Key Amendments To Canadian Sanctions Legislation Now In Force - Export Controls & Trade & Investment Sanctions

On June 22, 2023, the Budget Implementation Act, 2023, No. 1 received Royal Assent. The new legislation enacted several key amendments to Canadian sanctions legislation, which impact regulated financial institutions and businesses operating in and outside Canada. This bulletin provides an overview of key new requirements:

A new control test for list-based prohibitions under Canada's sanctions legislation.
A new requirement to report property of designated persons to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Sanctions enforcement by the Canadian government, with the seizure of a Russian cargo plane at Toronto Pearson Airport.
Several amendments to other existing jurisdiction-specific regulations.

New Control Test for List-Based Canadian Sanctions

Effective June 22, 2023, a new control test applies for list-based prohibitions under Canada's principal sanctions legislation, the Special Economic Measures Act (SEMA) and the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) (SML). Specifically, when the Government of Canada designates a person under these Acts, it is generally prohibited to deal in any property that is owned, held or controlled by or on behalf of the designated person. A new deeming provision added to the legislation now provides that if a designated person controls another entity, any property of that entity is deemed to be owned by the designated person. As a result, the entity the designated person controls is subject to the same dealing prohibition that applies to the designated person.

The legislation also introduces a new control test. Specifically, a designated person will be deemed to control an entity if one of the following three conditions is met:

50% Rule. The designated person directly or indirectly holds 50% or more of the shares or ownership interests in the entity, or 50% or more of the voting rights in the entity. Similar to the equivalent rule under United States law, the control threshold is at 50% rather than a majority of shares or ownership interest.
Board Composition or Powers Rule. The designated person is able to change the composition or powers of the entity's board of directors directly or indirectly. This condition is very broadly drafted and, unlike other jurisdictions that have a similar control test, does not specify a minimum number or percentage of board members that a designated person may appoint.
Ability to Direct Rule. It is reasonable to conclude, having regard to all the circumstances, that the designated person is able to direct the entity's activities directly or indirectly and through any means.

The control test does not apply in respect of control of a foreign state by designated persons. This exclusion ensures that the designation of senior government officials does not automatically extend to the foreign government as a whole. The new control test under sanctions legislation also does not address scenarios where multiple designated persons are involved in the ownership and management of an entity. In addition, the control test is not incorporated into the other Canadian sanctions statutes, such as the United Nations Act, the Freezing Assets of Corrupt Foreign Officials Act or the Criminal Code.

The new definition of control is a welcome step towards clarifying an important threshold issue for Canadian sanctions compliance. However, the second and third elements of this new test will raise practical compliance challenges. Specifically, these elements require deeper and more nuanced scrutiny to determine control than simply tracing the ultimate beneficial ownership of a counterparty. Companies should carefully consider how to incorporate this broad and nuanced definition into their sanctions compliance programs and on a case-by-case basis where due diligence identifies a designated person with a connection to a proposed transaction or engagement.

While the new control test reflects in many respects similar rules in other jurisdictions, such as the United Kingdom and European Union, these jurisdictions have issued regulatory guidance on how the qualitative elements of the control test are to be applied. No guidance has been issued by Global Affairs Canada in respect of the newly enacted control test. In this respect, it may be helpful for Canadian businesses to refer to the Advisory that Canada's federal financial institutions regulator, the Office of the Superintendent of Financial Institutions (OSFI) issued. The Advisory provides guidance on the application of the control in fact test under federal financial institutions statutes. It is important to keep in mind, however, that the control definition under federal financial institutions legislation is different from the control test under SEMA and SML. Therefore, not all aspects of the OSFI Advisory will be appropriate in the context of sanctions legislation.

As noted, the new control test under SEMA and SML is in effect as of June 22, 2023.

Sanctions Reporting Under FINTRAC

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) — Canada's federal anti-money laundering legislation — has also been amended to require regulated financial institutions and other reporting entities subject to the PCMLTFA to report to FINTRAC any property they hold that is owned or controlled by a person designated under SEMA or SML, in addition to the current terrorist property reporting requirement. This new reporting requirement is not in force yet and will take effect by an order of the federal government. It is expected that FINTRAC will issue guidance and reporting instructions once the new requirement takes effect.

Sanctions Enforcement

The continued conflict in Ukraine has allowed the federal government to use sanctions legislation as a tool to pressure Russia to cease its aggression against Ukraine. 2022 amendments to SEMA grant the federal government powers to seize, forfeit, dispose and redistribute assets owned by persons designated under SEMA or SML. The first two enforcement actions under SEMA occurred on December 19, 2022, and June 10, 2023, respectively. The December enforcement action, made under an Order in Council, restrained US$26-million from a company the federal government concluded was owned by a designated person. The second, more recent enforcement action, occurred on June 10, 2023, when the federal government seized a Russian cargo jet located at Toronto's Pearson Airport. This was the first example of a physical asset seizure under the revised SEMA enforcement provisions.

Other Sanctions Developments

In May 2023, the Government of Canada enacted new Special Economic Measures (Moldova) Regulations designating several persons due to their connections with Russia.

In June 2023, the Government of Canada made several new designations under the Special Economic Measures (Haiti) Regulations and the Special Economic Measures (Iran) Regulations.

Effective June 19, 2023, the Government of Canada enacted the Regulations Amending Certain Regulations Made Under the United Nations Act. This regulation amends 14 existing regulations made under Canada's United Nations Act to remove the need for humanitarian organizations to apply for ministerial authorizations in line with recently adopted United Nations Security Council Resolutions. Amendments were also made to the Criminal Code provisions under Bill C-41 to address humanitarian assistance involving Afghanistan.

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