Evasive Maneuvers – New Reporting Obligations And Enforcement Tools For Canada's Economic Sanctions Regime

Canada's economic sanctions regime is undergoing major changes to its reporting obligations and enforcement mechanisms. On June 20, 2024, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023 ("C-59") received royal assent. Among the many changes it brings into effect, C-59 raises a host of new sanctions considerations for importers and exporters, as well as financial services firms and other reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act S.C. 2000, c. 17 ("PCMLTFA"). More recently, on July 6, 2024, the Canadian Government also released a notice of proposed amendments to regulations under the PCMLTFA (the "Proposed Regulatory Amendments") that would require reporting on property directly or indirectly owned, held, or controlled by sanctioned persons. Collectively, these changes greatly expand the reporting obligations to Canada's Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC") and the Canada Border Services Agency ("CBSA") with regards to sanctions-related matters.

C-59 connects various aspects of Canada's anti-money laundering and sanctions regimes and significantly expands the reporting obligations of reporting entities under the PCMLTFA, including banks, insurance firms and brokers, securities dealers, accountants, real estate companies and brokers, casinos and precious metals and gems dealers, to matters relating to "sanctions evasion offences". To assist reporting entities with complying with these new requirements, on June 25, 2024 FINTRAC released a Special bulletin on financial activity associated with suspected sanctions evasion (the "Bulletin") which contains additional information regarding how C-59 will be implemented and the linkage it establishes between financial activity and sanctions evasion.

Importantly, C-59 also introduces entirely new obligations for importers and exporters to declare whether the goods they are importing or exporting are proceeds of crime or related to sanctions evasion, money laundering, or the financing of terrorist activities when making their required import or export reports to the CBSA. It also introduces declaration requirements for financial transactions related to these imports and exports. However, to date, CBSA has not released any guidance detailing how these obligations will be interpreted or implemented.

With regards to the Proposed Regulatory Amendments, among other changes, these amendments propose to greatly expand the existing requirements, which require reporting on property held by terrorist entities as well as persons listed under the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism, so that they also apply more broadly to listed persons under other Canadian sanctions regimes.

Up until now, the enforcement of economic sanctions in Canada, including the imposition of penalties for non-compliance, has been conducted on a criminal basis. Unlike their counterparts in other jurisdictions such as the United States and the United Kingdom, enforcement authorities in Canada have not had the benefit of a civil penalty regime that allows for enforcement on a strict liability basis. By bringing these reporting obligations within the umbrella of the PCMLTFA and its administrative monetary penalty regime, and by providing for a new administrative monetary penalty regime for importers' and exporters' sanctions evasion and other financial crimes declarations to CBSA, C-59 and the Proposed Regulatory Amendments change this and will significantly increase compliance risk.

These changes are discussed in greater detail below.

Reporting Requirements for Sanctions Evasion Offences

As we previewed in our December 11, 2023 legal alert on C-59, the bill establishes the concept of a "sanctions evasion offence." While C-59 does not create a distinct offence for sanctions evasion, it introduces a requirement for parties to report relevant information to FINTRAC when they have reasonable grounds to suspect that a transaction relates to the commission or attempted commission of a sanctions evasion offence. These new FINTRAC reporting requirements will come into force on August 19, 2024, 60 days after C-59 receives Royal Assent as required by subsection 306(3) of C-59.

New subsection 2(1) of the PCMLTFA defines the term "sanctions evasion offence" as follows:

Reports to FINTRAC on transactions that are suspected sanctions evasion offences are required to include all information that indicates the transaction may be an attempt to evade Canadian sanctions, including the products or services involved in the transaction. Reporting parties should also include information about the corporate structure of entities involved, and identifying information about legal arrangements involved.

The amendments to the PCMLTFA also grant the Minister of Finance the authority to issue directives and recommend the issuance of regulations related to sanctions evasion. These directives and regulations could address any financial transactions originating from or bound for any foreign state or foreign entity, and in the case of regulations, could also address facilitating these transactions. No such directives or regulations addressing sanctions evasion have yet been announced.

In the Bulletin, FINTRAC describes several techniques and channels that are frequently used to evade sanctions. These include:

1. Intermediary jurisdictions – the use of non-sanctioned financial institutions in other countries, and in particular, the use of regional financial and trade hubs such as the United Arab Emirates, Türkiye, China, and Hong Kong, as well as neighbouring jurisdictions that maintain commercial links with sanctioned jurisdictions;
2. Evasion of import and export controls – includes the circumvention of sanctions in the import and export process using various methods, such as routing goods through other jurisdictions;
3. Opaque corporate structures – as with other forms of money laundering, the use of complex corporate structures in multiple jurisdictions is a common tactic in sanctions evasion;
4. Non-resident banking –the use of financial institutions in jurisdictions separate from the one in which the company is registered;
5. Proxies and enablers – sanctioned entities transferring legal ownership to other individuals or professional enablers (such as lawyers or accountants); and
6. Virtual currencies and other alternative financial channels – using cryptocurrencies and other alternative financial channels to conceal the source of proceeds gained through sanctions evasion.

As noted above, the Bulletin explicitly identifies the United Arab Emirates, Türkiye, China, and Hong Kong as jurisdictions which are known to maintain commercial relations with sanctioned entities. Jurisdictions neighbouring sanctioned jurisdictions also pose a higher risk of participation in sanctions evasion. Individuals and entities with commercial ties to such jurisdictions must be aware of that risk and its potential impact on compliance with reporting obligations under C-59.

The examples above not only provide some guidance on what may constitute sanctions evasion, but also may provide insight into the Canadian government's priorities regarding investigation and enforcement of the obligations created by this new regime, as described below.

As a result of the amendments in C-59, the existing Administrative Monetary Penalty ("AMP") regime for failing to report would also apply for failing to report transactions related to sanctions evasion offences. Though existing regulations under the PCMLTFA provide an AMP framework for FINTRAC reporting requirements, this would be the first time that AMPs could apply to conduct that explicitly relates to Canada's sanctions regime. This development could be viewed as bringing Canada's sanctions enforcement regime into somewhat closer alignment with its allies like the United States, where civil penalties (which are similar in nature to AMPs) are common and provide regulators an enforcement tool as an alternative or in addition to pursuing criminal prosecution. Under the PCMLTFA's AMP regime, a party that is found to be non-compliant can be subject to AMPs of up to $500,000 each.

CBSA Declaration Regime and Associated Powers

C-59 also imposes new declaration requirements for importers and exporters under subsection 39.02(1) of the PCMLTFA, which requires importers and exporters of goods to declare to the CBSA:

1. "whether the good are proceeds of crime as defined by subsection 462.3(1) of the Criminal Code or are goods related to money laundering, to the financing of terrorist activities or to sanctions evasion; and
2. that the goods are actually being imported or exported, as the case may be."

This declaration requirement applies to all goods that are subject to the reporting requirements on import into or export from Canada under sections 12 and 95 of the Customs Act (respectively). Interestingly, the Canadian Government has decided to include this additional declaration requirement in the PCMLTFA, as opposed to the Customs Act, which could lead to some confusion for importers and exporters.

C-59 also adds a requirement for persons to make declarations in respect of financial transactions meant to pay for the goods that are being imported or exported. Specifically, under new subsection 39.02(4) to the PCMLTFA, provides that:

This requirement could be interpreted quite broadly based on the language of the provision, capturing all financial transactions paying for any good being imported or exported and reported under sections 12 or 95 of the Customs Act. This is a significant expansion of the information required in reports and declarations to the CBSA.

Notably, this new declaration regime refers to the term "sanctions evasion". This can be contrasted with the use of the term "sanctions evasion offence" in the FINTRAC reporting obligations noted above, which, as noted above, will be a defined term in the PCMLTFA. Though the intent behind the use of these different terms is unclear, it could be that the legislature's decision not to include "offence" with regards to the CBSA declarations may be indicative of a broader scope of application that is not limited to only incidents of sanctions evasion that amount to offences.

C-59 also contemplates the creation of additional record-keeping requirements related to this declaration. Importantly, the record keeping requirements could apply to persons that produce, supply, distribute or consume imported or exported goods, not just the importers and exporters. As with the declaration requirements, thus far, no specific details have been released around the scope of any potential new record-keeping requirements.

The new declaration regime under C-59 also provides additional powers to the CBSA and mechanisms for enforcement, penalties, review and appeal:

• CBSA officers have been granted search and seizure powers related to the declaration requirement, in line with those in the Customs Act for other failures to abide by Canada's importation regime. These search and seizure powers are available in circumstances where an officer suspects on "reasonable grounds" that a person has concealed goods or has made an inaccurate declaration.
• There are mechanisms for the review and appeal of decisions made by the CBSA with regards to this declaration and the related obligations. These review and appeal provisions under C-59 are nearly identical to equivalent provisions in the Customs Act, and allow for companies to ultimately appeal decisions made by the CBSA to the Federal Court.
• The Governor in Council will have the authority to make regulations establishing an AMP scheme for failing to abide by the CBSA reporting and declaration requirements described above, including those related to sanctions evasion, money laundering and terrorist financing activities. Though AMPs already exist for other customs related contraventions, as noted above, prior to C-59 there were no AMPs explicitly targeting sanctions violations. AMPs allow the government to penalize individuals and entities through a civil penalty framework as an alternative or in addition to regulatory offence prosecutions, which can be much more difficult to pursue.

Though, as noted above, this regime follows the more general reporting and customs declaration regime set out in the Customs Act, there remain significant open questions around the scope of the obligation and how it will be implemented. As of the date of this client alert, the CBSA has yet to issue any guidance on this new declaration requirement or these related provisions. Notably, despite C-59 having been given Royal Assent, these provisions are not yet in force, and will not be brought into force until a date to be set by the Canadian government. Therefore, it is possible that additional guidance and details around the implementation of this new regime will be provided before these provisions are implemented into the PCMLTFA.

Proposed Sanctioned Property Reporting Regime

As noted above, the Proposed Regulatory Amendments seek to amend regulations issued under the PCMLTFA to, among other changes, expand the scope of property reporting obligations to capture property held by persons listed under Canadian sanctions. These apply to PCMLTFA reporting entities, including financial entities, money services businesses, casinos, accountants, dealers in precious metals and stones, life insurers, real estate brokers or sales representatives and developers, securities dealers, and British Columbia notaries.

Specifically, the Proposed Regulatory Amendments will amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations to require reporting on property directly or indirectly owned, held or controlled by or, in some cases (depending on the relevant underlying sanctions regime) on behalf of, any "listed person or entity", which will be defined to include:

1. a terrorist group as defined in subsection 83.01(1) of the Criminal Code;
2. a person or entity that is the subject of an order or regulation made under the United Nations Act;
3. a person or entity that is the subject of an order or regulation made under the Special Economic Measures Act;
4. a foreign state, as defined in section 2 of the Special Economic Measures Act, that is the subject of an order or regulation made under that Act or the United Nations Act; or
5. a person who is the subject of an order or regulation made under section 4 of the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law).

The Proposed Regulatory Amendments propose a phased implementation of this reporting obligation, with the reporting obligation limited for the first six months after implementation to property held by persons identified under (a), (b) and (d) above.

According to the Regulatory Impact Analysis Statement ("RIAS") for the Proposed Regulatory Amendments, these changes are primarily being driven by the fact that, after Russia's invasion of Ukraine, Canada's sanctions are now being more commonly imposed against individuals, entities and states that have more significant economic and financial links to Canada. This has created the need "to have more robust systems in place to both utilize sanctions and address sanctions evasion, including through clear and effective reporting on sanctioned property in Canada". The RIAS also indicates that this change is also required to respond to Canada's international obligations, particularly those that arise out of the Financial Action Task Force, the global money laundering and terrorist financing watchdog that Canada is a member of.

Consultations on the Proposed Regulatory Amendments are open until August 5, 2024 (more information can be found here). These changes would greatly expand the scope of property-related reporting requirements to FINTRAC and, as with the changes under C-59, give FINTRAC a much greater role in sanctions compliance and enforcement.

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Both C-59 and the Proposed Regulatory Amendments impose significant changes to the regulatory landscape around economic sanctions, and significantly expand the reporting obligations and scope of due diligence for reporting entities under the PCMLTFA. C-59 also expands the scope of application of sanctions-related reporting to importers and exporters, many of whom have not been subject to the regime set out in the PCMLTFA up until now. All parties subject to these changes should ensure to undertake appropriate due diligence with regards to compliance with sanctions to ensure that they are making accurate reports and declarations as required by these new provisions under the PCMLTFA and its associated regulations.

As noted above, though the Bulletin provides some guidance on the Canadian Government's interpretation of sanctions evasion offences, there remains significant ambiguity in terms of how regulatory agencies, including the CBSA and FINTRAC, will apply these new provisions and employ the new powers that are provided to them through the passage of C-59 and the likely implementation of the Proposed Regulatory Amendments. The McCarthy Tétrault International Trade and Investment team will continue to monitor these developments as Canada continues to rapidly expand its use of sanctions and related measures.

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