Written By Jessica Horwitz, Sabrina A. Bandali, Laurie Wright and Kathleen Wang
On June 22, 2023, Budget Implementation Act, 2023, No. 1 (formerly Bill C-47) received Royal Assent. Among the various other measures in this omnibus bill, the Act made significant amendments to Canada's autonomous sanctions statutes, the Special Economic Measures Act (the SEMA) and the Justice for Victims of Corrupt Foreign Officials Act (the Magnitsky Law), to clarify "ownership" and "control" rules for purposes of sanctions imposed under the SEMA and the Magnitsky Law.
This represents the first time the Government of Canada has issued a binding rule or formal position on the circumstances in which asset freezes and dealings bans imposed under Canadian sanctions will extend to entities owned or controlled by sanctioned persons.
This amendment, and some others of note described below, are now in force. Please see our blog post from May 4, 2023, Canadian Government Introduces Legislation to Add Sanctions 50% Rule and Update Rules on Ownership and Control, for legislative background on the amendments.
Deemed Ownership Rule
The new "deemed ownership" provisions in the SEMA and the Magnitsky Law specify that if a sanctioned person "controls" an entity, any property that is owned—or that is held or controlled, directly or indirectly—by that entity is deemed to be property owned, held or controlled by the sanctioned person for purposes of applicable restrictions under the SEMA and the Magnitsky Law.
There are three circumstances in which "control" is present:
(a) the sanctioned 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 sanctioned person is "able, directly or indirectly, to change the composition or powers of the entity’s board of directors";
(c) "it is reasonable to conclude, having regard to all the circumstances", that the sanctioned person "is able, directly or indirectly and through any means, to direct the entity’s activities".
These new rules formally expand the scope of due diligence investigation that companies must undertake in relation to counterparties that may be owned or controlled by sanctioned persons. While provision (a) is reasonably clear and should provide a useful benchmark to evaluate the threshold for legal control, provisions (b) and (c) require a context-specific analysis of de facto control to establish whether a sanctioned person exercise effective control over an entity in the manner defined in the legislation.
These tests for de facto control create challenges from a due diligence perspective since prospective counterparties may not readily have access to information to evaluate how the entity's board functions or "all the circumstances" relevant to establishing how an entity's activities are directed. That said, sanctions risks can be mitigated by asking relevant questions at the outset of a transaction or business relationship to enable an informed evaluation of risk, and by documenting due diligence steps taken. It is important, in this regard, for organizations to have established sanctions compliance processes and procedures in place to ensure that appropriate efforts are made to ensure Canadian businesses do not violate or unwittingly participate in the circumvention of applicable sanctions.
- The Canadian government now has the power to impose sanctions restrictions on any person "outside Canada who is not a Canadian" who meets the listing criteria in the applicable sanctions regulation. This opens the door for Canada to impose secondary sanctions under a given sanctions program on persons in third countries (i.e., in neither Canada nor in the country targeted by the sanctions) who are engaged in facilitating sanctions evasion, or who have contributed to the grave breach of international peace and security, gross and systematic human rights violations or acts of corruption that a particular sanctions program is designed to address.
- Under the SEMA, there is now an express ability for Canada to prohibit the transfer or provision of "property other than goods" in relation to a sanctioned foreign state. The SEMA definition of "property" was previously expanded in Budget Implementation Act, 2022, No. 1 to mean "any type of property, whether real or personal or immovable or movable, or tangible or intangible or corporeal or incorporeal" including "money, funds, currency, digital assets and virtual currency".
- The Minister of Foreign Affairs can now coordinate and share information on sanctions matters with the following government agencies, which should contribute to improved sanctions enforcement in Canada:
- Minister of Transport;
- Minister of National Revenue;
- Minister of Justice and Attorney General of Canada;
- Minister of Citizenship and Immigration;
- The Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC").
- The Proceeds of Crime (Money Laundering) and Terrorist Financing Act was amended to permit FINTRAC to share information with the Minister of Foreign Affairs if it is relevant to the making, administration or enforcement of an order or regulation under SEMA or the Magnitsky Law, which again, is intended to facilitate information sharing and enforcement within government.
These amendments may necessitate updates to existing policies and risk assessments by Canadian and foreign businesses that trade with, provide services to or engage in transactions with entities in sanctioned regions or have links with sanctioned individuals or entities. Businesses should evaluate their current procedures in light of these new amendments, and think about how due diligence on prospective new transactions or business relationships may need to be updated.
These are complex and rapidly evolving matters, with significant exposure risks. The Bennett Jones International Trade & Investment group is available to assist companies to evaluate risk exposure, determine the applicability of these amendments to your business, and advise on the impact of Canadian sanctions on Canadian and foreign businesses.
Please reach out to any of the authors listed should you have any questions.