Canada's Foreign Extraterritorial Measures Act – A Backgrounder For Doing Business In Cuba - Export Controls & Trade & Investment Sanctions

Canada's Foreign Extraterritorial Measures Act (FEMA) and Orders issued under FEMA are Canada's response to foreign laws that apply extraterritorially to Canadian companies and nationals. Canadian corporations with U.S. ownership or U.S. affiliates who are seeking business opportunities in Cuba should be especially cognizant of the conflict between Canadian and U.S. laws created by FEMA and the "catch-22" situation that this can create in terms of compliance with U.S. and Canadian law: if the company complies with U.S. law, it faces serious sanctions under FEMA; on the other hand, if it does not comply with U.S. law, it may face serious sanctions under the U.S. laws that prohibit trade with Cuba.

FEMA issues often arise in the context of mergers between Canadian and American companies where the Canadian companies have existing Cuban businesses. In addition, the "catch-22" may arise more frequently in the present context, as Canadian companies explore doing business with Cuba in anticipation of new opportunities that may arise as a result of a thawing of U.S.-Cuba relations.

The comprehensive U.S. embargo nonetheless remains in place, as does Canada's blocking legislation, therefore creating the risk that companies will face the impossible situation of contravening one law by complying with another.

If Canadian companies do decide to export goods to Cuba, they must still be compliant with Canadian (and, if applicable U.S.) export controls, especially when their product contains U.S. origin goods.

FEMA and its relevant blocking Orders

FEMA is often referred to as "blocking legislation" because it was enacted to limit the extraterritorial application of foreign measures: specifically, it is an enabling statute authorizing the Attorney General to make Orders blocking extraterritorial measures from having an effect. In general terms, the laws of a foreign country are said to apply "extraterritorially" if they are directly applied to companies and citizens of another country. To date, FEMA has only been used to make an Order blocking Canadian companies and persons from complying with U.S. sanctions imposed against Cuba that have extraterritorial effect in Canada.

The 1992 Blocking Order

Under the authority of FEMA, and in response to expanded extraterritorial U.S. trade sanctions over Cuba through U.S. Cuban Assets Control Regulation (CACR), Canada enacted the Foreign Extraterritorial Measures (United States) Order, 1992, known as the "FEMA Order" in 1992. Its intent is to block the CACR which has extraterritorial jurisdiction to prevent, impede or reduce trade or commerce between Cuba and third countries, including Canada. The original Order was amended in 1996 to cover all extraterritorial U.S. measures taken at all levels of government aimed at impeding trade between Canada and Cuba.

With respect to doing business in Cuba, there are two important requirements under the FEMA Order that Canadian corporations must comply with: the notification obligation and the compliance obligation.

Notification Obligation

Under section 3(1) of the FEMA Order, any Canadian corporation and every director and officer of a Canadian corporation must give notice to the Attorney General of Canada of any "directive, instruction, intimation of policy or other communication" (the "received communications") relating to an extraterritorial measure of the United States (including any laws and regulations meant to restrict trade between Canada and Cuba) in respect to trade between Canada and Cuba received from someone in a position to direct or influence the policies of the Canadian company.

The phrase "directive, instruction, intimation of policy, or other communication" is not further defined within the Order. However, it is likely that it would be interpreted to be any communication that is similar in nature to directives, instructions and intimations of policy in that they are instructional or assertive.

Upon being the recipient of a received communication, the corporation has a responsibility to report the following to the Attorney General:

the name(s) and capacity of the person giving the notice;
the name(s) and capacity of the person from whom the communications originated;
the full text or, if not in writing, the purport of the communication;
the date(s) when the communication was received; and
the period during which the communication is intended to be in effect.

Compliance Obligations

The FEMA Order, under section 5, prohibits any Canadian corporation and its directors, officers, managers and employees from complying with any U.S. legislation that seeks to prohibit, infringe on or otherwise influence trade between Canada and Cuba. This prohibition applies to any act or omission constituting compliance with U.S. extraterritorial laws regarding Cuba even if compliance with that measure or communication is not the only purpose of the act or omission.

While the notification obligation discussed above applies to the corporation and its directors and officers, the non-compliance requirement also applies to managers or employees in a position of authority. While these individuals would not be required to notify the Attorney General regarding a received communication, they are obligated to ensure that they do not comply with a directive, instruction, intimation or policy or other communication relating a U.S. extraterritorial measure relating to Cuba.

The FEMA Order applies to trade in services, including technology, in addition to goods. It also contains a broad definition of "trade or commerce between Canada and Cuba" which include trade with any "designated national" or "specially designated national" (a term used by the U.S. to refer to individuals or companies whose assets are blocked by the U.S. and with whom U.S. persons are generally prohibited from dealing). A designated national listing has traditionally prohibited U.S. subsidiaries operating in Canada from doing business with Canadian companies active in Cuba. The FEMA Order makes it illegal under Canadian law for U.S. subsidiaries to comply with this prohibition, setting up the "catch-22" impossibility of complying with both sets of laws.

Consequences of non-compliance

Section 7 of the FEMA Order provides for the prosecution of violations of the FEMA Order by indictment or summary conviction. Upon indictment, the maximum monetary penalty for a corporation is $1.5 million and $150,000 for an individual, with an additional or alternative maximum imprisonment term of five years. Upon summary conviction, the maximum monetary penalty for a corporation is $150,000 and $15,000 for an individual, with an additional or alternative maximum imprisonment term of two years.

While there have been high profile investigations of potential breaches of FEMA by Canadian authorities, there are no reported instances of a Canadian company or person being prosecuted under the law. Nonetheless, given the potential for serious penalties, companies must be mindful of the catch-22 created by the law before they find themselves in a position where they are simply unable to comply with U.S. law without contravening Canadian law.

Challenges with FEMA compliance for Canadian companies

What is a Canadian corporation?

A "Canadian corporation" is defined in the FEMA Order as "a corporation that is registered or incorporated under the laws of Canada or of a province and that carries on business in whole or in part in Canada." This means that a subsidiary of a U.S. company registered in Canada and carrying on activities in Canada, even if minor, would be captured under the FEMA Order and subject to its reporting and compliance obligations.

How do these obligations affect Canadian subsidiaries of U.S. companies?

Canadian subsidiary corporations are bound by Canadian law, including the FEMA Order. Due to the extraterritorial reach of U.S. law, these same Canadian subsidiaries are also directly subject to U.S. laws that prohibit business with Cuba (as are the parent companies of these subsidiaries). The interaction of the two laws will often create a direct conflict that makes it impossible to reconcile the two sets of legal obligations.

Conflicts created by the notification obligation often can be avoided by ensuring that no one in a position to direct or influence the activities of the Canadian subsidiary makes such a communication relating to Cuba. This often arises in the context of communicating U.S. law compliance obligations to the Canadian subsidiary through corporate policies, training or other means. As the U.S. lessens its restrictions on doing business with Cuba, the potential that such communications will be made has actually increased. For example, the U.S. company may be exploring new opportunities for doing business in Cuba, and may request that its Canadian subsidiary do that same. However, if the U.S. company learns that an intended transaction will not be feasible due to the operation of U.S. law, and communicates this to the Canadian subsidiary, the FEMA notification obligations will be triggered.

While Canadian companies have in fact made notifications to the Attorney General regarding communications received from their U.S. parent, it is undesirable to be put in this position for obvious reasons. In many cases, the Canadian company and its U.S. parent will have no choice but to comply with the more stringently enforced U.S. laws that prohibit the transaction, which places the Canadian company and its officers and directors and employees in the position of having to contravene the FEMA non-compliance obligations. Making a notification to the Canadian government that the company is about to violate Canadian law is not ideal. In these circumstances, it is normally necessary to retain independent legal counsel for the Canadian officers, directors and employees.

As noted above, the lessening of the U.S. sanctions has given rise to more potential conflict as U.S. companies begin to explore what they can and cannot do in Cuba, and to communicate such opportunities, and restrictions, to their Canadian subsidiaries.

What if we're complying with U.S. laws for business reasons?

There may be instances where a Canadian entity linked directly to its U.S. counterpart chooses, for a practical business reason, to discontinue or not to pursue a business opportunity in Cuba. For example, if it determines that the profit margins are not sufficient or financing cannot be obtained at favorable rates. Under section 6 of the FEMA Order, a corporation or its directors, officers, managers or employees who chooses to abandon such business interests in a way that impedes or reduces trade between Canada and Cuba could be found to have "complied" with U.S. extraterritorial legislation in contravention of section 5 of the FEMA Order, even if compliance with the extraterritorial measure was only one of the reasons for refusing to do or continue business with Cuba.

Accordingly, Canadian companies should carefully document their reasons for not pursuing a business opportunity in Cuba. In addition, it is important to recognize that FEMA has not been interpreted by the Canadian courts, and may not be interpreted so as to prohibit a Canadian subsidiary from withdrawing from a Cuban transaction in every instance. As an example, FEMA prevents Canadian companies from complying with an "Extraterritorial measure of the United States", which is defined in the FEMA Order as capturing only those measures which operate or are likely to operate to prevent, impede or reduce trade and commerce between Canada and Cuba. It is therefore arguable that an act of compliance with U.S. laws pertaining to Cuba would not in itself violate the non-compliance obligations, so long as a business relationship with a Cuban entity is maintained, and the compliance with U.S. law does not detrimentally affect the overall exchange of goods or services. This may, for example, arise in circumstances where the Canadian subsidiary requires authorization from the U.S. government in order to conduct business with Cuba. The act of seeking such authorization may not in and of itself be considered a contravention of FEMA (although it involves compliance with U.S. laws pertaining to Cuba). However, if the U.S. government denies the authorization, and the Canadian company does not pursue the opportunity for this very reason, this may be viewed as a direct contravention of FEMA's non-compliance obligation.

Export Controls on U.S. Origin Goods

The U.S. directly governs the re-export of U.S. origin goods/technology from Canada. This means that the U.S. has passed laws that apply extraterritorially to any goods of "U.S. origin," defined as any good or technology which contains as little 10 per cent U.S. origin content of the value of the good/technology to be exported.

As a matter of comity, Canadian law also controls the re-export of U.S. origin goods/technology from Canada, but under item 5400 of the Export Control List, a good or technology is defined as "U.S. origin" only if it has not been substantially transformed in Canada – a much higher threshold.

In practice, if a Canadian company intends to re-export a good or technology from Canada and it is considered "U.S. origin" and has not been substantially transformed in Canada, then the Canadian exporter will need to obtain authorization to do so from both the U.S. government and the Canadian government (the Canadian government will not issue a permit under item 5400 unless it sees that the U.S. government has given authorization for the re-export). But if a Canadian company wishes to re-export a good or technology that contains U.S. origin components but has also been substantially transformed in Canada, and seeks U.S. law authorization in order to do, this may raise issues under FEMA because the Canadian company is complying with U.S. re-export controls without having any need to do so as a matter of Canadian law, creating another "catch-22" consideration for Canadian exporters to Cuba.

As discussed in our September 2016 article Weakened U.S. embargo against Cuba: Background for Canadian businesses, the U.S.'s regulatory sanctions regime is evolving and so are the obligations faced by U.S. entities. As such, trade between Cuba and Canadian corporations with links to U.S. entities remains complex and companies will have to continue to navigate carefully.

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.

Canada: Canada's Foreign Extraterritorial Measures Act – A Backgrounder For Doing Business In Cuba