Canadian Industry Pushing for More Sanctions Guidance on Complex Deemed Ownership Rules

The Canadian government should release more sanctions guidance to lower the business uncertainty that has spiked since Russia’s invasion of Ukraine last year and the implementation of Canada’s new deemed ownership rules in June, lawyers said at a conference this week. A Canadian official said the government is working on guidance but stressed that the wide scope of the country’s sanctions laws, particularly against Russia, is unlikely to change.

“It’s broad,” Stephen Burridge, director of sanctions policy at Global Affairs Canada, said of Canada’s new deemed ownership rules. “So take a very broad approach to its interpretation.”

Canada in June enacted several significant changes to its sanctions laws, including one that mimics the U.S. Treasury Department’s 50% rule, which extends blocking measures to any entity owned 50% or more by another sanctioned entity. Another allows Canada to establish that a sanctioned person has “effective control” over a business if that person is able to, directly or indirectly, “change the composition or powers” of that entity’s board of directors or if it’s “reasonable to conclude that the person is able to direct the entity’s activities.” Law firms warned that doing due diligence for these new deemed ownership tests could prove nearly impossible (see 2304280013).

More than four months after the rules became law, Jessica Horwitz, a trade lawyer with Bennett Jones, said diligence remains unclear. “What we don't have is guidance from Global Affairs about how the government intends to interpret the scope of effective control,” she said during a sanctions enforcement and compliance conference hosted by the Wilson Center this week.

“This is a really relevant question for businesses, because the question is: what due diligence is sufficient due diligence?”

Companies are unsure about the types of documents they need to request from their counterparty to determine whether a minority shareholder that may be subject to sanctions has the ability to change the composition of the board of directors, Horwitz said. She added that sometimes this information is kept confidential as part of a shareholders’ agreement or as part of the company’s bylaws, especially if the firm isn’t a publicly traded corporation.

“Then it becomes a negotiation with your counterparty,” Horwitz said. “Are they willing to disclose this information to help you get across your due diligence threshold and obtain a reasonable level of comfort with the transaction to demonstrate due diligence in the event that there was some kind of enforcement action later?”

Michael Milne, a trade lawyer with Cassidy Levy, said some of those compliance efforts are made more complicated by the fact that, unlike the Office of Foreign Assets Control, Canada doesn’t impose civil administrative penalties for violations. He said businesses don’t have examples of previous Canadian civil penalty cases to help them determine whether they should move forward with a potentially risky business transaction.

“Just last night, I was on the OFAC website looking at the fines that have been issued through this year. I think it's in the $500 million” range, Milne said. “There's been zero penalties of that type issued in Canada.”

Although banks and other sophisticated financial institutions “are very aware” of Canadian sanctions laws, other Canadian businesses “have a real business decision to make,” he said. “They can either choose to over-comply and forgo the opportunity, or they can choose to take the risk, even though they're getting advice from us that yes, there is some level of risk involved with this activity, but we can't tell you it's a certainty one way or the other.”

Milne said businesses choose to take the risks in “many cases,” mostly because they have seen a “relative lack of enforcement in Canada, publicly speaking.” He added: “I don't work for the government of Canada, I can't speak for them. But my sense is that it would be best if everyone knew the rules and complied with the rules as they are intended.”

Burridge, the Canadian government official, said he’s aware that industry wants more sanctions guidance. “We know that very, very well."

But he also stressed that Canada has taken a “very clear stance” against Russia and wants its sanctions, including the deemed ownership rules, to stop a broad range of business dealings with the country. “The measures that we've developed have hit a number of different sectors,” Burridge said. “They're meant to be broad in their scope.”

Canada is considering issuing guidance, he added, but there is a “fine line” between offering legal advice, which it can’t do, and “providing the kind of granularity on guidance” that companies want.

Burridge said the government has recently dedicated more funding to his agency, which should give it more resources to offer guidance. He asked businesses and lawyers to “continue to flag where these sticky points are” so the government can address them.

“I certainly don't want to make any sort of excuses, but definitely since February of 2022, the world has changed,” he said. “My very, very small team has been working tirelessly to try to engage with stakeholders and offer as much information as they can on these measures, but it is a work in progress.”