Canada's sanctions regulator, Global Affairs Canada ("GAC"), recently updated its Canadian Sanctions – Frequently Asked Questions (the "FAQs"), providing long awaited and important new guidance about the application and scope of Canada's sanctions laws.

We discuss the guidance and the implications for Canadian businesses below.

Background: Sanctions Compliance Challenges

The expansion of Canadian sanctions in response to Russia's invasion of Ukraine has created significant compliance challenges for Canadian businesses. Much of the challenge stems from the broad language used in Canada's sanctions laws, including the key prohibitions on persons in Canada and Canadians abroad from:

  • dealing in any property, wherever situated, that is owned, held or controlled by or on behalf of a sanctioned person (the "Dealings Prohibition")
  • entering into or facilitating, directly or indirectly, any transaction related to a dealing in property that is owned, held or controlled by or on behalf of a sanctioned person (the "Facilitation Prohibition")

Compounding the compliance challenge has been the lack, until now, of guidance from GAC—in contrast to sanctions regulators in the United States and the United Kingdom—about the application and scope of Canada's sanctions laws.

The Guidance

The guidance addresses the following compliance issues, all of which concern the Dealings Prohibition and the Facilitation Prohibition:

  • Can I deal with an entity that deals with a designated person?
  • Can I deal with the subsidiaries of a designated company?
  • What happens when a person is designated?
  • When does a prohibition apply?

Can I deal with an entity that deals with a designated person?

According to GAC, the Facilitation Prohibition prohibits both the direct and indirect facilitation of dealings between "any person and a sanctioned person", regardless of whether those parties are subject to Canadian jurisdiction or sanctioned by Canada. For instance, according to GAC, a Canadian company (A) would be prohibited from sourcing a product from a non-sanctioned foreign company (B) that uses inputs from a Canadian-sanctioned company (C), even though Company A does not itself have any dealings with Company C and Company C is not sanctioned under the laws applicable to Company B.

This interpretation indicates that GAC takes an expansive view of the Facilitation Prohibition, including as relates to indirect transactions. This has major implications for Canadian companies and their cross-border supply chains, since pursuant to GAC's guidance, the use of any inputs from Canadian-sanctioned companies in the production of goods, regardless of how far down the supply chain, may be sufficient to engage the Facilitation Prohibition for Canadian purchasers.

Can I deal with the subsidiaries of a designated company?

Knowing when a company is "owned or controlled, directly or indirectly" by sanctioned persons has proved particularly difficult, notwithstanding amendments to the Special Economic Measures Act introducing "deemed ownership" rules and criteria to assess control. GAC's guidance confirms a widely shared understanding that purchasing goods from a company that is majority-owned by a Canadian-sanctioned entity would violate the Dealings Prohibition, but GAC also indicates that purchasing goods from a company in which a Canadian-sanctioned entity has a minority ownership interest but is known to "exercise considerable influence" over the company, may also violate the Dealings Prohibition.

While seemingly intending to clarify the law, this guidance raises further questions. For instance, the meaning of "considerable influence" or how it is to be assessed is not found in Canada's sanctions laws or otherwise discussed in GAC's guidance, leaving Canadian businesses to make determinations about whether such influence engages the deemed ownership and Dealings Prohibition on their own.

What happens when a person is designated?

Although GAC's discussion about the application of the Dealings Prohibitions when a person is sanctioned provides a high-level summary of the law, it does suggest that they consider the dealings prohibition to be limited to commercial transactions rather than all dealings more broadly.

When does a prohibition apply?

GAC confirms that sanctions prohibitions apply only from the date of their entry into force. According to GAC, certain dealings with sanctioned parties may be permissible after the sanctions designation enters into force under exceptions to the Dealings Prohibition that are contained in the applicable regulations. GAC's guidance sets out several scenarios as to how these exceptions may apply. For instance, according to GAC, a Canadian company will be able to receive goods from a sanctioned company after the designation enters into force without violating the Dealings Prohibition provided that the Canadian company made payment to the sanctioned company prior to its designation.

Key Takeaways for Businesses

While not legally binding, the guidance indicates that GAC takes an expansive view of the application of Canada's sanctions laws. When read against the reality of global, multi-tier supply chains, the guidance highlights the need for robust compliance and de-risking strategies. The GAC guidance effectively puts companies on notice that GAC expects them have a thorough understanding of the applicability of sanctions to their operations and the potential liability for non-compliance. Companies must therefore exercise deep and ongoing due diligence to ensure that their dealings with their businesses partners and suppliers, including beyond their Tier 1 suppliers, do not violate Canada's sanctions laws.

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.