Lender ‘know your client’ diligence—compliance with Canadian sanctions laws

In light of the continuing globalization of trade and international cross border financing arrangements, it is critical to determine if a transaction is prohibited by sanctions laws. Under Canadian and international law, there are a variety of sanctions laws that apply to all individuals and businesses in Canada and to all Canadian citizens and Canadian-incorporated businesses operating outside of Canada. Understanding the restrictions and your obligations as a lender is essential.

Overview of Economic Sanctions Laws

1. Criminal Code

Part II.1 of the Criminal Code[1] outlines terrorism related offences, including the financing of terrorism. The Criminal Code clearly states that any dealing in property of terrorist groups, including certain entities outlined in the Regulations Establishing a List of Entities (as established under the Criminal Code and discussed further below), or providing or facilitating any financial or related service for any terrorist activity or group is strictly prohibited. In determining whether a financial institution knowingly financed a terrorist group, the courts will look to determine if the lender was wilfully blind. Meaning, did the lender deliberately refrain from making inquiries, including conducting proper due diligence, so as not to have its potential suspicions confirmed or the terrorist connections of its borrowing group revealed.

2. United Nations Act

When sanctions are enacted by the United Nations Security Council they are adopted into Canadian law through regulations made under the United Nations Act[2]. Sanctions made pursuant to the United Nations Act generally include prohibitions against providing financial or technical assistance, trade restrictions and arms embargoes. Currently, there are sanctions in place against Somalia, North Korea, South Sudan, Sudan, Central African Republic, Yemen, Iraq, Iran, Lebanon, Mali and Libya.

3. Special Economic Measures Act

Pursuant to the Special Economic Measures Act[3](“SEMA”), the Government of Canada has the ability to impose sanctions on foreign persons and jurisdictions where the government is of the opinion that a breach of international peace and security has occurred that is likely to cause a serious international crisis. It is important to note that SEMA provides the Government of Canada the authority to impose these sanctions without a UN Security Council resolution. Regulations enacted under SEMA generally prohibit dealings in the property, including the financial assets, of persons designated under the regulations. Currently, Canada has enacted regulations under SEMA against Burma, Iran, North Korea, Russia, Venezuela, South Sudan, Syria, Ukraine, Libya, Zimbabwe and Nicaragua.

4. Justice for Victims of Corrupt Foreign Officials Act

The Justice for Victims of Corrupt Foreign Officials Act[4] (“JVCO”) also known as the ‘Sergei Magnitsky Law’, provides for measures that can be taken against foreign nationals who have committed extrajudicial killings, torture or other gross violations of internationally protected human rights. As part of JVCO, the Government of Canada can prohibit individuals and entities in Canada, or any Canadian citizen or corporation outside of Canada, from entering into or assisting in financial transactions that relate to property held by a foreign national. An order made under JVCO is effective for five years and can be extended thereafter.

Pursuant to JVCO, federally and provincially regulated businesses (including banks, credit unions, insurance companies, trust and loan companies and investment managers) have a duty to determine on a continuing basis whether they are in possession or control of property that they have reason to believe is subject to an order or regulation under JVCO.

5. Freezing Assets of Corrupt Foreign Officials Act

The Freezing Assets of Corrupt Foreign Officials Act (“FACFO”)[5] authorizes the Government of Canada to issue orders directing that property located in Canada of a politically exposed foreign person be seized, frozen or sequestered when there is internal political turmoil in a foreign state. Additionally, FACFO allows the Government of Canada to restrict business transactions with politically exposed foreign persons. As with the sanctions under JVCO, FACFO sanctions expire after five years unless extended by the Canadian Government.

Lender Due Diligence Reference Materials

As part of lender “know your client” and anti-money laundering procedures, lenders should carefully consult the following materials to ensure that the borrower and/or its affiliates are not included on any of the following lists:

1. The United Nations updates a consolidated list of all designations under United Nations Security Council resolutions. This is a link to the full consolidated list.
2. Pursuant to section 83.05(1) of the Criminal Code, the Governor in Council may, by regulation, establish a list on which the Governor in Council may place any entity if, on the recommendation of the Minister of Public Safety and Emergency Preparedness, the Governor in Council is satisfied that there are reasonable grounds to believe that (a) the entity has knowingly carried out, attempted to carry out, participated in or facilitated a terrorist activity; or (b) the entity has knowingly acted on behalf of, at the direction of or in association with an entity outlined in (a) above. Linked here is the Schedule of the Regulations Establishing a List of Entities.
3. The Government of Canada has published the Consolidated Canadian Autonomous Sanctions List which outlines individuals and entities that are subject to specific sanction regulations under SEMA and JVCO. This is a link to the Consolidated Canadian Autonomous Sanctions List.
4. Any individuals designated under FACFO are not currently included in the above-noted consolidated list. However, the FACFO lists can be accessed through the FACFO Tunisia Regulations or the FACFO Ukraine Regulations.

Other Canadian Business Restrictions

1. Foreign Extraterritorial Measures Act

The Foreign Extraterritorial Measures Act[6] (“FEMA”) allows the Government of Canada to protect Canadians and Canadian businesses from the extraterritorial application of foreign laws. Under FEMA, Canadian sovereignty is protected, including Canada’s international trading and commercial interests, by allowing the Government of Canada to respond to unacceptable extraterritorial assertions of foreign jurisdiction. Currently, the following two blocking orders have been issued pursuant to FEMA:

(a) The Foreign Extraterritorial Measures (United States) Order, 1992 (the “1992 Order”)—blocks the extraterritorial application in Canada of the United States embargo against Cuba. The 1992 Order prohibits a Canadian corporation, including its directors, officers and employees, from complying with an extraterritorial measure of the United States in connection with any trade between Canada and Cuba.

(b) The Certain Foreign Extraterritorial Measures (United States) Order, 2014 (the “2014 Order”)—prohibits any person from Canada with complying with the United States “Buy America” requirements in connection with the redevelopment of premises leased by the State of Alaska from the Prince Rupert Port Authority.

2. Canadian Anti-Discrimination Laws

The Provinces of Ontario and Manitoba have each enacted a Discriminatory Business Practices Act[7]. The purpose of the legislation is to prevent discrimination in Ontario and Manitoba on the grounds of race, creed, colour, nationality, ancestry, place of origin, sex or geographical locations of persons employed in or engaging in business. The legislation strictly prohibits a person from refusing to engage in business with another person on account of any of the above-noted grounds. The legislation also includes an obligation to report any request to participate in prohibited activities.

3. Export and Import Permits Act

The Export and Import Permits Act[8] (“EIPA”), imposes export and import trade controls on specific goods and on goods coming from specific jurisdictions. The controls are outlined in the following three lists:

(i) The Area Control List sets out a list of countries that have export controls imposed by the Government of Canada.

(ii) The Export Control List sets out a list of goods that have export controls imposed by the Government of Canada.

(iii) The Import Control List sets out a list of goods that have import controls imposed by the Government of Canada.

Conclusion

A thorough due diligence process is key to determining if a potential borrower and/or its affiliates is flagged by any Canadian or international sanctions laws. Incorporating a review of the Consolidated Canadian Autonomous Sanctions List and the Regulations Establishing a List of Entities under the Criminal Code early on can help to ensure that any red flags are caught at the outset of the diligence process.

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[1] Criminal Code, RSC, 1985, c. C-46.

[2] United Nations Act, RSC, 1985, c. U-2.

[3] Special Economic Measures Act, S.C.1992, c.17,s.1.

[4] Justice for Victims of Corrupt Foreign Officials Act, SC 2017, c. 21.

[5] Freezing Assets of Corrupt Foreign Officials Act, SC 2011, c. 10.

[6] Foreign Extraterritorial Measures Act, RSC 1985, c F-29.

[7] Discriminatory Business Practices Act (Ontario), RSO 1990, c. D. 12 and Discriminatory Business Practices Act (Manitoba), CCSM c. B120.

[8] Export and Import Permits Act, RSC 1985, c. E-19.