Canada recently enacted significant amendments to its sanctions legislation, first forecast in Budget 2023 (see our previous bulletin: Budget 2023: International Trade Initiatives & Implications), introducing both a new "deemed ownership" rule and the power to impose "secondary sanctions." These amendments represent a further expansion of Canada's sanctions laws, creating additional risks and compliance challenges for Canadian businesses.
We explore these amendments and their implications below.
Background
Canada primarily imposes sanctions through the Special Economic Measures Act (SEMA) and associated regulations. A core SEMA prohibition is an asset freeze/dealings prohibition that prohibits any person in Canada or any Canadian abroad from dealing in property that is "owned, held or controlled, directly or indirectly" by sanctioned persons.
This prohibition creates considerable challenges for Canadian businesses given both its breadth and the fact that the SEMA does not contain definitions of ownership or control. Such is the case where a sanctioned individual owns a minority interest, and it must be determined whether such minority interests constitute control.
The uncertainty has been amplified by the rapid and significant expansion of Canada's sanctions laws in response to Russia's invasion of Ukraine. In addition, Canada has, as we discussed in a previous bulletin (Significant Expansion of Government Powers Under Canada's Sanctions Laws), amended its sanctions laws to give it new powers to seize and seek the forfeiture of property owned or controlled directly or indirectly by sanctioned persons, thereby raising the stakes regarding investments and for potential violations.
Notwithstanding the expanding compliance challenges for Canadian businesses, Canada is imposing additional compliance burdens arising from concerns with the issue of sanctions evasions particularly regarding Russia.
Recent Key Amendments
New Deemed Ownership Rule
The new "deemed ownership" rule holds that if a sanctioned person directly or indirectly controls an entity, any property that is owned, held or controlled by the entity is deemed to be owned by that sanctioned person and therefore subject to the asset freeze/dealings prohibition and/or seizure. Control is established under any of the following three criteria:
- The 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.
- It is reasonable to conclude, having regard to all the circumstances, that the person is able, directly or indirectly and through any means, to direct the entity's activities.
While the first criteria is clear and consistent with common and ordinary interpretations of control, the second criteria raises questions. It represents a significant broadening of the definition of control and therefore ownership of property. Yet, conceivably, a sanctioned shareholder having the right to appoint a minority of board members, or even a single member on a board, could under this criteria exercise "control" over the affairs of a business.
The third criteria is a residual category and raises even more questions. It essentially legislates a "de facto" control provision in Canadian sanctions law. While a Canadian court has examined the issue of de facto control, as we discussed in our previous bulletin concerning the Angophora Holdings Limited case, this criteria would benefit from additional clarification. What are the "circumstances" a Canadian business should consider to determine whether a sanctioned person has, for example, the indirect ability to direct "through any means" an entity's activities?
New Powers to Impose Secondary Sanctions
Secondary sanctions have been most notably employed by the US to encourage third-parties to abide by US sanctions laws or risk becoming sanctioned and losing access the US financial system and the ability to transact in US dollars. With growing concern about sanctions evasion by Russia, Canada has amended the SEMA to enable the government to impose secondary sanctions. Such authority enables Canada to prohibit dealings with persons outside the primary country targeted by sanctions who provide support to or do business with the sanctioned country or its sanctioned parties.
For example, as noted above, the SEMA authorizes the government to impose a dealings prohibition on the property owned or controlled by sanctioned persons. Prior to the amendments, such persons meant foreign states, persons in those foreign states, and nationals of those foreign states not ordinarily resident in Canada. The amendments expand the list of persons who may be sanctioned to also include "a person outside Canada who is not Canadian" (i.e., third-parties who are not in the targeted country). For example, prior to the amendments Canada introduced sanctions against Moldova to target Moldovans who have facilitated or supported Russian activities that violate Ukraine's territory. Following these amendments, such persons could be listed under the Russia sanctions.
Implications for Businesses
The new deemed ownership rule significantly expands the meaning of "control" and thus "ownership", substantially increasing the risk that businesses may be dealing in property owned by a sanctioned person in violation of the SEMA. Correspondingly, this will require businesses to expand the scope of their due diligence to address this increased risk. Businesses can also expect that Canada will begin to impose secondary sanctions, subjecting additional persons and entities to Canadian sanctions, representing yet another significant expansion of Canada's sanctions laws.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
