Canada: Recent Developments In Canadian Export Controls/Sanctions Laws

The month of July has been a very busy month in Canadian export controls and sanctions law. Notably, a number of recent developments either create, or have the potential to create, substantive differences between the export controls/sanctions laws of Canada and the laws of other countries/jurisdictions, further emphasizing the need for companies to take account of such differences in implementing and maintaining compliance programs. In the world of export controls, for example, recent amendments to the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies (the "Wassenaar Arrangement") to decontrol certain cryptographic items,¹ have been implemented in the U.S. but have yet to be reflected in Canada's export control regime. While we can expect that these amendments will likely be implemented with the issuance of the next version of Canada's Export Control List, until such time, the export of these cryptographic goods continue to be controlled under Canadian law. This communiqué discusses three additional recent developments of significance.

1. Canada Imposes Further Unilateral Sanctions Against Iran

Over the course of the past two months, Canada has put in place a more comprehensive global sanction regime against Iran, consisting of both multilateral and unilateral measures. The objectives of the international sanctions regime are to induce cooperation with the International Atomic Energy Agency, and to encourage Iran to suspend its uranium enrichment and reprocessing activities. On July 26, 2010, a little over one month after domestic implementation of the fourth and latest round of United Nations sanctions on Iran (the "U.N. Sanctions Regulations"), Canada announced that it was imposing unilateral sanctions on Iran under the infrequently used Special Economic Measures Act (the "Unilateral Sanctions Regulations").² This marks the first time that Canada has gone beyond U.N.-based sanctions against Iran.

The Unilateral Sanctions Regulations, which, according to statements made by the Canadian Government, focus on the energy sector as well as the financial services sector, are meant to complement other recent unilateral measures imposed by the U.S. and the European Union, and to enhance the global effort to temper Iran's behaviour.³ These unilateral measures are aimed at further encumbering Iran's ability to participate in global commerce, including hindering its ability to develop, produce, export and import refined petroleum.

In the area of financial services, the latest round of U.N. Sanctions Regulations expanded the prohibition on the provision of property, financial or other related services, to include a prohibition on making such services available to Iran, or any person or corporation in Iran or subject to its jurisdiction, for the purpose of investing in commercial activity related to uranium mining, production or use of specified nuclear materials and technology in Canada.⁴ As such, the complexity of due diligence and reporting obligations for financial institutions had already increased prior to Canada's Unilateral Sanctions regulations. ⁵

According to information posted by Canada's Department of Foreign Affairs and International Trade ("DFAIT"), the Unilateral Sanctions Regulations implement further restrictions by prohibiting the establishment of correspondent banking relationships with Iranian financial institutions, as well as prohibiting the provision or acquisition of financial services that allow an Iranian financial institution to be established in Canada. In addition, DFAIT has advised that the Unilateral Sanctions Regulations prohibit the purchase of any debt from the Government of Iran. The cumulative effect of these restrictions will be to make it very difficult to transact business with Iran or other associated entities, while simultaneously making it increasingly difficult for Iranian entities to participate in the global economy.

In addition to strengthening the multilateral regime imposed on financial institutions, the Canadian government has announced that the Unilateral Sanctions Regulations target Iran's oil and gas sector. Iran is one of the world's top oil producers, yet it is forced to import refined oil, as it does not have adequate refinery capacity.⁶ According to statements made by DFAIT, the Unilateral Sanctions Regulations prohibit the export of goods and technology used in refining oil and gas. In addition, they prohibit new investment in the Iranian oil and gas sector. While there is no indication that the Unilateral Sanctions Regulations speak to current investments, it is difficult to conceive of how existing investments could be maintained, given the scope of the export prohibitions and the prohibitions relating to financial services. Thus, while it appears that certain trade with Iran continues to be permissible, the landscape for Canadian businesses doing business with Iran has become significantly more complex.

In light of the increased scope and complexity of the Iran sanctions regime, and the fact that key terms such as "financial services" and "investment" have not been defined with precision in other Canadian sanctions regimes,⁷ parties contemplating any form of business transaction or undertaking which even remotely involves Iran, would be well advised to seek legal advice prior to proceeding.

Canada's domestic regime is not the only regime of which Canadians doing business with Iran must be cognizant. On July 1, 2010, the President of the United States signed the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (the "U.S. Act"). Prior to the U.S. Act becoming law, the U.S. already had an extensive embargo on trade with Iran with certain extra-territorial application. The U.S. Act significantly expands the sanctionable activity applicable to non-U.S. entities and increases the severity of those sanctions, particularly in the target sectors. The U.S. Act also further increases the burden on financial institutions to prevent and monitor prohibited activity. Given the increased focus of the U.S. Act on non-U.S. entities, Canadian companies, especially those in the oil and gas and financial services sectors, must proceed with extreme caution when dealing with Iran, and certain other notable countries (such as Malaysia and the United Arab Emirates).⁸

In addition to specifically targeting the behaviour of non- U.S. entities, other sections of the U.S. Act may impact Canadian business. This is most pronounced in the area of government procurement. Canadian businesses that participate in government contracts in the U.S. may inadvertently disqualify themselves by running afoul of the U.S. Act. Even companies that do not do business outside of Canada, which are contemplating a transaction or undertaking which even remotely involves Iran, would be well advised to ensure that their proposed activities are in compliance with U.S., European and other relevant sanctions, as well as export controls laws.

2. First Criminal Conviction Under Canadian Sanctions/Export Controls Laws

Even prior to the new round of sanctions against Iran, Canadian authorities have shown increased diligence about enforcing the restrictions in place. The Canada Border Services Agency (the "CBSA"), the Agency that enforces Canada's export restrictions, has been increasing its scrutiny of shipments to countries that they deem diversion risks, including the United Arab Emirates, Hong Kong and Malaysia. This increased scrutiny has led to Canada's first successful prosecution under Canada's Iran sanction regime.

On July 6, 2010, Mahmoud Yadegari, an Iranian-born Canadian citizen operating a business out of Toronto, became the first individual to be tried and convicted in Canada under a combination of Canadian sanctions, export controls and sanctions laws. The charges result from an attempt by Mr. Yadegari to export 2 U.S.-origin pressure tranducers from Canada to Iran through Dubai, without first obtaining a permit. ⁹ In total, there were 10 charges laid against Mr. Yadegari pursuant to numerous acts, including the United Nations Act, the Customs Act, the Export and Import Permits Act (EIPA), as well as the Nuclear Safety & Control Act and the Criminal Code. On July 6, 2010, Mr. Yadegari was found guilty of nine of the 10 counts against him (he was acquitted on the forgery charge),¹⁰ and was sentenced to four years and three months in prison.

This decision signals increased diligence on the part of the CBSA to enforce Canada's existing export and transactional restrictions pertaining to Iran, including increased scrutiny of exports destined to certain regions in the Middle East and other "destinations of diversion concerns." In order to minimize the risk of delay caused by detention, exporters are well-advised to be aware of their obligations under export controls and sanctions laws, to be as precise as possible in completing export documentation and, when in doubt, to apply for an export permit and/or advisory ruling prior to export.

3. North Korea Added to Area Control List

In reaction to the recent sinking of a South Korean vessel in waters near the border with North Korea, Canada moved to impose enhanced restrictions on trade, investment and other bilateral relations between Canada and North Korea. As part of this reaction, Canada has added North Korea to the Area Control List (ACL) under the EIPA.¹¹

As a result of North Korea's inclusion on the ACL, all exports from Canada to North Korea will require an export permit. While in theory permit applications for exports to North Korea will be considered on a case-bycase basis, the Export Controls Division of the Export and Imports Control Bureau has indicated that, in practice, most applications will be denied.i¹² Exports that are of a humanitarian nature will be considered, as will exports that constitute personal or settlor's effects.

Footnotes

1 See "Recent Developments in the Export Control of Encryption Technology", Olivia Wright, July 2010, Focus on International Trade (Fraser Milner Casgrain LLP), for further discussion of these revisions to the Wassenaar Arrangement.

2 Canadian regulations implementing United Nations Security Council Resolution 1929 came into force on June 17, 2010. See "Government of Canada Implements Iran Sanctions", Chris Kent and Chris Cochlin, July 2010, Focus on International Trade (Fraser Milner Casgrain LLP), for a general overview of the U.N. Sanctions Regulations. The Unilateral Sanctions Regulations are being imposed pursuant to regulations promulgated under the Special Economic Measures Act (SEMA). See Special Economic Measures (Iran) Regulations (SOR/2010-165).

3. On July 26, 2010, the European Union issued a directive that implements further sanctions against Iran. These sanctions similarly focus on the oil and gas sector, as well as the financial and shipping sectors. Other countries, such as Australia, New Zealand and Japan, are also contemplating unilateral action.

4 For further detailed information on the U.N. Sanctions Regulations, see reference at footnote 1.

5 The Office of the Superintendent of Financial Institutions Canada (OSFI) issued a Notice on June 28, 2010 regarding implementation of the U.N. Sanctions Regulations, advising its constituents that the OSFI lists had been updated to reflect the new list of entities and individuals subject to monthly review. See OSFI Notice "Regulations Amending the Regulations Implementing the United Nations Resolution on Iran." OSFI issued a further Notice on June 30, 2010 specifically calling for increased diligence when dealing not only with Iran, but also certain banks outside of Iran which have been identified by the Financial Action Task Force as having deficiencies in their anti-money laundering/combatting the financing of terrorism regimes. See OSFI Notice "Financial Transactions related to Jurisdictions Listed Herein."

6 "Update 3-EU Tightens Screw on Iran with Extra Sanctions", July 26, 2010, Reuters, www.reuters.com.

7 Note that as of the issuance of this communication, the text of Unilateral Sanctions Regulations is not yet available. However, in other sanctions regimes covering investment and financial services (e.g. Myanmar), neither term is defined.

8 Although the U.S. Act has extra-territorial effect, Canada has not passed an order under the Foreign Extra-territorial Measures Act, as it did in regard to Cuba. As a result, Canadian companies that are subsidiaries of U.S. companies are currently free to follow any directives from their parent companies as they relate to doing business with Iran.

9 According to an article by the Canadian Press, "Toronto Man Convicted in Iran Nuclear Case", Tuesday, July 6, 2010, Mr. Yadegari purchased the goods from a Boston-area company and the U.S. company alerted authorities.

10 Mr. Yadegari has 30 days from the Court's decision to appeal same.

11 In reality, the addition of North Korea to the ACL is somewhat symbolic as prior to its inclusion, Canada already engaged in a negligible amount of trade with North Korea.

12 Notice to Exporters, Serial No. 172, July 14, 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.