Economic Sanctions - The New Compliance Minefield - J. Boscariol

John W. Boscariol, International Trade and Investment Law Group, McCarthy Tétrault LLP / mccarthy.ca

Economic Sanctions: Canada’s New Economic Sanctions: Canada’s New Compliance MinefieldCompliance Minefield

John W. BoscariolJohn W. Boscariol

[email protected]

February 8, 2012

Montréal, QuébecMontréal, Québec

i.e. Canada i.e. Canada Canadian & U.S. Export Controls WorkshopCanadian & U.S. Export Controls Workshop


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Growing Impact of Canadian Trade Controls

¬ what’s driving this? ¬ since 9/11, new emphasis of Canadian authorities on security (vs.

government revenues)

¬ more recently, increased penalties, enforcement by U.S. authorities

¬ pressure from U.S. affiliates, suppliers and customers (and U.S. government)

¬ penalty exposure

¬ operational exposure

¬ reputational exposure

¬ Canadian companies are now more concerned than ever before about whom they deal with, where their products and technology end up, and who uses their services

¬ financings, banking relationships, mergers and acquisitions


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What Are Canada’s Trade Controls? ¬ export and technology transfer controls

¬ Export Control List, Area Control List

¬ economic sanctions¬ Special Economic Measures Act¬ United Nations Act¬ Freezing Assets of Corrupt Foreign Officials Act ¬ Criminal Code (“terrorist groups”)

¬ domestic industrial security¬ Defence Production Act, Controlled Goods Program

¬ other legislation of potential concern¬ blocking orders (Cuba)¬ anti-boycott policy and discriminatory business practices laws

¬ anti-bribery law (Corruption of Foreign Public Officials Act and US FCPA)

¬ “compliance convergence”


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Today’s Focus

¬ Canadian economic sanctions - hotspots¬ Iran

¬ Syria

¬ Cuba

¬ Libya

¬ Egypt and Tunisia

¬ core elements of your compliance strategy

¬ three key vulnerabilities


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Canada’s Economic Sanctions Legislation¬ Special Economic Measures Act and United Nations

Act can include:

¬ ban on providing goods, services, technology

¬ assets freezes – cannot deal with listed individuals, companies, organizations

¬ ban on facilitation

¬ monitoring and reporting obligations

¬ application to persons in Canada and Canadians outside Canada

¬ permit process


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United Nations Act Regulations

¬ countries, groups and individuals subject to sanctions under United Nations Act:

Al-Qaida and Taliban

Côte d’Ivorie

Democratic Republic of the Congo

Iran

Sudan

Sierra Leone

Lebanon

Iraq

Somalia

Eritrea

terrorists and terrorist organizations

Liberia

North Korea

Libya


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Special Economic Measures Act Regulations

¬ authority for Canada to impose economic sanctions absent or in addition to a UN Security Council resolution

¬ currently in force

¬ Iran

¬ Syria

¬ Burma

¬ Zimbawe

¬ North Korea


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Transactions Involving Iran¬ United Nations Act regulations

¬ March 2007

¬ export and import ban on nuclear, uranium enrichment-related activities

¬ ban on related technical assistance, investment, services

¬ asset freeze on designated individuals and entities

¬ June 2010

¬ activities related to investing in commercial activity in Canada involving uranium mining, production or use of specified nuclear materials and technology

¬ assets freeze on additional individuals and entities

¬ export and supply ban on additional nuclear and military related items


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Transactions Involving Iran ¬ Special Economic Measures Act (July 2010):

¬ making any new investment in the Iranian oil and gas sector¬ exporting or otherwise providing to Iran items used in refining oil and gas¬ establishing correspondent banking relationships with Iranian financial

institutions¬ providing or acquiring financial services to allow an Iranian financial

institution (or a branch, subsidiary or office) to be established in Canada, or vice versa

¬ purchasing any debt from the Government of Iran¬ dealing with designated persons involved in nuclear, chemical, biological or

missile proliferation¬ exporting or otherwise providing to Iran arms and related material not already

banned and items that could contribute to Iran’s proliferation activities (listed goods in Schedule 2)

¬ providing a vessel owned or controlled by, or operating on behalf of the Islamic Republic of Iran Shipping Lines with services for the vessel’s operation or maintenance.


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Transactions Involving Iran ¬ Special Economic Measures Act (November 21,

2011):¬ a broad prohibition against providing or acquiring any financial

services to or for the benefit of, or on the direction or order of, Iran or any person in Iran

¬ a broad prohibition against the supply of any goods used in the petrochemical, oil or natural gas industry (this is expanded from the earlier prohibition which applied only to goods used in the refining of oil or liquefaction of natural gas)

¬ the addition of various entities and individuals to the list of designated persons — there is a general prohibition on dealings with these persons

¬ the addition of various items and equipment to the prohibited goods list

¬ some limited grandfathering


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Transactions Involving Iran

¬ Special Economic Measures Act (January 31, 2012):

¬ 5 entities and 3 individuals added to list of designated persons


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Transactions Involving Iran

¬ Export and Import Permits Act

¬ ECL item 5400 controls export and transfer of US-origin goods and technology

¬ require a permit for transfer from Canada to Iran

¬ conditions for obtaining a permit

¬ extraterritorial US sanctions

¬ Export Administration Regulations license requirements and other US sanctions rules (OFAC)

¬ US Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (amends to Iran Sanctions Act)

¬ recent restrictions on dealings with Central Bank of Iran


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R. v. Yadegari ¬ July 6, 2010, first successful prosecution under the Iran sanctions

regulations under United Nations Act

¬ attempted shipment to Iran through Dubai dual-use pressure transducers

¬ could be used in heating and cooling applications as well as in centrifuges for enriching uranium

¬ judge found that Yadegari “knew or was wilfully blind that the transducers had the characteristics that made them embargoed”

¬ also violations of Customs Act, Export and Import Permits Act, Nuclear Safety and Control Act, and Criminal Code

¬ sentenced to 51 months imprisonment (slight reduction on appeal)


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Transactions Involving Libya¬ beginning February 27, 2011, combined SEMA and UNA regulation

¬ broad coverage and complex

¬ significantly narrowed on August 31 and September 23, 2011 but still must proceed carefully

¬ currently limited UN-based sanctions measures remain¬ funds, financial assets and other economic resources in Canada of certain

Libyan entities that were frozen on or before September 16, 2011 remain frozen (subject to obtaining exemption certificate)

¬ property in Canada of UN-listed Qadhafi family members and associates and entities owned or controlled by them continues to be subject to prohibitions against direct and indirect dealings and other asset freeze measures;

¬ prohibitions against making property or financial or other related services available to UN-listed Qadhafi family members and associates and entities owned or controlled by them continue to apply;

¬ prohibitions against making property or financial or other related services available for the benefit of UN-listed Qadhafi family members and associates and entities owned or controlled by them continue to apply; and

¬ broad arms embargo remains in force


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Transactions Involving Syria¬ May 24, 2011, imposition of economic sanctions against Syria

under SEMA

¬ asset freeze against 25 listed individuals associated with the current Syrian regime and 7 government entities involved in security and military operations

¬ ban on the export or transfer from Canada to Syria of goods and technology subject to export controls

¬ exceptions for payments from designated persons pursuant to contract entered into before they became designated

¬ permit process


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Transactions Involving Syria¬ August 14, 2011, extended to Commercial Bank of Syria and Syriatel,

among others

¬ October 4, 2011, imposed petroleum sanctions

¬ importing, purchasing, acquiring, carrying or shipping any petroleum or petroleum products, excluding natural gas, that are exported, supplied or shipped from Syria after October 4, 2011

¬ providing or acquiring financial or other related services to, from or for the benefit of or on the direction or order of Syria or any person in Syria for the purpose of facilitating the importation, purchase, acquisition, carriage or shipment of any petroleum or petroleum products, excluding natural gas, from Syria

¬ making an investment in an entity in Syria that is engaged in the oil industry if that investment involves a dealing in any property, wherever situated, held by or on behalf of Syria, a person in Syria or a national of Syria who does not ordinarily reside in Canada

¬ providing or acquiring financial or other related services to, from or for the benefit of or on the direction or order of Syria or any person in Syria for the purpose of investing in the oil industry in Syria


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Transactions Involving Syria¬ October 4, 2011, added 12 entities and 27 individuals

to list of designated persons

¬ December 23, 2011

¬ ban on importing, acquiring, carrying, or shipping any goods (other than food) coming from Syria

¬ ban on investment in Syria and any related services

¬ ban on supplying any goods, including technical data, to Syria for use in monitoring of telecommunications

¬ added 10 entities and 33 individuals to list of designated entities

¬ January 25, 2012

¬ added 7 entities and 22 individuals to list of designated entities


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Penalty Exposure

¬ contravention of UNA Act regulations subject to criminal penalties of up to $100,000 and/or imprisonment of up to ten years

¬ contravention of SEMA regulations subject to criminal penalties of up to $25,000 and/or imprisonment of up to five years


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Freezing Assets of Corrupt Foreign Officials Act

¬ permits Canadian government to freeze assets or restrain property of “politically exposed foreign persons” at written request of foreign state or where foreign state is in state of turmoil or political uncertainty

¬ March 23, 2011 regulations enacted with respect to Tunisia and Egypt, targeting former leaders, family members and associates listed by name

¬ regulations prohibit dealings with listed persons and impose duty to report to RCMP

¬ criminal penalties of up to $25,000 and/or imprisonment for up to five years


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The Cuban Conundrum

¬ problem, whether or not you trade with Cuba

¬ Canada’s expanding economic relationship with Cuba¬ Canada is one of Cuba’s largest trading partners

¬ Canadian exports to Cuba - machinery, agrifood products, sulphur, electrical machinery, newsprint

¬ Canadian imports from Cuba - ores, fish and seafood, tobacco, copper and aluminum scrap and rum

¬ Canada is one of Cuba’s largest source of foreign direct investment

¬ Canadian FDI - nickel and cobalt mining, oil and gas, power plants, food processing


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The Cuban Conundrum (cont’d)

¬ expanding extraterritorial reach of U.S trade embargo

¬ 1962 – imposition of full trade embargo under Trading With the Enemy Act

¬ 1975 – elimination of general license allowing trade by foreign non-banking entities

¬ had to apply for specific license and demonstrate independent operation re decision-making, risk-taking, negotiation and financing

¬ 1990 – Mack Amendment proposed outright prohibition on issuance of licenses to foreign affiliates of U.S. firms

¬ 1992 – Cuban Democracy Act

¬ 1996 – Helms-Burton Act extends aspects of Cuban embargo to Canadian companies that have no connection with U.S. entities


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Current U.S. Measures vs. Cuba

¬ Cuban Assets Control Regulations¬ administered by U.S. Treasury’ Office of Foreign Assets Control

¬ prohibition on foreign entities owned or controlled by U.S. persons from doing business with Cuba

¬ Export Administration Regulations¬ administered by the U.S. Department of Commerce’s Bureau of Industry and

Security

¬ requires that a re-export license be applied for where U.S. content is 10% or more

¬ Helms-Burton Act ¬ Title III – private right of action vs. “traffickers” in “confiscated property” (right

suspended)

¬ Title IV – bar on entry in the United States for traffickers, their spouses and minor children


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Canadian Response to U.S. Trade Embargo of Cuba

¬ diplomatic

¬ NAFTA/WTO?

¬ primarily FEMA and the 1996 FEMA Order


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The Foreign Extraterritorial Measures Act

¬ 1996 “blocking” order

¬ obligation to notify Canadian Attorney General of certain communications

¬ prohibition against complying with certain U.S. trade embargo measures

¬ penalty exposure: up to $1.5 million and/or 5 years imprisonment


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The Notification Obligation

“Every Canadian corporation and every director and officer of a Canadian corporation shall forthwith give notice to the Attorney General of Canada of any directive, instruction, intimation of policy or other communication relating to an extraterritorial measure of United States in respect of any trade or commerce between Canada and Cuba that the Canadian corporation, director or officer has received from a person who is in a position to direct or influence the policies of the Canadian corporation in Canada.”


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The Non-Compliance Obligation

“No Canadian corporation and no director, officer, manager or employee in a position of authority of a Canadian corporation shall, in respect of any trade or commerce between Canada and Cuba, comply with an extraterritorial measure of United States or with any directive, instruction, intimation of policy or other communication relating to such a measure that the Canadian corporation or director, officer, manager or employee has received from a person who is in a position to direct or influence the policies of the Canadian corporation in Canada.”


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What is an “Extraterritorial Measure of the United States”?

¬ U.S. laws that may be considered “extraterritorial measures of the United States”:

¬ Cuban Assets Control Regulations

¬ Export Administration Regulations

¬ Helms-Burton (?)

¬ other


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FEMA Enforcement Experience

¬ there has never been an attempted prosecution of the Canadian blocking order

¬ no case law or administrative/prosecutorial guidelines

¬ no guidance from the Canadian government

¬ numerous investigations - American Express, Eli-Lilly, Heinz, Red Lobster, Wal-Mart and others

¬ Wal-Mart’s Cuban pyjamas

¬ nationalistic sensitivities


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Critical FEMA Conflict Points

¬ training programs

¬ compliance manuals

¬ communications and instructions

¬ server accessibility

¬ meetings and telephone conversations

¬ M&A due diligence

¬ contracts – e.g., supply agreements with U.S. companies, intercompany agreements, purchase orders, etc.

¬ end-use certificates


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What Are Your “Red Flag” Destinations?¬ raise red flag where you have knowledge, suspicions, or reason

to believe that technology, goods or services are ultimately destined for or may be accessed or used in or by any of the following countries or entities:

– Myanmar (formerly Burma) – Belarus– Syria– Libya – Sudan– Iraq– terrorists and terrorist organizations – Al-Qaida and Taliban – Zimbabwe – Afghanistan– Pakistan

– Cuba – Guinea– Iran – Democratic Republic of the Congo– Eritrea – Côte d’Ivorie – Liberia – Sierra Leone– North Korea– Lebanon – Somalia – Tunisia– Egypt


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Core Elements of Your Export Control and Economic Sanctions Compliance Program¬ basic components should include:

¬ corporate compliance manual

¬ screens and lists

¬ appointment of compliance officers

¬ internal audit procedures

¬ correction / voluntary disclosure process

¬ training programs

¬ contract review

¬ conflict procedures


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If you remember only three things…

¬ key areas of vulnerability

¬ interplay between Canadian and U.S. trade controls

¬ technology transfer controls

¬ screening all transactions against all sanctions programs and designated persons


John W. BoscariolMcCarthy Tétrault LLPInternational Trade and Investment Lawwww.mccarthy.caDirect Line: 416-601-7835

E-mail: [email protected]: www.linkedin.com/in/johnboscarioltradelaw Twitter: www.twitter.com/tradelawyer

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Economic Sanctions - The New Compliance Minefield - J. Boscariol