Caught in the crossfire: Canada’s flawed sanctions regime clouds business certainty

Warren Ferguson is an associate in the competition and foreign investment group at Stikeman Elliott LLP.

While Canada’s economic sanctions regime is built with the laudable goal of addressing international peace and security concerns, gross violations of human rights, and significant corruption, it is a flawed system that often causes real uncertainty for law-abiding Canadian businesses.

Since Russia’s expanded invasion of Ukraine began in February, 2022, Canada’s use of economic sanctions has reached an unprecedented level. As of January, 2024, these sanctions, including the Special Economic Measures Act (SEMA), directly target more than 4,400 individuals and entities in at least 24 countries by imposing serious criminal liability targeting prohibited dealings.

However, fundamental flaws in the structure of this sanctions regime make it difficult for well-intentioned Canadians to comply. The growing burden of Canadian economic sanctions often falls on these same individuals and businesses, not their intended target – bad foreign actors.

Ambiguity in the scope of Canada’s economic sanctions regime makes it challenging for businesses to conduct commercial activities while ensuring they also comply with the law.

As an example, consider a scenario where a person sanctioned under SEMA indirectly owns 5 per cent of a Canadian company and has the right or ability to appoint a member to that company’s board of directors. Under one interpretation of SEMA’s vague deemed-ownership rules, that Canadian company would be deemed to be owned by the sanctioned person. If that is the case, it would be illegal for any Canadian to deal with that company, even if a law-abiding Canadian individual owned the remaining 95-per-cent ownership interest along with the right to appoint all the remaining board members.

Perhaps Parliament intended to criminalize all these dealings, and therefore to require Canadians to engage in extensive diligence any time they deal with any company whose ownership structure is uncertain. However, this seems unlikely and inconsistent with international practice. It is more likely that the deemed-ownership rule (which only came into force in June, 2023) was written with one objective in mind, without considering the unintended consequences of vague language on its general applicability by the average Canadian business.

While some upstanding Canadian businesses cautiously “overcomply” with unclear law, actual sanctions evaders and other bad actors will profit while facing little risk of criminal prosecution. Despite (or perhaps because of) the ambiguous nature of Canada’s criminal sanctions regime, there have been almost no prosecutions, successful or otherwise, by Ottawa for sanctions violations. Over the past 20 years, there have been only three prosecutions under various statutes, resulting in one conviction, one guilty plea and one acquittal. In fact, Canada has not commenced a prosecution under SEMA over the past 2½ years, despite sanctioning thousands of individuals and entities since Russia’s expanded invasion of Ukraine.

This stands in stark contrast with sanctions-enforcement efforts in the United States. In 2023, the Office of Foreign Assets Control secured civil penalties and settlements against 17 businesses totalling more than US$1.5-billion, in addition to notably successful criminal prosecutions (at least in comparison with Canada) undertaken by the U.S. Department of Justice.

Global Affairs Canada, the government agency responsible for administering our sanctions regime, has provided little useful guidance on interpreting ambiguity therein. Most strikingly, this includes no guidance on how to interpret Canada’s deemed-ownership rules, which remain an international outlier more than a year after coming into force. Without such guidance, those Canadian businesses that are most compliant often err on the side of caution and choose not to engage in transactions that Parliament may well have intended to be completely legal. In effect, this uncertainty negatively affects desirable Canadian economic activity.

Canada’s sanctions regime suffers from several fundamental flaws that make it hard for Canadians to both comply with the law and remain competitive on the world stage. The combined effect of ambiguous laws with no effective guidance from GAC coupled with insufficient enforcement puts Canadians at a global disadvantage. In a 2024 report, Parliament’s standing committee on foreign affairs and international development appears to have noted several of these deficiencies, but changes do not appear forthcoming. Until those changes materialize, law-abiding Canadian businesses will be left in a worst-case scenario, caught in the crossfire of a well-intentioned but flawed regime.

Canada’s sanctions are founded on laudable objectives – it is unfortunate the practical reality is not as praiseworthy.

This post was originally published on here