Baker McKenzie’s Canadian international trade and customs team is publishing a series of articles reviewing 2023 trade and customs compliance developments and looking ahead to 2024’s burgeoning issues. This article focuses on Canada’s economic sanctions regime.
Canada’s sanctions regime underwent significant legislative amendments in 2023, which expanded the Government’s authority to prohibit certain dealings; meanwhile the Government has yet to publish guidance on its novel legislative provisions, sanctions permit approvals are rare, and there remain no public reports on enforcement activities.
In 2024, we expect to see continued amendments to existing regulations enacted under the Special Economic Measures Act (SEMA) and the Justice for Victims of Corrupt Foreign Officials Act (JVCFOA) and delisting of persons/entities; the adoption of new SEMA regulations to respond to past and present breaches of international peace and security; the possibility of the first application filed in a Canadian court to forfeit property owned by a designated person; and enhanced enforcement focused on sanctions circumvention, specifically on high-risk products detailed in guidance issued by the G7. We expect that approvals on sanctions permit applications will remain rare and we have no reason to expect that the Government will issue long-awaited guidance in the near future. It remains to be seen whether Canada will avail itself of its new secondary sanctions authority in an effort to crack down on sanctions circumvention.
For businesses seeking to comply with Canadian sanctions laws, this means ensuring their current due diligence measures address Canada’s novel deeming provision and the risk of secondary sanctions, that they are reviewing and implementing the guidance issued on red flags and high risk products for sanctions circumvention, and that they continue to follow developments under Canadian law, including the possibility of Global Affairs Canada issuing guidance, and future amendments to SEMA regulations. If necessary, businesses can seek permits to undertake activities otherwise prohibited by Canadian sanctions; however businesses should brace themselves for long wait times and the possibility that a permit application will be denied, or perhaps be irrelevant when issued.
This article focuses on the following:
- Sanctions legislative developments including:
- The enactment of a novel deeming provision;
- Expanded powers of the Government to designate persons;
- Implementation of sanctions in relation to Moldovan nationals and amendments to country-specific sanctions regulations covering individuals and entities in Iran, Haiti, Sri Lanka, Myanmar and in relation to the war in Ukraine; and
- Delisting of designated persons under Canada’s Russia sanctions.
- Enforcement activities in 2023 and expected enforcement activities in 2024.
- Implementation of Canada’s asset forfeiture regime in 2023 and the potential court proceedings in 2024.
In 2023, the SEMA and the JVCFOA were amended to implement a novel deeming provision and to expand the Government’s authority to designate persons under SEMA regulations. Additionally, a number of country-specific SEMA regulations were amended to introduce new prohibitions, designate new individuals and entities and delist certain individuals. Finally, the Government introduced the first amendments to the JVCFOA since 2018, designating additional persons.
Deemed ownership provision
The SEMA and the JVCFOA impose a dealings prohibition on property owned, held or controlled by a designated person. The dealings prohibition is effectively an asset freeze. It prohibits any person in Canada or any Canadian outside Canada from dealing in property, entering into or facilitating a transaction related to a dealing in property, providing financial or related services in respect of a dealing in property, making goods available to a designated person or persons acting on their behalf, and providing financial or other services to or for the benefit of a designated person.
In June 2023, Canada amended the SEMA and JVCFOA to include a novel deemed ownership provision (Deeming Provisions). These provisions establish when a designated person controls an entity, and therefore is deemed to own the property of that entity.
A designated person “controls” an entity (except a foreign state) when one of three criteria 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;
- The person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; 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.
The Deeming Provisions broaden the scope of SEMA regulations and the JVCFOA by expanding the property that is subject to the broad dealings prohibition and increase the compliance burden on entities subject to Canadian sanctions. If not already addressed, entities will need to enhance their sanctions due diligence to account for the Deeming Provisions’ criteria. Entities require more than beneficial ownership information to determine the issue of “control”, for example, entities will need to seek out corporate governance documentation such as shareholders agreements, and corporate by-laws to assess the criteria noted above.
Expansion of the Minister of Foreign Affair’s designation powers
In June 2023, the SEMA was also amended to expand the Government’s authority to prohibit activities with certain persons unrelated to a foreign state targeted by SEMA sanctions. Previously, the Government could only prohibit activities targeting a foreign state, persons in that foreign state and nationals of that foreign state that did not ordinarily reside in Canada. The SEMA now permits the Government to designate, and prohibit certain activities with, any “person outside Canada who is not Canadian” under any of the country-specific regulations issued under the SEMA.
In other words, the Government has authority to designate a national of, or an entity incorporated in, country “Y” under SEMA sanctions regulations enacted against country “X”. Given that there is no longer a nationality requirement tied to a designation under a specific regulation, the Government can wield this new authority as a secondary sanctions measure to target those doing business with or supporting a territory or persons subject to sanctions. For example, prior to this amendment, the Government enacted sanctions in relation to Moldova to target individuals connected to Russia. With the amendment in force, the Government can now designated non-Russian nationals (like those named in the Moldova sanctions) under the Russia sanctions regulations.
In August 2023, Canada amended the definition of “designated person” in 13 country-specific sanctions regulations enacted under the SEMA. These amendments expanded the authority of the Government to designate persons under each of these regulations. Specifically, the Government may designate former nationals of a foreign state in a country-specific sanctions statute. Prior to the amendments, if a designated or listed individual renounced their citizenship in the sanctioned foreign state, the Government lacked authority to designate them under a particular sanctions statute.
Canada has faced growing pressure by its allies and its member organizations (G7 and the Five Eyes) to eliminate sanctions circumvention. Establishing the authority to enact secondary sanctions seeks to achieve this goal by expanding the risk of doing business with territories, entities and persons subject to Canadian sanctions. Canada has yet to enact secondary sanctions under any SEMA regulation.
Amendments to SEMA regulations
The list of individuals and entities designated under Canada’s unilateral sanctions legislation continues to grow. Regulations are not subject to the Parliamentary legislative process and are enacted and amended by way of an Order in Council. Regulations may be enacted overnight, with little notice and may come into force immediately with partial retroactive effect.
Although Canada continues to implement sanctions in coordination with its allies, Canada has continued to implement unilateral sanctions measures, such as designated persons and entities, not otherwise sanctioned by its allies. In 2023, Canada amended several of the country-specific SEMA regulations, including the following: Russia, Belarus, Ukraine (Russian-occupied territories), Iran, Sri Lanka, Haiti, and Myanmar. Canada also enacted sanctions in relation to Moldovan nationals. We have included a summary of the 2023 amendments in the Appendix to this article.
In 2023, Canada also implemented its first amendments to the JVCFOA since 2018, designating Lebanese, Russian, Iranian and Myanmar nationals for human rights violations. These amendments finally fulfilled the Prime Minister’s 2021 Mandate Letter to the Minister of Foreign Affairs requesting that she continue to support and implement the JVCFOA.
In 2024, we expect that Canada will continue to designate persons and entities under existing SEMA regulations and continue to enact new regulations in response to grave breaches of international peace and security, human rights abuses and other grounds prescribed by the SEMA. For example, Canada recently announced sanctions against persons affiliated with Hamas. Additionally, despite a five-year hiatus on designations, we also expect that the Government will continue to designate individuals under the JVCFOA in 2024 in cases where the factual circumstances meet the narrow grounds for designating persons/entities under the JVCFOA (as compared to the SEMA).
Delistings under SEMA regulations
Each country-specific SEMA regulation provides for a delisting mechanism, whereby designated persons may make an application to the Minister of Foreign Affairs to have their name removed from a Schedule to the regulation.
In 2023, several delisting applications filed in relation to SEMA regulations were denied by the Minister of Foreign Affairs. This resulted in a flurry of applications for judicial reviews filed with the Federal Court, challenging the authority of the Government to designate a particular person, and/or the reasonableness of the Minister’s decision denying a delisting application. Some applications were mutually discontinued, and the designated person/applicant’s name was later removed (by way of regulation) from Schedule 1 of the particular sanctions regulation at issue. For example, in 2023, six individuals were removed from Schedule 1 of Canada’s Russia sanctions. In 2024, we expect further delistings, as demonstrated by the four individuals removed from Schedule 1 of Canada’s Russia sanctions on February 2, 2024.
Despite public reporting on possible sanctions violations and enforcement by the United States’ Bureau of Industry and Security (BIS) against Canadian incorporated entities, there has been little to no enforcement of Canada’s sanctions regime in 2023.
As a member of the G7, Canada is a member of the newly established “Enforcement Coordination Mechanism“ tasked with bolstering compliance and enforcement of Canada’s sanctions measures. To date, there has been no corresponding increase in public investigations or prosecutions with respect to Canadian sanctions. The Government has implemented the G7’s coordinated enforcement objectives by publishing specific guidance on sanctions circumvention through different Government agencies: in May 2023, FINTRAC published a Special Bulletin on Russia-linked money laundering and terrorist financing, warning that designated persons may rely on established money laundering channels to circumvent and evade sanctions to move assets from Russia. Canada has also implemented the G7+’s Oil Price Cap and recently published a related Compliance and Enforcement Alert focused on key evasion methods, recommendations for identifying evasion, mitigating risks, and information on how to report suspected breaches.
While BIS added two Canadian entities to its Entity List in February 2023, the first Canadian public reports regarding sanctions non-compliance began to be published in the last quarter of 2023, with Canadian national security agencies probing reports that a Canadian company’s drone technology was sold to a Russian university in violation of Canadian sanctions and reports that Russia is circumventing Canadian sanctions to purchase Canadian-made mine detonators through Kyrgyzstan.
This new public attention to sanctions non-compliance may result in heightened enforcement in 2024. Businesses must remain vigilant in their sanctions due diligence and ensuring their compliance mechanisms continue to reflect Canadian law. Increased enforcement efforts are also expected from the Government’s commitment in Budget 2023 to amend the Criminal Code and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to create sanctions-related information reporting obligations for the financial sector, as well as the implementation of Canada’s new federal beneficial ownership registry, and the commitment to establish a Canadian Financial Crimes Agency (whose focus appears to be tied to anti-money laundering enforcement).
Businesses must be mindful that violations of Canadian sanctions legislation may result in large fines and/or imprisonment and that liability extends to both organizations and individual employees. At this time, the Remediation Agreement regime (i.e., deferred prosecution agreements) available under Part XXII.1 of the Criminal Code does not extend to offences listed under Canadian sanctions or export controls legislation. Accordingly, businesses have less avenues to pursue a non-trial resolution in the event of a sanctions violation.
Implementation of Asset Forfeiture Regime
Canada introduced an asset forfeiture regime in June 2022 under the SEMA, which grants authority for the Government to seize and forfeit, and then dispose and redistribute assets owned, held or controlled by designated persons. To forfeit assets, the Government must first issue an Order in Council seizing the assets, followed by an application filed in a provincial court to forfeit the assets.
To date, the Government has issued two seizure orders: (1) an order targeting assets held at a Canadian bank with alleged ownership by Roman Abramovich (December 2022); and (2) an order targeting a Russian-registered cargo aircraft (June 2023) alleged to be owned by designated persons. The Government has yet to file a forfeiture application in a provincial court and the assets remain frozen. It remains to be seen whether the Government will bring a forfeiture application in 2024. In order to successfully forfeit the property seized, the Government must show that the property in question is the same property described in the Order in Council and that it is owned, held or controlled directly or indirectly by the person named in the Order in Council.
Appendix: Amendments to country-specific regulations enacted under the SEMA and the JVCFOA
|In January 2023, Canada enacted a news sanctions regime against Sri Lanka in response to former state officials responsible for committing “gross and systemic violations of human rights” during Sri Lanka’s civil conflict from 1983 to 2009. The new Special Economic Measures (Sri Lanka) Regulations list four individuals in Schedule 1, including former Presidents Gotabaya Pajapaksa and Mahinda Rajapak.
|Canada announced additional amendments to the Special Economic Measures (Russia) Regulations against Russian individuals and entities in relation to the war in Ukraine in February 2023, for reasons including “peddling disinformation and propaganda”. February 2023 sanctions against Russian individuals and entities also prohibited the export to Russia of certain chemical elements for use in electronics, and banned the import, purchase, or acquisition of Russian arms, ammunition, and other weapons, wherever situated or processed, from Russia or from any person in Russia. In March 2023, Canada also prohibited the import, purchase and acquisition of steel and aluminum goods listed under Schedule 11 of the Special Economic Measures (Russia) Regulations from Russia or from any person in Russia. Amendments sanctioning additional Russian individuals and entities were also enacted in April 2023, May 2023, July 2023, August 2023, September 2023, November 2023, December 2023. In December 2023, Canada imposed new import restrictions on Russian diamonds and diamond jewelry related products.
|Belarusian individuals and entities have also been sanctioned in relation to the war in Ukraine. In April 2023 and August 2023, Belarusian entities were sanctioned under the Special Economic Measures (Belarus) Regulations in response to the Belarusian regime’s role in “enabling Russia’s illegal invasion and attempted annexation of Ukrainian territory”.
|In June 2023, Canada amended the Special Economic Measures (Ukraine) Regulations, targeting individuals and entities “connected to Russia’s theft of Ukrainian cultural objects and efforts to ‘Russify’ Ukraine’s culture”, and that are “related to private military companies fighting for Russia that originate in Ukraine”.
|In June 2023, Canada enacted the Special Economic Measures (Moldova) Regulations in response to Russia’s ongoing war of aggression against Ukraine. Individuals and entities sanctioned include Moldovan oligarchs, business people, parliamentarians, politicians and a political party connected to Russia. Additional persons were sanctioned in October 2023.
|January 2023, February 2023, March 2023, May 2023, June 2023, August 2023, and September 2023 amendments to the Special Economic Measures (Iran) Regulations added senior Iranian officials and government entities to the sanctions list that support Iran’s “destabilizing activities both domestically and abroad” and participate in the “gross violation of human rights”. October 2023 additions to the Iran sanctions list incorporated prohibitions related to nuclear weapons, military supplies and individuals and entities associated with Iran’s nuclear program that are set to expire under the United Nations Security Council Resolution 2231.
|Amendments to the Special Economic Measures (Haiti) Regulations also occurred in January 2023, February 2023, March 2023, June 2023, and September 2023 with high-profile Haitian elites sanctioned in relation to “acts of significant corruption”, “gross and systematic human rights violations” and criminal activities.
|January 2023 and October 2023 also saw amendments to the Special Economic Measures (Burma) Regulations in response to “escalating attacks” against Myanmar’s civilian population. The amendments sanction individuals and entities identified as performing key functions on behalf of Myanmar’s military regime, and include a new prohibition on the export, sale, supply or shipment of aviation fuel (wherever situated globally) destined for Myanmar or any person in Myanmar.
|In August 2023, Canada amended the JVCFOA for the first time since 2018 to include three Lebanese nationals who were “involved in acts of significant corruption, including the misappropriation of public assets for personal gain and the transfer of the proceeds of corruption to foreign states”. The JVCFOA was further amended in December 2023 to designate Russian, Iranian and Myanmar nationals for human rights violations.