A cautionary tale illustrating the recent trend in the enforcement of Canada's economic sanctions by the RCMP.
An Alberta-based company has been fined $90,000 for violating the Special Economic Measures Act ("SEMA"). The company attempted to export Viton o-rings, valued at 30 cents apiece, to Iran – the result: a $90,000 fine for a transaction worth approximately $15.00. The charges that led to the conviction and resulting fine were the first ever brought under SEMA (which has been in place for 20 years).
Understanding The Legislation
SEMA, along with the United Nations Act, represents one of the principal mechanisms through which Canada imposes economic sanctions on foreign states. The United Nations Act allows for the domestic implementation by the Canadian government of sanctions instituted by the United Nations Security Council. SEMA authorizes Canada to establish sanctions that further its own foreign policy objectives in the absence of or in addition to a Security Council Resolution. Currently, the countries that are subject to sanction measures under SEMA include: Burma, Iran, North Korea, Russia, Syria, Ukraine and Zimbabwe. The Canadian government typically tailors the nature of sanctions it applies to a specific country in response to political, economic, and security developments.
SEMA gives the Government of Canada the authority to make any order or regulation that prohibits Canadians and persons in Canada from dealing with a foreign state or designated person (which may include specified entities). These regulations can include prohibitions on the export and import of goods, transfer of technical data and technology, and the provision of certain services to the subject state and/or any designated persons. The potential penalties for violations of SEMA are serious: fines and imprisonment.
The Events Giving Rise To The Charges
The charges in question stemmed from an attempt by Lee Specialities Inc. ("Lee"), which is a private company based in Red Deer, Alberta, to export Viton o-rings to Iran. Lee operates as a manufacturer of oil field equipment. The Viton o-rings in question are often used in the oil field. Being resistant to high temperatures and chemicals, they can also be used in nuclear programs. Because of this, they are on the list of goods that Canada bars from export to Iran.
According to an Agreed Statement of Facts submitted to the Court when Lee pleaded guilty to the $90,000 fine, the issue was a mail-room mix-up. Lee apparently received an order from Kan Dana Middle East LLC for $6,054.50 worth of fittings, couplers and o-rings. The original order had the account address in Iran, but the shipping address in the United Arab Emirates. The account and shipping addresses were changed five times as Lee went back and forth with Kan Dana over the details of the shipment and payment. The "last version of acknowledgment" listed an address in Dubai for both the account address and shipping address. Unfortunately, though, the cargo – including the $15 worth of Viton o-rings – was instead sent to an address in Iran via a shipping company. The Canada Border Service Agency ("CBSA") seized the shipment at the airport, and notified the RCMP.
Judge Allan Fradsham called the $90,000 "perfectly appropriate" given the circumstances. He stated: "it was a low amount of money and it seems like an innocent thing."
This $90,000 fine for an innocent mistake over a small transaction is a wake-up call for Canadian companies operating internationally: we believe that Canada is signaling it intends to follow the lead of its trade allies (like the United States of America where compliance and enforcement is the norm and penalties for breaches exceed $100M) in enforcing trade law restrictions.
Increased Vigilance
This case underscores a recent trend of increased active enforcement by the RCMP and CBSA of economic sanctions and related measures. Increased vigilance on the part of companies engaged in cross-border business transactions is required. Contraventions of these laws will result in, at best, operational disruptions and tarnished reputations, and at worst, criminal prosecution. An effective and comprehensive compliance strategy can mitigate the risk of contraventions and help reduce your company's potential exposure should a contravention occur.
BLG's export control and economic sanctions team regularly assists clients with cross- border transactions involving countries and persons subject to economic sanctions. In many cases, economic sanctions do not prevent the continuation of international business, so long as Canadians take the steps necessary to ensure compliance with them.
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