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The Monkey’s Paw ― Global Affairs Canada releases new economic sanctions FAQs

Global Affairs Canada (“GAC”) has quietly supplemented its existing “Frequently Asked Questions” page to add four new questions and answers regarding economic sanctions.

Unlike their counterparts in allied countries and regions, including the United States, the United Kingdom and the European Union, Canadian sanctions authorities have yet to issue any substantive guidance on the interpretation of sanctions measures. Although the business, financial, and legal communities in Canada have been eagerly awaiting such guidance for many years, it is unclear whether these four additions to GAC’s website are intended to address these concerns or whether more questions and answers, or comprehensive guidance, will follow.

The four new FAQs address the following key sanctions issues:

These new Q&A entries include examples intended to demonstrate how the statutory provisions of the Special Economic Measures Act (“SEMA”) and the Justice for Victims of Corrupt Foreign Officials Act (“JVCFOA”) will apply in certain contexts.

While intended to clarify the application of these statutory measures, the new FAQs are unfortunately unclear and at times appear to depart from the statutory and regulatory language. As such, in some cases, they raise further questions about GAC’s interpretation of the various provisions and appear likely to render an analysis of the application of these provisions more, rather than less, complicated.

We review some of the more significant aspects of these FAQs below.

Confirmation that there is no “double-Canadian” requirement for the prohibition on facilitation regarding listed persons

Canada’s sanctions regulations typically include broad prohibitions on dealings directly or indirectly involving listed or designated persons. For example, section 3 of the Special Economic Measures (Russia) Regulations (the “Russia Regulations”), like many of the country-specific regulations under SEMA, prohibits persons in Canada and Canadians outside of Canada from, among other things:

  1. dealing in any property, wherever situated, that is owned, held or controlled by or on behalf of a listed person; and
  2. entering into or facilitating, directly or indirectly, any transaction related to such dealings;

A new FAQ from GAC (“Can I deal with an entity that deals with a designated person?”) makes clear that the paragraph 3(b) prohibition applies to a person in Canada or Canadian who engages in the “direct or indirect facilitation of dealings between any person and a designated person” (emphasis added), regardless of whether that third party is Canadian or situated in Canada, or whether that third party itself is listed. This is further illustrated by the following scenario given as an example:

Scenario 1: A Canadian company (“A”) is the end-user of a type of product that it purchases from a non-designated foreign supplier (“B”). Company B manufactures this product using materials that it sources directly from a company recently designated under the Special Economic Measures (Russia) Regulations (“C”).

While a foreign supplier is not subject to Canadian sanctions and it may be legal for B to deal with C in jurisdictions outside of Canada, transactions between Canadian company A and foreign supplier B involving company’s C products are nonetheless considered prohibited under the Special Economic Measures (Russia) Regulations unless an exception is applicable. It would therefore be prohibited for the Canadian end-user company, A, to continue procuring goods from B that involve dealings with C past the date on which the listing of C came into force.

The new FAQ does not address the broader facilitation provision typically found in Canadian sanctions regulations, such as section 5 of the Russia Regulations, which prohibits any person in Canada or any Canadian outside Canada from “knowingly do[ing] anything that causes, facilitates or assists in, or is intended to cause, facilitate or assist in, any activity prohibited by [other provisions within the sanctions regulations].” Insofar as no Canadians or persons in Canada are engaged in the activities prohibited under section 3 or other like provisions of the sanctions regulations, the regulatory language continues to suggest that section 5 or other like provisions should not be engaged.

Application of exceptions to sanctions prohibitions

Another FAQ (“When does a prohibition apply?”) clarifies, unsurprisingly, that prohibitions will apply from the date of their entry into force and are not retroactive. In addition, it notes that prohibitions may include a wind-down period, a mechanism that has been used in a very limited manner for certain prohibitions under the Russia Regulations. .

GAC also discusses exceptions for circumstances in which contracts are already in place and the activities pursuant to them will not benefit designated persons. Interestingly, it appears that GAC takes the view that, so long as any payment made to a designated person under such a contract occurred prior to their listing, it is permissible to “discharge contractual obligations, in whole or in part” ― including by receiving property from the designated person ― after their listing, as illustrated by the following example:

Scenario 2: A Canadian company (“A”) has entered into a contract with a non-designated Russian company (“B”). As per the contract, A sends funds to B in return for the delivery of non-designated goods. At a given time, company B is designated under the Special Economic Measures (Russia) Regulations and is thus subject to a dealings ban. At the time that the designation came into force, payment had been made but the goods provided by B had not yet been delivered.

The financial transaction between company A and company B is not considered to have contravened the dealings prohibitions because it was completed prior to the coming into force of B’s designation. As for the goods: given that company A has already provided payment to company B, and provided that the activity does not require in any further dealings with B or benefit it in other ways, A may receive the goods delivered by B and use them without engaging the dealings prohibitions.

Although the FAQ does not cite any specific provision of the Russia Regulations GAC in support of this assessment regarding goods and other property received from designated person, it appears that GAC could be relying on a broad (and welcome) interpretation of paragraph 4(a) which provides that the section 3 prohibitions do not apply in respect of any payment made by or on behalf of a [listed person] that is due under a contract entered into before the person was listed, provided that the payment is not made to or for the benefit of a [listed person]”.

Deemed ownership and dealings with subsidiaries

Another of the new FAQs (“Can I deal with the subsidiaries of a designated company?”) addresses an aspect of the deemed ownership provisions implemented under SEMA and the JVCFOA last year (the “Deemed Ownership Rule”). The Deemed Ownership Rule under SEMA provides as follows:

Deemed Ownership

2.1 (1) If a person controls an entity other than a foreign state, any property that is owned – or that is held or controlled, directly or indirectly – by the entity is deemed to be owned by that person.


(2) For the purposes of subsection (1), a person controls an entity, directly or indirectly, if any of the following criteria are met:

(a) 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;

(b) the person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; or

(c) 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.

In the new FAQ, GAC sets out the following two scenarios it notes may “serve as illustrative examples” of the application of the Deemed Ownership Rule:

Scenario 1: A Canadian company is considering the possible sanctions implications of buying goods from a subsidiary of a listed entity. The designated parent company owns a majority of shares in the subsidiary. Given that one of the deemed ownership provisions apply, the subsidiary would be deemed to be owned or controlled by the designated parent company with respect to the dealings bans under the SEMA and the JVCFOA. Consequently, it would be prohibited for the Canadian company to purchase goods from the subsidiary.

Scenario 2: A Canadian company is considering the possible sanctions implications of buying goods from a subsidiary of a listed entity. While the designated parent company does not meet the 50% or more ownership criteria of the subsidiary, it is known to exercise considerable influence over its strategic decision-making. Given that at least one of the deemed ownership provisions applies, the subsidiary would be deemed to be owned or controlled by the designated parent company. Consequently, it would be prohibited for the Canadian company to purchase of goods from the subsidiary. (emphasis added)

GAC seems to be suggesting in Scenario 2 that “considerable influence over [an entity’s] strategic decision-making” will be the governing consideration. However, the concept of having “considerable influence over” does not appear in the Deemed Ownership Rule, and its scope and application are unclear ― and could be viewed as being broader than the ability to direct an entity’s activities, the test set out in paragraph (c) of the Deemed Ownership Rule. For example, it is not clear what kind of evidence would be required to establish that a company has considerable influence over another's strategic decision-making, or how to measure the degree of such influence.

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Given the significance of these potential changes, businesses should reassess their activities as well as any past determinations received from GAC or legal opinions regarding whether those activities may be prohibited, as these may be affected by this guidance.

The McCarthy Tétrault International Trade and Investment team will continue to monitor these developments and shifting sanctions strategies as the Russia’s further invasion of Ukraine continues into its second year, and Canada continues to rapidly expand its use of sanctions and related measures.



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