The Interaction of Canadian and US Economic Sanctions Against Iran and Other Countries

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1 The Interaction of Canadian and US Economic Sanctions Against Iran and Other Countries John W. Boscariol June 14, 2016

2 Growing Impact of Canadian Trade Controls 1 what s driving this? since 9/11, new emphasis of Canadian authorities on security (vs. government revenues) more recently, increased penalties, enforcement by U.S. authorities pressure from U.S. affiliates, suppliers and customers (and U.S. government) Canada s reputation as an emerging sanctions hawk? penalty, operational, reputational exposure Canadian companies are now more concerned than ever before about whom they deal with, where their products and technology end up, and who uses their services financings, banking relationships, mergers and acquisitions

3 2 What Are Canada s Trade Controls? export and technology transfer controls Export and Import Permits Act Export Control List Area Control List economic sanctions Special Economic Measures Act United Nations Act Freezing Assets of Corrupt Foreign Officials Act Criminal Code domestic industrial security Defence Production Act, Controlled Goods Program other legislation of potential concern blocking orders (Cuba) anti-boycott policy and discriminatory business practices laws anti-bribery law (Corruption of Foreign Public Officials Act/FCPA)

4 Key Elements of Your Export Control / Economic Sanction Compliance Program 3 basic components of the compliance program should include: corporate compliance manual screens and lists appointment of compliance officers internal audit procedures correction / voluntary disclosure process training programs contracts conflict procedures home grown

5 4 Canada s Economic Sanctions Regime United Nations Act implementation of UN Security Council resolutions Special Economic Measures Act impose economic sanctions absent or in addition to a UN Security Council resolution Freezing Assets of Corrupt Foreign Officials Act politically exposed persons Tunisia and Ukraine Criminal Code terrorist groups Area Control List under Export and Import Permits Act Belarus and North Korea

6 Special Economic Measures Act Regulations 5 targeted countries Iran Syria Burma Zimbawe North Korea Ukraine Russia South Sudan

7 Transactions Involving Iran 6 starting in 2010, escalating SEMA measures against Iran culminating in broad trade embargo (May 29, 2013): included prohibitions against exporting, selling, supplying or shipping goods, wherever situated, to Iran, to a person in Iran, or to a person for the purposes of a business carried on in or operated from Iran importing, purchasing, acquiring, shipping or transhipping any goods that are exported, supplied or shipped from Iran, whether the goods originated in Iran or elsewhere making an investment in an entity in Iran providing or acquiring financial services to, from or for benefit of a person in Iran over 600 entities and individuals had been designated under Canada s Special Economic Measures (Iran) Regulations

8 Transactions Involving Iran 7 effective February 5, 2016, broad trade embargo measures have been removed, leaving only: prohibitions on activities involving 202 listed persons prohibitions supplying any Schedule 2 items, wherever situated, to Iran, to a person in Iran, or to a person for the purposes of a business carried on in or operated from Iran (and related technology transfer restrictions) Schedule 2 has 41 categories, including: Aluminum and aluminum alloy products - Piping, tubing, fittings, flanges, forging, castings, valves, any unfinished products in any form and any waste or scrap that are made of aluminum and its alloys that are not specified in the Export Control List. Stainless steel valves, piping, tubing and fittings - Any valves, piping, tubing and fittings that are made of stainless steel type 304, 316 or 317 and that are not specified in the Export Control List.

9 Transactions Involving Iran note separate export controls regime - Export and Import Permits Act February 5, 2016 Notice to Exporters No. 196 policy of denial for broad range of items on Export Control List ECL item 5400 controls export and transfer of USorigin goods and technology require a permit for transfer from Canada to Iran conditions for obtaining a permit 8

10 Transactions Involving Iran 9 must now address new disconnect between US and Canadian sanctions re-exports/re-transfers of US-origin items to Iran differing interpretations of US-origin by US and Canadian authorities involvement of US persons OFAC General License H authorizes certain transactions for US-owned foreign entities that are otherwise prohibited for US persons under the continuing embargo

11 10 Russia / Ukraine Economic Sanctions Measures designated person restrictions 290 entities and individuals broad prohibition on range of activities debt financing prohibition (30 or 90 days maturity) equity financing prohibition prohibitions against supply of listed goods or related financial, technical or other services for use in offshore oil exploration or production at a depth greater than 500 meters; oil exploration or production in the Arctic; or shale oil exploration or production

12 11 Russia / Ukraine Economic Sanctions Measures prohibitions on dealing with Crimea region of Ukraine, including: investment and related services importing, purchasing, acquiring, shipping or otherwise dealing in goods exported from the region exporting, selling, supplying, shipping or otherwise dealing in goods destined for the region; transferring, providing or communicating technical data or services; providing or acquiring financial or other services related to tourism

13 12 Russia / Ukraine Economic Sanctions Measures export control policy no export permit issued for items on Export Control List if material benefit to Russian military March 25, 2015 unanimous Parliamentary motion: imposition of sanctions against foreign nationals involved in the detention, torture and death of Sergei Magnitsky. government to explore sanctions as appropriate against any foreign nationals responsible for violations of internationally recognized human rights in a foreign country, when authorities in that country are unable or unwilling to conduct a thorough, independent and objective investigation of the violations current government resisting adoption of Magnitsky sanctions

14 Latest on Burma Canada had most aggressive sanctions of any country effective April 24, 2012 most Burma sanctions measures repealed currently 44 companies and 38 individuals are designated persons arms and related material embargo (including data transfers) 13

15 Latest on Belarus Belarus listed on Area Control List under Export and Import Permits Act prohibits all export and technology transfers to Belarus unless obtain permit, which is only granted in rare circumstances May 7, 2016, Canada announced that it will remove Belarus from the ACL (could be many months away) until Belarus is removed from the ACL, Global Affairs Canada will issue export permits on request as a matter of course for any good or technology that is not listed on Export Control List ECL-items (e.g., encryption or cybersecurity tech and software) still subject to restrictive policy 14

16 The Cuban Conundrum problem, whether or not you trade with Cuba Canada s expanding economic relationship with Cuba Canada is one of Cuba s largest trading partners Canadian exports to Cuba - machinery, agrifood products, sulphur, electrical machinery, newsprint Canadian imports from Cuba - ores, fish and seafood, tobacco, copper and aluminum scrap and rum Canada is one of Cuba s largest source of foreign direct investment Canadian FDI - nickel and cobalt mining, oil and gas, power plants, food processing 15

17 16 The Cuban Conundrum (cont d) expanding extraterritorial reach of U.S. trade embargo 1962 imposition of full trade embargo under Trading With the Enemy Act 1975 elimination of general license allowing trade by foreign non-banking entities had to apply for specific license and demonstrate independent operation re decision-making, risk-taking, negotiation and financing 1990 Mack Amendment proposed outright prohibition on issuance of licenses to foreign affiliates of U.S. firms 1992 Cuban Democracy Act 1996 Helms-Burton Act extends aspects of Cuban embargo to Canadian companies that have no connection with U.S. entities

18 17 Current U.S. Measures vs. Cuba Cuban Assets Control Regulations administered by U.S. Treasury Office of Foreign Assets Control prohibition on foreign entities owned or controlled by U.S. persons from doing business with Cuba Export Administration Regulations administered by the U.S. Department of Commerce s Bureau of Industry and Security requires that a re-export license be applied for where U.S. content is 25% or more Helms-Burton Act Title III private right of action vs. traffickers in confiscated property (right suspended) Title IV bar on entry in the United States for traffickers, their spouses and minor children

19 Canadian Response to U.S. Trade Embargo of Cuba 18 diplomatic NAFTA/WTO? primarily FEMA and the 1996 FEMA Order

20 19 The Foreign Extraterritorial Measures Act 1996 blocking order obligation to notify Canadian Attorney General of certain communications prohibition against complying with certain U.S. trade embargo measures penalty exposure: up to $1.5 million and/or 5 years imprisonment

21 20 The Notification Obligation Every Canadian corporation and every director and officer of a Canadian corporation shall forthwith give notice to the Attorney General of Canada of any directive, instruction, intimation of policy or other communication relating to an extraterritorial measure of United States in respect of any trade or commerce between Canada and Cuba that the Canadian corporation, director or officer has received from a person who is in a position to direct or influence the policies of the Canadian corporation in Canada.

22 21 The Non-Compliance Obligation No Canadian corporation and no director, officer, manager or employee in a position of authority of a Canadian corporation shall, in respect of any trade or commerce between Canada and Cuba, comply with an extraterritorial measure of United States or with any directive, instruction, intimation of policy or other communication relating to such a measure that the Canadian corporation or director, officer, manager or employee has received from a person who is in a position to direct or influence the policies of the Canadian corporation in Canada.

23 What is an Extraterritorial Measure of the United States? U.S. laws that may be considered extraterritorial measures of the United States : Cuban Assets Control Regulations Export Administration Regulations Helms-Burton (?) other 22

24 23 FEMA Enforcement Experience there has never been an attempted prosecution of the Canadian blocking order no case law or administrative/prosecutorial guidelines no guidance from the Canadian government numerous investigations - American Express, Eli-Lilly, Heinz, Red Lobster, Wal-Mart and others Wal-Mart s Cuban pyjamas nationalistic sensitivities

25 Critical FEMA Conflict Points 24 training programs compliance manuals communications and instructions server accessibility meetings and telephone conversations M&A due diligence contracts e.g., supply agreements with U.S. companies, intercompany agreements, purchase orders, etc. end-use certificates

26 Canadian Rules on Boycotts and Discriminatory Practices 25 in addition to export controls, trade embargoes, asset freezes and blocking orders Canada s boycott policy provincial discriminatory business practice legislation

27 Canada s Boycott Policy 26 October 21, 1976 federal policy; does not prohibit compliance with international economic boycotts identifies unacceptable activities taken in connection with such boycotts requiring a firm or individual to engage in discrimination based on race, nationality, etc. of another Canadian firm refusing to purchase from or sell to another Canadian firm refusing to sell Canadian goods to any country or refraining from purchasing from any country restricting commercial investment or other economic activity in any country sanction is denial of government support and assistance in such transactions

28 Provincial Discriminatory Business Practices Legislation 27 Discriminatory Business Practices Act (Ontario) prohibits refusing to engage in business with others where: refusal is an account of on attribute (e.g., geographical location) of the others or of a third person with whom the others do business; and refusal is a condition of the engaging in business of the company making the refusal and another person prohibits entering into a contract in which one party refuses to engage in business with another person on account of an attribute of that other person or of a third person with whom that person conducts business prohibits seeking or providing negative statements of origin requires reporting of requests to engage in discriminatory business practices

29 Provincial Discriminatory Business Practices Legislation (cont d) 28 penalty/sanction exposure cause of action for damages against person who contravenes banned for providing goods or services to Ontario government for five years up to $100,000 fine

30 29 What Are Your Red Flag Destinations? incorporate ACL, UN and SEMA embargo destinations into your compliance program raise red flag where you have knowledge, suspicions, or reason to believe that technology, goods or services are ultimately destined for or may be accessed or used in or by any of the following countries or entities: Myanmar (formerly Burma) Belarus Syria Libya Sudan South Sudan Iraq terrorists and terrorist organizations Al-Qaida and Taliban Zimbabwe Afghanistan Pakistan Cuba Guinea Iran Democratic Republic of the Congo Eritrea Côte d Ivoire Liberia Sierra Leone North Korea Lebanon Somalia Yemen Central African Republic Tunisia Russia Ukraine

31 30 Key Issues in Interaction With US and Other Regimes do you screen against Canadian lists? lists of over 2,000 designated persons individuals, companies, organizations Special Economic Measures Act regulations United Nations Act regulations Freezing Assets of Corrupt Foreign Officials Act regulations Criminal Code anti-terrorism provisions any involvement in the transaction purchaser, ultimate user, vendor, creditor, broker, service provider applies regardless of where Canadian company is doing business applies to non-canadians in Canada

32 31 Key Issues in Interaction With US and Other Regimes Canadian measures may be broader than those of the United States and other countries Russia / Ukraine 290 designated persons Belarus, Burma, Libya, North Korea importance of home grown compliance policies

33 32 Key Issues in Interaction With US and Other Regimes Canadian measures can be in direct conflict with those of the United States Foreign Extraterritorial Measures Act blocking order in respect of US trade embargo of Cuba obligation to notify Canadian Attorney General of certain communications criminal penalty exposure: up to $1.5 million and/or 5 years imprisonment provincial business discriminatory practices legislation

34 Key Issues in Interaction With US and Other Regimes 33 Canadian measures can be in direct conflict with those of the United States Canadian human rights / employment laws and potential conflict with deemed re-export rules US controls under International Traffic in Arms Regulations Department of Defense Trade Controls (US State) US Export Administration Regulations (Commerce Control List) - Department of Commerce

35 Key Issues in Interaction With US and Other Regimes 34 significant differences in administration and guidance on economic sanctions no FAQs, guidelines, rulings, opinions no consolidated lists no voluntary disclosure process no deferred or non-prosecution agreements reporting obligations mandatory for property of designated persons when Global Affairs Canada becomes aware of potential violation, immediate notification to RCMP

36 35 Implications for Trade Controls Compliance and Enforcement internal compliance programs must be home grown training and internal communications screening process and providers coordination of internal investigations and disclosures involving multiple jurisdictions

37 John W. Boscariol McCarthy Tétrault LLP International Trade and Investment Law Direct Line: LinkedIn: Twitter: