|August 14, 2014|
Previously published on August 11, 2014
To date, Canada’s response to the ongoing conflict in the Ukraine has been the imposition of sanctions on Pro-Russian elements of the former Ukrainian government and Eastern Ukrainian separatist factions linked to Moscow. Russia itself has responded with sanctions directed at prominent Canadians. The term “sanctions” conjures an image of trade limits and embargoes. Canada’s legislation allows for a diversity of measures, including travel and visa restrictions, asset freezing, the suspension of diplomatic relations, and penalties meted out to enterprises engaged in business or trade with sanctioned parties. This bulletin reviews the specific legal mechanisms of Canada’s sanctions regime associated with freezing assets of politically-exposed persons. Doing business with any such persons while sanctions are in force is a criminal offence, regardless of the nature of the business transacted.
The Freezing Assets of Corrupt Foreign Officials Act
The Freezing Assets of Corrupt Foreign Officials Act (“Act”) is a recent addition to Canada’s sanctions regime. The Act gives the Canadian government power to seize, freeze, or sequester the property of corrupt “politically exposed foreign persons” (“PEFP”), and to restrict dealings with PEFPs in Canada or by Canadians abroad. While the Act confers the Canadian government broad powers, its potential use is limited, first requiring a foreign state’s request to freeze PEFP assets for misappropriating state property or acquiring it inappropriately through political stature. At present, two regulations have been made under the Act, naming PEFPs in Egypt and Tunisia, and the Ukraine. Companies should be cognizant of current regulations and named PEFPs as they may be required to cease business dealings with PEFPs, or disclose PEFP assets under their control.
Who Qualifies as a PEFP?
The term “politically exposed foreign person” refers generally to a foreign state’s political leadership. Under the Act, a PEFP is defined as anyone who holds or has held any of the following positions and their close associates: (i) Heads of state; (ii) Members of the executive council of government or member of legislature; (iii) Deputy ministers or equivalent rank; (iv) Ambassadors or attachés or councillors of an ambassador; (v) Military officers with a rank of general or above; (vi) Presidents of a state-owned company or state-owned bank; (vii) Heads of government agencies; (viii) Judges; (ix) Leaders or presidents of political parties represented in the legislature; and (x) Holders of prescribed offices or positions (“prescribed” means by regulation).
What Can the Government Do?
The Act gives the Canadian government power to make orders to seize, freeze, or sequester any PEFP property located in Canada. Assets may be frozen for up to five years; however, an order may be extended more than once. In addition, the Act permits the government to make orders or regulations that restrict or prohibit Canadians from dealing directly or indirectly with PEFP property, entering into or facilitating a related financial transaction with PEFP property, or providing financial services with respect to PEFP property.
A significant limitation in the regime is the prohibition on action unless a foreign state requests it to freeze the assets of a named individual. The request must be written and assert that the named person misappropriated the foreign state’s property or acquired property inappropriately by virtue of their office or personal or business relationships.
If a written request is received, the Canadian government must be satisfied that three conditions are met, namely:
1. the person identified is a PEFP;
2. there is internal turmoil or an uncertain political situation in the foreign state; and
3. making an order or regulation is in the interest of international relations.
Obligations Imposed on the Private Sector
The Act requires persons in Canada or Canadians abroad to report any PEFP property in their possession or control, or information about a transaction involving PEFP property to the Commissioner of the Royal Canadian Mounted Police. The Act also requires certain listed entities to continually determine whether they possess or control PEFP property. These entities include:
(i) foreign banks, as defined in section 2 of the Bank Act;
(ii) cooperative credit societies, savings and credit unions, caisses populaires regulated by a provincial Act and associations regulated by the Cooperative Credit Associations Act;
(iii) foreign companies, companies, provincial companies and societies, as all of these are defined in s. 2(1) of the Insurance Companies Act;
(iv) fraternal benefit societies regulated by a provincial Act in respect of their insurance activities and insurance companies and other provincially-regulated entities engaged in the business of insuring risks;
(v) provincially-regulated trust companies and loan companies;
(vi) entities that engage in any activity described in s. 5(h) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act if the activity involves the opening of an account for the client; and
(vii) entities authorised under provincial legislation to engage in the business of dealing in securities or to provide portfolio management or investment counselling services.
By this legislation, most financial services providers, no matter their size or market activities, are subject to a monitoring and reporting requirement.
Consequences of Breach and Exceptions to the Act
Anyone found to have wilfully contravened an order or regulation under the Act is guilty of an indictable offence and is liable to a term of imprisonment of up to five years, or a fine of up to $25,000. However, the Minister of Foreign Affairs may issue permits to undertake activities or transactions restricted under the Act. Importantly, a permit may be subject to additional terms and conditions and the Minister may amend, suspend, revoke or reinstate the permit at any time.
Measures Currently in Force
Measures Targeting Tunisia and Egypt
On March 23, 2011, the Canadian government issued the Freezing Assets of Corrupt Foreign Officials (Tunisia and Egypt) Regulations. The Regulations give effect to written requests from the Tunisian and Egyptian governments following a period of political upheaval in each country associated with the Arab Spring. Targeted under the regulations are former leaders and senior officials of each state’s previous regime.
In summary, according to the Regulations, a person in Canada or a Canadian outside Canada must not: (i) directly or indirectly deal with PEFP property; (ii) directly or indirectly enter into or facilitate any financial transaction related to PEFP property; and (iii) provide financial services or other related services in respect of PEFP property.
Measures Targeting the Ukraine
On March 4, 2014, the Canadian government issued the same type of restrictions in the form of the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations. Those named in the Regulations include Ukraine’s former president, Viktor Yanukovich, and those closely associated with his inner circle. Additional names have been added at various points, including after the destruction of Malaysian Airlines flight MH17.
The Act’s Place Within Canada’s Sanctions Regime
The Act holds a small but important position in Canada’s overall sanctions regime. Most Canadian sanctions are issued under the United Nations Act, giving effect to UN Security Council resolutions, or the Special Economic Measures Act, in response to situations that are deemed to breach international peace and security.
The Act’s implementation is largely discretionary, having no requirement for finding a PEFP “corrupt” by the Canadian government. Rather, corruption is implied by a foreign state’s request to freeze a PEFP’s assets and by the Canadian government’s decision to act “in the interest of international relations”. The Act’s use will depend therefore on the Canadian government’s opinion of those targeted for sanction as well as Canada’s present relations with the state in question.
To date, the Act’s favoured use is for situations of political transition in foreign states. Whether this trend continues is uncertain, however, there is an emerging pattern to suggest the Act may be used against former leadership of rogue states that have, through installing a new government, gained fresh legitimacy in the eyes of the Canadian government.
As a general rule, companies should regularly screen new and existing customers for listing as a PEFP. Financial services providers should treat sanctions compliance as they do all anti-money laundering and terrorist finance protocols; the same types of internal review conducted to adhere to those regimes is sufficient for avoiding transacting with a PEFP. As the Act is used in situations of political transition, Canadian businesses should be aware of potential political instability in states where the business has operations, and monitor, through management training and oversight, points of interface with public figures and government personnel. A sanctions regime can be imposed overnight, and is enforceable immediately; preparation is the best means of ensuring full compliance.