designated person. For example, comprehensive sanctions due diligence could require a review of corporate by-laws and shareholders resolutions to determine shareholder rights and to consider the avenues whereby a designated person could “directly or indirectly” alter a Board of Directors’ powers or composition.
Unilateral Action Threshold
As drafted, this threshold appears to provide a “catch-all” authority to deem control based on the factual matrix at issue. The sole defining feature of the threshold is that the facts must reasonably show that a designated person can direct the entity’s activities. The ability to unilaterally direct an entity’s activities may be direct or indirect and can be accomplished by any means. The breadth of the Unilateral Action Threshold creates the possibility that negative control, e.g. a veto, would be sufficient to show control.
Expanded Authority to Prohibit Activities on Persons Unrelated to Foreign State Targeted by Sanctions
Bill C-47 also proposes amendments to expand the authority of the Government to prohibit activities with certain persons under the SEMA. Currently, the Government can enact regulations under the SEMA that impose prohibited activities targeting a foreign state, persons in that foreign state, and nationals of that foreign state that do not ordinarily reside in Canada. Bill C-47 seeks to expand the Government’s authority to prohibit activities with persons “outside Canada who [are] not Canadian”.
As drafted, this amendment would permit the Government to prohibit activities with persons that do not have the typical nexus (e.g. geographic presence, incorporation, citizenship) with a foreign state targeted by regulations enacted under the SEMA. In practice, the expanded authority would allow the Government to designate any person outside Canada that is not Canadian under a country-specific SEMA regulation to prohibit certain activities with that person. Accordingly, the proposed amendments appear to establish a new foreign policy tool which seeks behavioural change from persons (not located in Canada who are not Canadian) trading with foreign states that are targeted by Canadian economic sanctions.
Reliance on AML Framework for Sanctions Enforcement
Bill C-47 makes what may appear to be insignificant amendments to information-sharing provisions, but in reality these amendments establish the foundation for increased collaboration between Global Affairs Canada and the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC“) on enforcement of the Sanctions Laws. Bill C-47 amends the Sanctions Laws to enble the Minister of Foreign Affairs to disclose to FINTRAC “any information that is relevant to the making, administration or enforcement” of the sanctions regulations, or seizure orders enacted under the Sanctions Laws and amends the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to enable FINTRAC to share information with the Minister of Foreign Affairs.
While financial institutions typically take a coordinated approach to sanctions and AML compliance, the Government committed to establishing a novel legislative reporting requirement in its 2023 economic agenda (“Budget 2023”). Currently, certain financial institutions have a continuing duty to determine and disclose the existence of the property controlled by designated persons in their possession to the RCMP. Budget 2023 proposes that financial institutions will have additional sanctions reporting requirements to FINTRAC.
These amendments align with the Government’s broader AML-centric agenda, which will also serve sanctions compliance and sanctions enforcement activities. For example, the Government recently introduced Bill C-42 which amends existing legislation to create a federal public beneficial ownership registry, which will ostensibly facilitate sanctions compliance by detailing the ownership of federally incorporated entities, and potentially provincial entities, should provinces opt into the proposed regime. The Government is also financing a study led by Public Safety Canada into the creation of a Canadian Financial Crimes Agency focused on AML enforcement, which could play a future role in sanctions enforcement.
Businesses should continue to monitor Bill C-47 throughout the legislative process. The Deeming Provisions may be scrutinized by the Standing Committee on Finance, which could propose amendments to the current legislative drafting. Businesses should also consider that while the Deeming Provisions are not yet in force, they provide insight into the Government’s position on the holdings and powers of designated persons that may indicate control. Accordingly, businesses should consider the proposed amendments against their current sanctions compliance methodologies and if necessary, seek legal advice on compliance with Canadian economic sanctions.
 See Division 10 of Bill C-47.
 Special Economic Measures Act, SC 1992 c 17 at s 2; Justice for Victims of Corrupt Foreign Officials Act, SC 2017 c 21 at s 2.
 Angophora Holdings Limited v Ovsyankin, 2022 ABKB 711.
 Note that the 50% Rule is a starting point for non-designated entities that are owned or controlled by blocked governments. Non-designated entities affiliated with a blocked government are also considered block is the government controls the non-designated entity, even with less than 50% ownership. In circumstances where a non-designated entity is controlled, but not 50% or more owned by a designated person, the entity is at higher risk of being designated by OFAC and OFAC cautions U.S. persons dealing with such non-designated entities.
 The Deeming Provisions appear to specify that an entity does not include a “foreign state” for the purposes of the provisions. In practice, this could be interpreted to mean that a designated head of a foreign state (e.g. President or Prime Minister) is not deemed to be the owner of the property that is owned by that foreign state and therefore the Dealings Prohibition does not apply to that property. The Deeming Provisions could also be interpreted to mean that they only apply to persons (not including foreign states) controlling entities and therefore, state-owned entities are excluded from the application of the Deeming Provisions.