Read the Article - Fasken Martineau

Vol. 10 No. 2
REVUE CANADIENNE DE DROIT INTERNATIONAL
2015
Legal Developments / Développements juridiques
This section is intended to provide only summaries or
highlights of selected recent legal developments from
around the world. The articles do not constitute specific
legal advice on the part of the authors, their law firms,
or the Canadian International Lawyer journal. Readers
are advised to retain competent local counsel in order to
verify the applicability of the relevant legislation for their
particular situations.
Cette section présente uniquement des résumés ou des
points saillants de faits récents de nature juridique
recueillis de par le monde. L’information publiée sous
cette rubrique ne doit pas avoir valeur d’avis juridique ou
être réputée remplacer les conseils détaillés portant sur
une affaire individuelle. Les lecteurs sont invités à obtenir
les services d’un conseiller juridique local compétent afin
de vérifier si la législation pertinente trouve application.
THE SANCTIONS REGIME
AGAINST RUSSIA BY CANADA,
THE UNITED STATES, AND THE
EUROPEAN UNION
disapproval of the situation in Crimea and in Eastern
Ukraine by issuing sanctions against (i) certain persons
from the former Ukrainian regime who are involved in
ongoing military activities in Ukraine, and (ii) certain persons in Russia who the Canadian government considers are
involved in the troubles in Ukraine, and the businesses or
financial institutions used by or controlled by such persons.
Financial Institutions: The Front
Line in Canadian Sanctions Risk
Management and Compliance
Clifford Sosnow*
Les institutions financières canadiennes sont en première ligne dans la gestion du risque de violation et de la
conformité aux sanctions imposées par le gouvernement
canadien à l’échelle internationale, en particulier en ce
qui concerne la Russie et l’Ukraine. Ces sanctions interdisent les opérations financières avec certains individus
et certaines entreprises, et il revient aux institutions
financières de s’assurer de n’engager aucune opération
avec ces personnes et entités. Avec les sanctions contre la Russie, de nouvelles obligations ont été imposées
aux opérations relatives aux dettes obligataires et aux
fonds pour dépenses de capital. De plus, les institutions
financières doivent déterminer de façon continue si elles
détiennent des avoirs au nom des personnes ou entités
désignées et déclarer la découverte de ces avoirs. La
violation de ces obligations peut entraîner une peine de
prison et des amendes importantes, sans délai de prescription. Étant donné que les institutions financières
sont en première ligne dans la gestion des risques de
sanction et de la conformité, ils doivent maintenir des
programmes de conformité et de surveillance solides
pour atténuer ce risque potentiellement important.
Canada imposes economic sanctions as an instrument
of foreign policy. For example, Canada expresses strong
32
Because sanction law expresses the Canadian government’s foreign policy values, the Canadian government is
‘alive’ to vigorously enforcing its sanctions law. Financial
institutions are on the front line in managing risk of violation and shouldering the burden of compliance. Banks
and other financial institutions must exercise strong due
diligence compliance screening, monitoring, and reporting functions. This article discusses why.
What Legal Instruments Are Used to Impose
Sanctions?
Sanctions in Canada are primarily imposed through
the United Nations Act1 (UNA), which implements UN
Security Council (UNSC) resolutions, and the Special
Economic Measures Act2 (SEMA), which the Governor
in Council may use when there has been a grave breach
of international peace and security that has resulted in a
serious international crisis.
Both the UNA and the SEMA are enabling legislation they do not specify any countries, people or companies,
but permit the government to issue country specific regulations. For example, SEMA regulations include Iran,
Syria, Russia and Ukraine, Zimbabwe and, most recently,
South Sudan.3
Since the obligations imposed on banks and other financial
institutions under UNSC resolutions are mirrored in the
SEMA regulations and these set out robust obligations on
L’Association du Barreau canadien
2015
CANADIAN INTERNATIONAL LAWYER
financial institutions, the remainder of this article focusses
on SEMA imposed obligations on financial institutions.
To Whom Do SEMA Sanctions Apply?
SEMA sanctions apply to any person in Canada or any
Canadian anywhere in the world. Since under SEMA a
Canadian includes corporations organized under the laws
of Canada or a province, sanctions obligations apply to
any financial institution organized under federal or provincial law. The Office of the Superintendent of Financial
Institutions (“OSFI”) also interprets SEMA sanctions
to apply to foreign branches of Canadian Federally
Regulated Financial Institutions (“FRFI”), although the
SEMA and its regulations do not state this.4
The Unique Burden of the Financial Services Sector5
Canadian sanctions law lists designated persons – prohibited individuals or companies including banks, investment
firms, technology companies and manufacturers – with
whom all transactions are prohibited. Financial institutions cannot ‘deal’ in any real or personal ‘property’,
wherever located, held by or on behalf of a designated
person. The OSFI interprets ‘property’ to include cash,
financial assets, insurance benefits or premiums, rights to
receive funds or financial assets, and securities. Financial
institutions are also prohibited from providing ‘financial or other related services’ in respect of such dealings.
The OSFI interprets this to include asset management,
mortgage lending and providing property or any other
insurance policies. Finally, the sanctions law prohibits
providing financial or related services to or for the benefit
of a designated person. This could include banks providing letters of credit to, for example, the US subsidiary of
a designated person.
There are exceptions including: (i) loan re-payments
from a designated person to a person in Canada for loans
entered into prior to the person becoming sanctioned; (ii)
pension payments; and (iii) transactions necessary for a
Canadian to transfer funds in a designated bank to a nondesignated bank.
The Additional Burden Imposed by the SEMA
Sanctions on Russia6
Canada imposes additional debt and equity prohibitions on
financial institutions when dealing with certain designated
persons listed in the SEMA Russia regulations. Financial
The Canadian Bar Association
Vol. 10 No. 2
institutions cannot transact in debt obligations with certain designated persons. Depending in which schedule
to the SEMA Russia Regulations a designated person is
listed, the debt obligation cannot have a maturity longer
than either 30 or 90 days. This includes loans, bonds, treasury bills, or debentures with (i) designated persons; (ii)
property of such persons; or (iii) rights in the property of
such persons, unless the debt was issued prior to the sanctioning of the person. Financial institutions also cannot
transact in capital funding or issue shares in exchange for
an ownership interest in (i) a designated person; (ii) the
property of such person; or (iii) the rights in the property
of this person. These equity financing prohibitions do not
apply to transactions commenced before the listing of the
designated person. Also, Canadian banks cannot finance
the sale, shipment or export to Russia of specified goods
for use in Arctic and deep water oil or in shale oil exploration and production.
The Special Monitoring and Reporting Obligations of
Financial Institutions7
Financial institutions, such as banks, insurance companies, and companies authorized to issue securities must
determine on a continuing basis whether they hold property owned by or on behalf of a designated person. The
OSFI adds three additional obligations on Canadian
FRFI’s: (i) on a continuing basis means as often as reasonably possible - weekly at a minimum, more frequently
as circumstances require (e.g., daily); (ii) monthly reporting on the total value of assets in respect of designated
persons (including a ‘nil’ report); (iii) applying the reporting obligation to foreign branches of Canadian FRFI’s
institutions.
The SEMA Regulations sanctions also require every person in Canada including financial institutions to disclose
to the RCMP without delay any property in their possession that the person has reason to believe is directly or
indirectly owned or controlled by a designated person;
or is being held by an entity directly or indirectly owned
by a designated person. The OSFI interprets ‘control’ as
a 25% ownership stake. Courts may consider a 10% stake
is evidence of control.
Violations by Financial Institutions Can Have Severe
Consequences
Violations of the SEMA sanctions can result in significant criminal liability. More serious violations, deemed
33
Vol. 10 No. 2
REVUE CANADIENNE DE DROIT INTERNATIONAL
indictable offences, can result in jail terms of 5 years and
fines in any amount at the discretion of the court. There is
no time limit to prosecute indictable offences.8
The threshold for a SEMA violation is a “wilful contravention or failure to comply with the regulations.” 9
Because wilful can include ‘wilful blindness’, financial
institutions which have suspicions that assisting in certain client transactions may violate the SEMA sanctions
yet fail to do proper client due diligence, may be subject to criminal liability.10 Further, since SEMA sanctions
prohibit any person in Canada and any Canadian outside
Canada causing, assisting, or intending to cause or assist
any of the prohibited activities listed in the sanctions,
financial institutions must not engage in conduct that aids
or abets violating companies.11
The Need for Prudent Best Practices
Financial institutions are on the front line of sanctions risk
management and compliance. While Canada’s sanctions
responses are often similar to US and EU sanctions they are
not the same. There is risk in assuming that no legal consequences flow in Canada from having compliance programs
based on US or EU law. Because of the significant risk of
harm from violations, financial institutions ought to consider prudent, best practices risk management including:
(i) robust ‘know your customer/client’ screens that enable
verification of beneficial ownership of closely held companies; (ii) obtaining representations and warranties that
a counterparty is not engaged and will not engage in any
activity that violates sanctions; and (iii) having a robust
internal compliance program with mandated training.
*Clifford Sosnow is a partner at Fasken, Martineau
DuMoulin, LLP and is an internationally recognized
trade, investment and anti-bribery law advisor, strategist
and advocate. He is consistently ranked by independent
Canadian and international directories as being among
the best of the best, a leading practitioner and achieving
the highest level of expertise on sanctions, export/import
licensing compliance, Cuba blocking law, investment
treaty law, WTO law, dumping/ countervail investigations
and customs compliance. Email: [email protected]
Clifford Sosnow est un associé chez Fasken, Martineau
DuMoulin, LLP et un conseiller juridique, un stratège, un
activiste de renommée internationale dans les domaines
du commerce, des investissements et de la lutte contre
la corruption. Les répertoires indépendants canadiens
et internationaux le classent invariablement parmi des
34
2015
meilleurs du monde et le qualifient de praticien de premier
rang qui atteint le plus haut niveau d’expertise en matière
de sanctions, de conformité aux autorisations en matière
d’exportations et d’importations, de la loi imposant le
blocus de Cuba, du droit lié aux traités d’investissement,
du droit relatif à l’OMC, des enquêtes anti-dumping et sur
les droits compensateurs et de la conformité aux règlements douaniers. Courriel : [email protected]
Endnotes
RSC 1985, c U-2.
SC 1992, c 17.
3
For a full listing of sanctioned countries, see <http://www.international.gc.ca/sanctions/countries-pays/index.aspx?lang=eng>. Canada
also has enabling legislation called the Freezing Assets of Corrupt
Foreign Officials Act (SC 2011, c 10). When the government of a
foreign state asserts in writing that certain persons have acquired property ‘inappropriately’ (i.e., corruptly) and requests that the assets of
these persons held in Canadian banks and other financial institutions
be frozen, or seized, the Canadian government can pass regulations
freezing the assets and prohibiting all activity with these persons. For
the purposes of this Act, such persons are called, ‘politically exposed
foreign persons’. Generally, prohibitions under this Act are similar to
those under SEMA sanctions. Canada also imposes sanctions against
the export of any goods or technology to countries listed in the “Area
Control List” of the Export and Import Permits Act, RS 1985, c E-19
[EPIA]. Currently the list is made up of Belarus and North Korea, and
there can be no exports to these countries unless a permit is obtained
(e.g. for humanitarian purposes).
4
See generally the OFSI publication: “Designated Persons Listings
and Sanctions law”, online: <http://www.osfi-bsif.gc.ca/eng/fi-if/amlcclrpc/pages/dsninstr.aspx>.
5
For an example, see Special Economic Measures (Iran) Regulations
SOR/2010-165, s 3-3.1.
6
See Special Economic Measures (Russia) Regulations, SOR/2014-58,
s 3.1-3.3.
7
For an example, see Special Economic Measures (South Sudan)
Regulations, SOR/2014-235, s 6-7.
8
See SEMA, supra note 2, s 8(b).
9
Ibid, s 8.
10
Wilful blindness imputes knowledge to a person whose suspicion is
aroused to the point where the person sees the need for further inquiries, but deliberately chooses not to make those inquiries. See R v
Briscoe, 2010 SCC 13.
11
For example, see Special Economic Measures (Syria) Regulations,
SOR/2011-114, s 4. See also Criminal Code, RSC 1985, c C-46, s 22.
1
2
Russia and Ukraine Sanctions: Cold
War Redux?
Donald R. Dinan*
Le gouvernement des États-Unis a imposé une série de
sanctions contre des individus et des entités russes en
réponse à l’intervention de la Russie en Ukraine. Ces
sanctions comprennent notamment le refus de visas
L’Association du Barreau canadien