Canada: CSIS Cautions On Foreign Investment's Potentially Negative Impact To Canadian Businesses And Economic Security; Tighter Rules For Foreign Investment

What is CSIS?

The Canadian Security Intelligence Service ("CSIS") is Canada's principal national intelligence service. CSIS investigates actions believed to constitute a threat to the security and safety of Canada. Arguably, CSIS' role is even greater given the population's need to trust and rely on its national intuitions, including its security and intelligence, during the COVID-19 pandemic.  CSIS' uniquely defensive purpose is to monitor, collect and investigate Canada's security threats, including economic espionage and foreign-influenced activities.

Canadian Intelligence Service's 2019 Public Report

On May 20, 2020, CSIS issued a statement in connection with the recent release of its 2019 Public Report ("Report").  The Report aims to provide, amongst other things, a summary of the threats to Canada and its national interests.  As globalization continues to dominate, the global community, including the potential threats that it may pose to national security, has a wider reach on Canadian businesses and Canadian life generally.

The Report discusses many topics relevant to Canada in 2018/2019, including the current state of terrorism and violent extremism and the ongoing need to protect democratic institutions, but the area of focus here is CSIS' review as it relates to foreign investment and Canada's economic security.

CSIS' Review on Foreign Investment and Canada's Economic Security

In its Report, CSIS notes that due to Canada's economic wealth, open business and scientific capabilities, and innovative workforce and infrastructure, Canada offers appealing opportunities to foreign investors.  But the Report goes on to caution that economic espionage in Canada is increasing in its "breadth, depth and potential economic impact". The Report also alerts that the impact of these violations are hard to quantify, but nevertheless are material.

Although most foreign investment in Canada is done openly and transparently, the Report draws attention to the threat that there are many private firms and state-owned enterprises that are closely linked to their governments and/or intelligence services and that such parties are able to seek corporate acquisitions in Canada or operate other economic activities related to Canada.  Corporate acquisitions by these persons present possible risks related to (1) weaknesses in critical infrastructure, (2) control over strategic sectors, (3) espionage and foreign influenced activities, and (4) illegal transfer of technology and expertise.  A main concern related to the investment by these state-owned enterprises is that they are used by some to advance covert foreign state objectives in a manner that may lead to competitive disadvantages to Canadians and may tip market forces against Canadians.  The Report goes on to advise that Canadian economic interests abroad are also possible targets and Canadian entities by virtue of being in some foreign jurisdictions may be obligated to comply with intrusive and wide-ranging security requirements.

As CSIS continues to investigate and identify the threats that espionage and foreign influenced activities pose to Canada's national interests and business interests, it will work closely with domestic and international partners to address such threats.

Current Impact due to the COVID-19 Pandemic

On April 18, 2020, the Minister of Innovation, Science and Industry released a policy statement announcing that, in light of the evolving COVID-19 pandemic, certain foreign investments in Canada will be subject to enhanced scrutiny under the Investment Canada Act (the "Act"). As discussed in Fasken's prior blog post titled "Enhanced Scrutiny of Foreign State-Owned Investors / Critical Infrastructure at the Heart of Canadian National Security Concerns", the Canadian government implemented such measures in an attempt to protect Canadian businesses from opportunistic investment caused by swift drops in valuations.  The policy also attempts to ensure that foreign investment in Canada does not present new risks to Canada's economy or national security, including health and safety.

In its ministerial statement, the Canadian government stated that it will examine each foreign investment on its merits but the focus of its review will be on foreign direct investments "in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government".  Of note, this enhanced scrutiny applies to all investments regardless of their value – including acquisitions of a non-controlling interest in a Canadian business. The Canadian government maintains that it will also apply this enhanced scrutiny to all foreign investments by state-owned investors, as well as to private investors that are closely tied to or subject to direction from foreign governments.

The Canadian government has stated that such additional measures of scrutiny may involve the Minister requesting supplementary information and/or extending timelines for review as authorized by the Act, in order to ensure that the Canadian government can fully assess these investments.  In its statement, the Canadian government advises that foreign investors are urged to consider the Act's review process early on in the deal and investment process.  As a result, non-Canadian companies should keep this in mind if they are negotiating transactions on tight timelines.  These enhanced measures will likely continue for the foreseeable future given the profound impact the COVID-19 pandemic is expected to have on the Canadian economy.

In fact, on June 11, 2020, the Time Limits and other Periods Act (COVID-19) (the "TLPA") was introduced in Parliament as part of Bill C-17, which is entitled An Act respecting additional COVID-19 measures. As discussed in Fasken's recent blog post titled "Investors: Expect Delays Ahead", the TLPA if enacted, would create uncertainty with respect to the length of time a review may take, and may result in material extensions of time periods for national security reviews under the Act. In a nutshell, the TLPA would, among other things, have the effect of permitting the Minister under the Act to issue orders extending the time periods applicable to the national review process in Canada by up to six months – provided that any such extension must end before December 31, 2020.

Takeaways

In its Report, CSIS states that it does not see a decline but rather expects the continuation of such national security concerns related to foreign investments or other economic activities in Canada.  The Report recognizes that economic espionage and foreign-influenced activities weaken Canada's status among international economic competitors in the global market and decreases job opportunities,  as well as impacts corporate and tax revenues.  This recognition denotes the need for the national security and business communities to raise public awareness of the scope and nature of foreign-influenced activity and espionage against Canada and Canadian businesses.  The above mentioned efforts of the Canadian government are intended to reduce the negative effects that these activities have on Canada's economic growth and ability to innovate, especially in these changing times.

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