The G7 announced the creation of a new Enforcement Coordination Mechanism “to bolster compliance and enforcement of our measures and deny Russia the benefit of G7 economies” on the one-year anniversary of Russia’s invasion of Ukraine.
Having focused on the enforcement of sanctions by the United States, United Kingdom, the European Union, Germany, France, and Italy in the past weeks, we continue our overview with enforcement trends in Canada.
Our next instalment will look at sanctions enforcement from the perspective of Japan.
- What are the recent sanctions enforcement trends in Canada?
In late March 2023, the Canadian Federal Government tabled its annual economic agenda (“Budget 2023“), which includes several notable commitments related, directly or indirectly, to sanction enforcement. These commitments may forecast a new era for sanctions enforcement in 2023. In Budget 2023, the Government of Canada made a commitment to amend the Criminal Code and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”) and foreshadowed new regulatory obligations for the financial sector to “report sanctions-related information” to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”).
Historically, sanctions are administered by Global Affairs Canada, and have been enforced by the Royal Canadian Mounted Police (“RCMP”) and the Canada Border Services Agency, with prosecutions conducted by the Public Prosecution Service of Canada (“PPSC”). To date, there is a dearth of sanctions enforcement in Canada as there are only three publicly reported cases (1 guilty plea, 1 conviction, and 1 acquittal). Under the current framework, certain reporting entities in the financial sector have a continuing duty to determine and disclose whether they have property owned or controlled by or on behalf of a designated person. As drafted, disclosures under the Special Economic Measures Act (“SEMA”) regulations is made to the Commissioner of the RCMP, and not to FINTRAC. At this time, it is unclear how the proposed obligation to report sanctions information to FINTRAC may change the current regulatory framework; however, future amendments may signal greater regulatory collaboration.
The anticipated amendments, coupled with the implementation of a federal beneficial ownership registry by the end of 2023, and the commitment to establish a Canadian Financial Crimes Agency tasked with implementing money laundering charges, prosecutions and convictions and asset forfeiture, signal a new era of sanctions enforcement in 2023.
Currently, the Government of Canada appears to be focused on enforcing the new seizure and asset forfeiture mechanism under the SEMA that entered into force in June 2022. As noted above, Canadian persons are required to report property in their possession or control that is owned or controlled by designated persons or on their behalf to the RCMP and freeze such property. To date, the RCMP has published the amount of property that has been disclosed to it under the Special Economic Measures (Russia) Regulations and it has followed-up with disclosing entities to assess the status and value of the assets previously disclosed, likely to evaluate whether the assets should be subject to the forfeiture mechanism.
- What are the maximum penalties for violations?
Canadian sanctions and export controls laws are penal in nature. Violations may result in large fines and imprisonment and liability extends to both organizations and individual employees. Pursuant to the SEMA, the Justice for Victims of Corrupt Foreign Officials Act, and the Freezing Assets of Corrupt Foreign Officials Act, an accused may be liable to imprisonment for up to five years. Pursuant to the United Nations Act, an accused may be liable for imprisonment for up to ten years.
Violations of the Export and Imports Permit Act, with respect to controlled goods, may result in large fines in the court’s discretion and/or up to ten years’ imprisonment.
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. However, new offences may be added by way of Order in Council on recommendation of the Minister of Justice. In any event, the PPSC has authority to enter into resolution discussions with defence counsel to narrow issues at trial or avoid trial entirely (e.g. enter into a guilty plea).
- Is there a mechanism by which countries can submit a voluntary self-disclosure of possible violations to mitigate penalties?
The Federal Policing Operations – Intake Unit of the RCMP accepts and administrates voluntary disclosure of sanctions violation. There is no formal process or format required for voluntary disclosures. Canadian persons contemplating voluntary disclosures should consider if there are multiple enforcement and/or regulatory agencies that they should be reporting to at the same time. For example, Canadian securities registrants may be required to make disclosure to their primary regulator. Voluntary disclosures do not guarantee relief from prosecution and the penalties associated with a successful conviction; however, a disclosure may precede a plea agreement and mitigate the penalties associated with any future plea.
- What do you think the G7 Enforcement Coordination Mechanism means for Canada?
Canada is currently facing pressure from its G7 trading partners, particularly the U.S., to increase enforcement of its trade controls. This pressure is resulting in increased scrutiny, and in the future may facilitate new investigations, charges, and prosecutions of parties in violation of Canadian sanctions and export controls. The G7 Enforcement Coordination Mechanism will open up these enforcement opportunities through increased coordination and information sharing between the G7. Although the G7 sanctions regimes are not identical, they are coordinated, and Canada has one of the strictest regimes, implementing broader restrictions than other G7 nations. A multinational enterprise with operations in Canada facing enforcement in other G7 nations will likely also face the risk of enforcement in Canada. National and international attention to sanctions circumvention may force the Government to act and initiate investigations, lay charges and prosecute offenders.
A manifestation of this pressure is evident in Canadian enforcement of its export controls. The CBSA recently acknowledged that officers from the U.S. Bureau of Industry and Security (“BIS”) are embedded in CBSA’s counter-proliferation unit. The CBSA’s acknowledgement follows comments from Matthew Axelrod, the assistant secretary for export enforcement of BIS, in March, that BIS was looking to deploy a permanent, “dedicated” BIS official in Canada to boost enforcement of Canada’s trade control commitments. Additionally, on February 27, 2023, BIS added two Canadian companies to its Entity List, “based on information that these companies significantly contribute to Russia’s military and/or defense industrial base and are involved in activities contrary to U.S. national security and foreign policy interests”.
- What is one thing that you would recommend companies do now to get ready for increased enforcement in Canada and increased coordination with the other G7 members?
Given the representations of the Government of Canada in Budget 2023, companies should continue to follow the evolving enforcement landscape and the potential for amendments to disclosure requirements currently in force.
In the meantime, companies should focus on codifying and auditing their current sanctions compliance, and given the scope of the G7 Enforcement Coordination Mechanism, this work should be implemented globally, across all jurisdictions in which a company operates. For example, a company may consider the following actions:
- Review and update, if necessary, their standard sanctions screening and third party due diligence procedures, including ensuring that policies reflect the extra-territorial reach of Canadian sanctions regulations applying to Canadian persons situated anywhere in the world;
- Create a jurisdictional matrix illustrating overlap between company operations and sanctions laws; and
- Paper the underlying reasoning and due diligence supporting operational decisions in high-risk jurisdictions (e.g. sanctioned countries or countries where there exists a high risk for sanctions circumvention).
If companies are concerned about potential violations of Canadian sanctions laws, they should contemplate initiating an internal investigation to establish the facts, conduct a root cause analysis, and determine the risk of a violation. Companies should take steps to ensure that any internal investigations are properly conducted to secure privilege over attorney work product and other communications.