Written By Jessica Horwitz, Sabrina A. Bandali and Laurie Wright
On April 20, 2023, Canada's federal government introduced Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023. Among the numerous legislative changes contained in this omnibus budget bill are some potentially significant amendments to certain Canadian economic sanctions legislation, namely the Special Economic Measures Act (SEMA) and the Justice for Victims of Corrupt Foreign Officials Act (Magnitsky Law). Among other things, the amendments introduce new legal tests with the apparent intention of clarifying Canada's murky sanctions "ownership and control" rules.
Although the proposed legislation contains some helpful clarifying elements, other elements of the bill do not improve the status quo, under which a lack of clear rules or interpretive guidance make it difficult for businesses to navigate compliance in practice.
Most Canadian sanctions regulations contain a standard set of prohibitions that include a ban on dealings in property with, the provision of financial services to, and the supply of goods to (or in some regulations the broader term "property" is used) individuals or entities listed in an applicable sanctions schedule ("listed persons"). The effect of this suite of prohibitions is to freeze the listed person's assets and to generally restrict their ability to transact business with Canada and Canadians. However, historically Canada has not had clear rules about when ownership or control by a listed entity would be sufficient to extent the prohibition to other entities or their property.
The wording of the standard 'asset freeze' clause reads as follows, subject to minor variations in individual sanctions regulations:
3 It is prohibited for any person in Canada and any Canadian outside Canada to
(a) deal in any property, wherever situated, that is owned—or that is held or controlled, directly or indirectly—by a listed person;
(b) enter into or facilitate any transaction related to a dealing referred to in paragraph (a);
(c) provide any financial or related services in respect of a dealing referred to in paragraph (a);
(d) make available any goods, wherever situated, to a listed person or to a person acting on behalf of a listed person; or
(e) provide any financial or related services to or for the benefit of a listed person.
In contrast with other "like-minded" sanctions-imposing countries such as the United States, the European Union and the United Kingdom, which have either legislated definitions of ownership control or detailed interpretive guidance, Canada has historically not had any legislation, regulation, case law, administrative policy or guidance that specifically defines the circumstances in which property—including assets held by corporate subsidiaries—is considered property "owned, held or controlled, by or on behalf of" a listed person for purposes of the asset freeze and dealings ban.
The first and only time that the ownership and control provisions of Canadian sanctions legislation were meaningfully considered by a Canadian court was in October, 2022 when the Alberta Court of the King's Bench discussed the scope of the economic sanctions on Russia in the context of a motion to stay enforcement of an arbitral award that would have benefitted a joint venture entity that was 50 percent owned by a sanctioned company: Angophora Holdings Limited v. Ovsyankin, 2022 ABKB 711. Although the stay was not granted, the Court commented that that the evidence of 50 percent ownership constituted "a strong prima facie case that Angophora may be controlled by or acting on behalf of a corporation subject to the Russian sanctions".
Canada's lack of a concrete policy on sanctions ownership and control has elicited criticism from Canadian businesses and citizens who desire guidance and certainty to inform their sanctions due diligence and compliance efforts.
Bill C-47—Sanctions Ownership and Control
In an apparent attempt to address this concern and narrow the interpretive gap between Canada and its key trading partners, Bill C-47 introduces a "deemed ownership" clause to the SEMA and the Magnitsky Law. The proposed amendment specifies that "control" of an entity is deemed to constitute ownership of that entity's property, and defines the circumstances in which control is present:
2.1 (1) If a person controls an entity other than a foreign state, any property that is owned—or that is held or controlled, directly or indirectly — by the entity is deemed to be owned by that person.
(2) For the purposes of subsection (1), a person controls an entity, directly or indirectly, if any of the following criteria are met:
(a) the person holds, directly or indirectly, 50% or more of the shares or ownership interests in the entity or 50% or more of the voting rights in the entity;
(b) the person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; or
(c) it is reasonable to conclude, having regard to all the circumstances, that the person is able, directly or indirectly and through any means, to direct the entity’s activities.
This definition introduces a formal "50% rule" that is similar to the one that has long been in place in the United States. The US rule deems any property of an entity owned 50 percent or more by a listed person to be also subject to the same sanctions prohibitions as the listed person. In Canada, absent guidance or authoritative judicial interpretation about the scope of "ownership and control" in this context, it has been a longstanding best practice to assume that majority ownership would extend the asset freeze / dealings ban to a subsidiary of a listed person. The proposed amendment in Bill C-47 will provide long-desired certainty that if an entity is owned 50 percent or more by a listed person, directly or indirectly, then the restrictions in Canadian sanctions laws will extend to the owned entity's property.
Although Canada has chosen to mirror the U.S. approach of "50% or more" for purposes of the bright-line ownership based control test, the proposed amendments go farther and also incorporate a broader definition of control that is more akin to the EU's approach. The proposed Canadian definition of control contemplates that deemed ownership can arise in a situation where a listed person owns less than 50 percent of shares or ownership interests but exercises "effective" control of an entity, either by having the ability, directly or indirectly, to change the composition or powers of the entity’s board of directors or to direct the entity's activities. This rule could also conceivably trigger sanctions restrictions in situations where the listed person holds no ownership interest at all, for example, if a listed person transfers legal title of assets to a close family member for purposes of circumventing sanctions, but in fact retains control over the assets.
The control criteria in the proposed amendment remain very broad. For example, the criterion of being "able, directly or indirectly, to change the composition or powers of the entity's board" does not specify a threshold for such influence (for example, the ability to appoint a certain number of directors). The residual provision in proposed paragraph 2.1(2)(c) of any circumstances in which "it is reasonable to conclude, having regard to all the circumstances, that the person is able, directly or indirectly and through any means, to direct the entity’s activities" also does not specify a minimum extent or type of direction of the entities activities that would trigger the deeming provision. Absent policy guidance, therefore, these amendments suffer from a similar ambiguity as found in the current legislation.
In practice, these amendments are consistent with how businesses have conservatively interpreted the application of Canadian sanctions. Absent a bright line legal test, evaluating undefined ownership and control criteria under Canadian sanctions law already required undertaking a fact-specific analysis on a case-by-case basis.
That said, these amendments, and in particular confirmation of a 50 percent rule, provides some clarification for businesses to evaluate the results of the due diligence screenings and enable those performing sanctions risk assessments to reach a clear "no go" decision faster in situations where an entity is known to have 50 percent or more ownership by a listed person.
Other Proposed Amendments
In addition to the ownership and control provisions, Bill-C47 also proposes a number of other amendments to the SEMA that could have a material impact on Canadian sanctions compliance depending on how they are interpreted and administered. For example,
Various enabling provisions throughout the SEMA are amended to empower the Canadian government to implement sanctions restrictions on any person "outside Canada who is not Canadian", expanding the scope of the SEMA's sanctions authority which is currently limited to only target individuals or entities located in or nationals of the country named in the regulation.
A new paragraph (e.1) is added under subsection 4(2) of the SEMA to allow Canada to prohibit "the transfer or provision by any person in Canada or Canadian outside Canada of property other than goods to that foreign state, any person in that foreign state, a national of that foreign state who does not ordinarily reside in Canada or a person outside Canada who is not Canadian". This would align the SEMA with the Magnitsky Law, which allows for the prohibition on supplying any "property" broadly speaking to a listed person, including both tangible property (goods) and intangible property (such as money, funds, currency, digital assets, virtual currency); the current SEMA only contemplates a prohibition on the supply of "goods".
The Bill also includes amendments to the sanctions statutes and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to harmonize and coordinate sanctioned asset reporting obligations under the various statutes, and expands the list of other Canadian government departments with whom Global Affairs Canada can coordinate and share information on sanctions matters, which should assist in the government's information gathering and enforcement.
The Bennett Jones International Trade & Investment team has extensive experience helping clients navigate sanctions compliance issues. If you have any questions about Canadian sanctions matters, please contact one of the authors.