It has been over a year since Russia first declared the “independence” and “sovereignty” of the non-government controlled areas of Donetsk and Luhansk in Ukraine and the subsequent full-scale invasion of Ukraine. Since that time, Canada and its allies, including the United States, the United Kingdom, and the European Union, have been engaged in an unprecedented campaign to apply punitive economic measures, largely through sanctions, to Russia, Belarus, and the Russian-occupied regions of Ukraine. Given the size of the Russian economy (estimated as the 11th largest in the world in 2021), the integration of Russia and its banks in the international financial system, and the level of commercial trade and investment between Russia and Western nations, these measures targeting Russia constitute the most significant and complex international sanctions regime in modern history.
As we pass the one year mark of Russia’s further invasion of Ukraine, all signs point to continued geopolitical instability in the region and further expansion of aggressive international sanctions and trade control measures. It is therefore an appropriate time to not only take stock of the scope of the measures that have been applied over the last year, but also to highlight the challenges that Canada’s broad sanctions response has created for those doing business abroad, address what can be expected during the balance of 2023, and outline the steps companies can take to mitigate their risk exposure and ensure compliance going forward.
1. Key Lessons Learned
The aggressive rollout of sanctions measures against Russia by the Western allies throughout 2022 provided many challenges and lessons for Canadian companies in the context of sanctions implementation and compliance. Some of the key ones include:
Multiple sanctions regimes are at play – The activities of any company doing business abroad will likely engage the sanctions regimes of multiple jurisdictions. For Canadian companies this means that in addition to Canada’s sanctions measures, they must also consider the application of US, UK, and EU measures, some of which may be extraterritorial, as well as those of other countries which may apply depending on jurisdictional touchpoints. In some cases, Canadian companies must also consider the risk of exposure to countermeasures threatened or imposed by the sanctions target, i.e. Russia.
Although the Western allies’ measures are described as being “coordinated”, there are often significant differences in scope - In many cases, Canada’s sanctions are more aggressive than those of its allies such that what may be wholly permissible in the United States or other Western countries is prohibited by Canada. One example is Canada’s sanctioning of certain Russian banks and other parties who are not sanctioned, or not sanctioned to the same extent, by US, UK, or EU authorities or who are subject to winding-down exemptions or general licenses by these countries, which Canada does not employ. Another example is Canada’s services prohibitions which apply to 30 categories of services, in stark contrast to the more limited measures of its allies. Given these differences, in every instance that requires sanctions diligence, Canadian sanctions measures, including listings, should be examined alongside the measures of other jurisdictions, as compliance with foreign sanctions regimes against Russia would not automatically mean that the Canadian sanctions requirements are satisfied.
Lack of published guidance continues to present significant challenges for risk assessment and compliance – Unlike other Western jurisdictions, Canada has not publicly issued substantive guidance on the interpretation of its sanctions measures. Uncertainties continue to persist on a range of issues, including, for example, the application of sanctions to entities owned or controlled by designated persons, the meaning of “facilitate, directly or indirectly, transactions related to dealings” involving listed persons, the application of sanctions to dealings in publicly traded debt and equity securities of designated Russian and Belarussian entities, the scope of the services prohibitions, and the meaning of “a person in” Russia or Belarus for purposes of supply prohibitions on goods, technology and services. As we’ve previously discussed, this absence of guidance has been noted in at least one judicial decision examining the issue of entities owned or controlled by designated persons, with this decision relying on foreign guidance published by Western allies to attempt to fill the void. Because of this, the Canadian government has been overwhelmed with inquires and sanctions permit requests seeking clarification on the interpretation of these broadly worded prohibitions. Notably, Canada has announced its intention to invest $76 million to strengthen Canada’s capacity to implement and enforce sanctions. This includes establishing a dedicated bureau at Global Affairs Canada to address sanctions issues.
Transactional due diligence is more important than ever – Rigorous sanctions and trade controls diligence is now expected and demanded in M&A, corporate finance, as well as regular commercial transactions and relationships, which includes a thorough screening of counterparties and others directly or indirectly involved in the transaction and those who own or control them, understanding the target’s potential exposure to sanctioned jurisdictions and listed persons, and ensuring that targets have effectively implemented sanctions compliance policies and controls. In some cases, because of compliance risks and monitoring costs or the potential reputational exposure, firms have decided to withdraw or refrain from activities involving Russia, Belarus or the occupied regions of Ukraine, regardless of whether they are strictly required to do so under applicable sanctions. In the current geopolitical environment, given both the legal and reputational impact of these concerns, sanctions compliance has become a priority for the boards and senior management of organizations with international operations.
Sanctions measures are extraterritorial, and apply beyond just imports into and exports from Canada or other activities within Canada – The sanctions prohibitions apply to “persons in Canada” and “Canadians outside Canada”. The activities of a Canadian individual or entity anywhere in the world are subject to the jurisdiction of these Canadian measures. Although frequently announced or referred to as “import bans” or “export bans”, these measures apply more broadly to Canadians located anywhere in the world who may be sourcing items from or supplying items to Russia or “persons in Russia”. This includes Canadians located in countries that have different or more relaxed measures in place when it comes to dealing with Russia or Belarus. Whether it involves a Canadian company operating abroad or a Canadian national employed by a foreign entity or sitting on its board of directors, they fall within the jurisdiction of Canadian sanctions law and are prohibited from engaging in these activities even if the goods, services, or technology at issue have no connection to Canada.
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- John W. Boscariol
- Oksana Migitko
- Gajan Sathananthan