Canada: Canada Announces First Use Of Seizure And Forfeiture Mechanism Against Sanctioned Persons

On December 19, 2022, the Minister of Foreign Affairs (the "Minister") announced that Canada would seize and pursue the forfeiture of assets totaling US$26 million held by Granite Capital Holdings Ltd. (the "Abramovich Assets"), a company the government asserts is owned by Roman Abramovich, a Russian oligarch who was designated as a listed person under the Special Economic Measures (Russia) Regulations ("Russia Regulations") on March 10, 2022 for his "complicity in President Putin's choice to invade a peaceful and sovereign country."¹

Notably, Granite Capital Holdings Ltd. is not itself a listed entity under the Russia Regulations. The government has indicated that the Abramovich Assets are dividends being held in a Canadian bank account.² No seizure measures have been announced in respect of Canadian assets owned, held, or controlled by other entities in which Mr. Abramovich owns an interest. Most significantly, Mr. Abramovich owns 28.64% of the shares of Evraz PLC,³ a steel producer with a substantial Canadian presence and number of active steel production sites in Western Canada. At the time the sanctions against Mr. Abramovich were announced, Canadian Prime Minister Justin Trudeau stated that they should not impact the operations of Evraz in Canada,⁴ although to date, unlike the United States, European Union, and United Kingdom, Canada has issued no guidance on how to treat entities that are partially or wholly-owned by persons listed under Canadian sanctions regulations.⁵ Evraz has not been listed by Canada or the United States, while it has been designated by the United Kingdom.

This marks the first time that Canada will have used the new asset forfeiture and redistribution mechanism added to the Special Economic Measures Act ("SEMA") this past summer,⁶ and discussed at greater length in our July 5, 2022 and May 2, 2022 client alerts.

Canada was the first G7 nation to provide for the forfeiture and redistribution of sanctioned assets. Paragraph 4(1)(b) of SEMA allows the Minister under certain circumstances to issue an order for the seizure or restraint of property in Canada owned — or held or controlled, directly or indirectly — by a foreign state, any person in that foreign state, or a national of that foreign state who does not ordinarily reside in Canada (a "Seizure Order"). These include circumstances where the Minister is of the view that: (i) an international organization of which Canada is a member has called upon its members to impose sanctions against a foreign state, (ii) there is a grave breach of international peace and security that is likely to result in a serious international crisis, (iii) gross and systemic human rights violations have been committed in a foreign state, or (iii) a national of a foreign state is responsible for or complicit in acts of significant corruption.

It is not clear whether the Minister has already issued a Seizure Order in respect of the Abramovich Assets. A person whose property is the subject of a Seizure Order may, until such time a Forfeiture Order (discussed below) is issued, apply to the Minister to request that the property cease to be subject to the Seizure Order.

The Minister's announcement states that the Minister "will now consider making a court application to forfeit the [Abramovich Assets] permanently to the Crown." Once the Seizure Order is issued, the Minister may apply to the Superior Court of the province in which the seized or restrained property is located for an order that such property be forfeited to the Crown (a "Forfeiture Order"). Such application must be made on notice to Mr. Abramovich and any person who appears to have an interest in or right to the property, and the court may hear any such person. There appears to be a relatively low bar for obtaining a Forfeiture Order under SEMA. The court must issue the Forfeiture Order if it is determined that (i) the property in question is the same property as described in the Seizure Order and (ii) it is owned, held, or controlled directly or indirectly by the person referred to in the Seizure Order. The seized property or proceeds thereof may be used for certain statutorily specified purposes, including the reconstruction of foreign states and compensation for victims of grave breaches of international peace and security, human rights violations, and acts of significant corruption.

The Minister has announced that, if a Forfeiture Order is received, the proceeds of the Abramovich Assets may be "used for the reconstruction of Ukraine and compensation to victims of the Putin regime's illegal and unjustifiable invasion."

This exercise of the seizure and forfeiture power marks a new watershed in the development and application of not only Canada's economic sanctions, but those of the rest of the G7 and the EU as their economic and political action against Russia continues to intensify. The attempted forfeiture and redistribution of the Abramovich Assets may trigger legal challenges in Canadian courts or through international arbitration pursuant to Canada's Foreign Investment Protection and Promotion Agreement with Russia. In force since 1991, this bilateral investment treaty allows Russians to claim against the Canadian government for its failure to abide by its investment protection obligations, including its commitment not to engage in expropriation of Russian-owned assets without compensation. It is also possible that the government of Russia will retaliate in response to the forfeiture of the Abramovich Assets by taking action against Canadian assets within the reach of Russian jurisdiction.

This case will be watched closely as it is expected to set a precedent for the future seizure, forfeiture, and redistribution to Ukraine of Russian funds and other assets located in Western countries. The McCarthy Tétrault International Trade and Investment team will continue to monitor these developments and shifting sanctions strategies and countermeasures as the Russian invasion of Ukraine enters its tenth month.

Footnotes

1. Global Affairs Canada, "Sanctions – Russian invasion of Ukraine" (Last updated December 9, 2022): https://www.international.gc.ca/world-monde/issues_development-enjeux_developpement/response_conflict-reponse_conflits/crisis-crises/ukraine-sanctions.aspx?lang=eng.

2. The Globe and Mail, "Canada says it will seize Russian oligarch's funds, donate money to Ukraine" (19 December 2022): https://www.theglobeandmail.com/politics/article-canada-says-it-will-seize-russian-oligarchs-funds-donate-money-to/.

3. Evraz, " Ownership and Control of the Company": https://www.evraz.com/en/news-and-media/press-releases-and-news/ownership-and-control-of-the-company-supply-of-steel-by-the-group-/ .

4. See "Canada slaps sanctions on Russian oligarch Roman Abramovich", CBC News (March 11, 2022): https://www.cbc.ca/news/politics/canada-ukraine-russia-abramovich-sanctions-1.6381180.

5. Notwithstanding that Abramovich owns fewer than a third of Evraz PLC's shares, and is only entitled to appoint three of the company's 12 directors, the United Kingdom has concluded that "Abramovich exercises effective control of Evraz PLC given his significant shareholding and the shareholdings of his close associates who it is reasonable to expect Abramovich could direct through his close ties with Abramov and Shvidler, as well as his power to nominate directors of the board".

6. A similar forfeiture and redistribution mechanism was added to the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) at the same time.

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