Canada's Crack-down on Sanctions Evasion

August 23, 2024

Written By Jessica Horwitz, Alison FitzGerald, Nathan Shaheen and Quinn Scarlett

On June 20, 2024, Bill C-59, the Fall Economic Statement Implementation Act received royal assent. Division 8 of this legislation introduced various amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, SC 2000, c 17 (PCMLTFA or the Act) and the Criminal Code (the Amendments) to support the Canadian Government's ongoing efforts to combat financial crime and prevent sanctions evasion.

On August 19, 2024, certain notable sections of the Amendments came into force that broaden the suspicious transaction reporting requirements under the Act to cover transactions suspected of relating to sanctions evasion. The Amendments also introduce new declaration requirements for importers and exporters regarding the sanctions status of property they are trading, which will be implemented in due course subject to the development of corresponding administrative procedures. Related proposed regulatory amendments, also not yet in force, will further expand sanctioned property reporting obligations for reporting entities under the Act.

These changes broaden the due diligence obligations of certain entities and the scope of information available to law enforcement and reflect a growing global trend of using international sanctions to penalize foreign governments, individuals and entities that engage in activities that violate international law or Canadian legal values to encourage behavior change. Canada's use of economic sanctions as a preferred foreign policy tool has accelerated since Russia invaded Ukraine in 2022; at present, more than 4,000 entities and individuals are listed under Canada's sanctions lists, and numerous other import, export, investment and transportation restrictions affect certain countries, geographic regions and industries. The Amendments also represent notable effort by the Government of Canada to improve its track record on sanctions enforcement, which was criticized in a report released last year by the Senate Standing Committee on Foreign Affairs and International Trade.

Key Amendments

1. Reporting Requirement for Sanctions Evasion Offences

The Act is Canada's primary anti-money laundering enforcement legislation. It imposes specific compliance, due diligence and reporting obligations on certain categories of businesses—such as financial institutions, investment dealers, money services businesses, real estate brokers, casinos, and dealers in gems and precious metals (see a full list here)—to help law enforcement detect and deter violations of the money laundering and terrorist financing prohibitions in the Criminal Code.

Reporting entities under the Act are already required to monitor for, and report to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), any transactions that are suspected of involving proceeds of crime (aka, money laundering) or terrorist financing activities.

The Amendments require that reporting entities now also disclose transactions, or attempted transactions, associated with the commission of a sanctions evasion offence to FINTRAC. The amended Act defines a sanctions evasion offence as:

[. . .] an offence arising from the contravention of a restriction or prohibition established by an order or a regulation made under the United Nations Act, the Special Economic Measures Act (SEMA) or the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law)(JVCFOA).‍

Reporting entities must submit a suspicious transaction report (STR) "as soon as practicable" once they have taken measures that establish reasonable grounds to suspect that the transaction is related to the commission of money laundering, terrorist financing, or a sanctions evasions offence. (See the FINTRAC website for information about other upcoming changes to its reporting systems).

Pursuant to FINTRAC’s Special Bulletin on Financial Activity Associated with Suspected Sanctions Evasion, when submitting an STR for a suspected sanctions evasion offence, reporting entities should include any available information on the ownership, control, and structure of entities involved in the relevant financial transaction(s), such as the owners, directors, officers and individuals with signing authority of each entity, as well as any information about related persons or other entities involved, where possible. The report should also include all available identifying information and descriptions of any legal entities or arrangements involved or associated with the impugned financial transaction(s).

In its compliance guidance on reporting suspected sanctions evasion, FINTRAC notes that if a transaction is suspected of being related to both a money laundering or terrorist financing offence and a sanctions evasion offence, a single STR containing all required information should be submitted.

2. Enhanced Importer and Exporter Reporting Requirements

The Amendments also introduce enhanced reporting obligations for individuals and entities engaged in the importation or exportation of goods under the Customs Act (not just AML reporting entities). When implemented, these amendments will expand the scope of activities that must be reported under the Act and the scope of reporting entities, such as the requirement for travelers crossing the border to declare monetary instruments valued at CAD $10,000 or more.

Specifically, persons engaged in import or export activities will be required to declare, to a customs officer, whether goods "actually" being imported or exported are proceeds of crime or are connected to money laundering, terrorist financing, or sanctions evasion. Moreover, the Amendments will require that importers or exporters must make this declaration in relation to "any financial transaction purporting to pay for goods being imported or exported." The exact form and timing of the declaration is not yet known.

The Amendments impose a duty to provide accurate, truthful, and complete information in all declarations and communications with customs and law enforcement officers. Persons engaged in import or export activities will also be required to maintain comprehensive records of these transactions for a period prescribed by regulation and must produce these records upon request by an officer. The provision references existing recordkeeping obligations under the Customs Act "with any modifications that the circumstances require", so it is not yet clear whether the scope of recordkeeping requirements to be implemented in relation to these amendments will be broader than the records that importers and exporters must already keep under applicable customs and trade control laws.

Businesses that trade in goods should also note that if an officer has reasonable grounds to believe traded goods are the proceeds of crime, or are related to money laundering, terrorist activities, or sanctions evasion, the officer may seize and forfeit said goods.

The Amendments will also authorize the Minister of Public Safety and Emergency Preparedness to create an administrative monetary penalty (AMP) scheme to promote compliance with the reporting requirements of imported and exported goods. This is a notable development because it represents a new mechanism by which Canada can financially penalize persons who engage in transactions involving sanctioned property on a civil basis without the need to meet criminal standards of evidence on prosecution.

Entry into force of this section of the Amendments has been deferred to allow the CBSA to implement corresponding forms and procedures for the declarations and to design the AMP program.

3. Increased Scope of Ministerial Directives

The Amendments allow the Government to consider risk of sanctions evasion when issuing ministerial directives or imposing restrictions or prohibitions on transactions. Section 11.42 of the Act already authorizes the Minister of Finance to issue "Ministerial Directives" that require reporting entities under the PCMLTFA to undertake specified supplemental due diligence in relation to financial transactions that involve a particular foreign state, foreign entity, or trusts deemed to be high risk. For example, in February 2024, a Ministerial Directive was issued that requires reporting entities to perform enhanced due diligence on all transactions involving Russia.

By virtue of the Bill C-59 Amendments, the Minister of Finance is now authorized to issue written directives and restrict transactions involving any foreign state or entity if the Minister is of the opinion that there is a risk that such transactions may facilitate sanctions evasion.

4. Lower Burden for Crown Prosecutors in Financial Crime Cases

The Amendments also amend section 462.31 of the Criminal Code to reduce the evidentiary burden on prosecutors in cases involving the prosecution of financial crimes by eliminating the requirement to prove mens rea (i.e., knowledge or intention to commit the crime) in circumstances in which the accused is charged with a money laundering offence but not the underlying offence. The Amendments provide that a court may now infer mens rea from the circumstances of a transaction, specifically if the manner in which the accused dealt with the property or its proceeds is "markedly unusual" or "inconsistent with lawful activities typical of the sector" in which they take place. The usual mens rea standard continues to apply for the prosecution of the underlying offence.

In the sanctions evasion context, this means that it will now be easier, for example, to prosecute persons for sending, transferring possession of, transporting, transmitting, altering, disposing of or otherwise dealing with property or proceeds derived from a SEMA or JVCFOA violation.

Expanded Property Reporting Requirements under Proposed Regulations

To complement the Amendments that came into force on August 19, 2024, several amendments have been proposed to regulations under the PCMLFTA (the Proposed Regulations). The proposal remained open for consultation until August 5, 2024, and the Proposed Regulations are awaiting a date to be brought into force by order of the Governor in Council. Once in force, the Proposed Regulations will expand sanctioned property reporting requirements by reporting entities under the Act.

Subsection 83.1(1) of the Criminal Code requires that any person in Canada and every Canadian outside Canada disclose property that is "in their possession or control that they know is owned or controlled by or on behalf of a terrorist group" to the Commissioner of the Royal Canadian Mounted Police or to the Director of the Canadian Security Intelligence Service. Similar reporting obligations also exist under Canada's terrorism-related sanctions regulations. The current Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations go a step further for PCMLTFA reporting entities, requiring them to submit corresponding Terrorist Property Reports (TPRs) to FINTRAC in respect of said property at the same time they file their report to the RCMP or CSIS.

The Proposed Regulations will expand these requirements for reporting entities by broadening the definition of a "listed person or entity" to capture persons designated under Canadian sanctions legislation. The proposed definitions will capture:

• individuals or entities subject to an order made under the SEMA;
• a "foreign state" subject to an order under SEMA or the United Nations Act; and
• a person who is the subject of an order made under the JVCFOA.

Further information on currently sanctioned individuals and entities can be found on the Consolidated Canadian Autonomous Sanctions List and the United Nations Security Council Consolidated List (which are implemented in Canadian law under Canada's United Nations Act). Details about Canada's current sanctions programmes can be found on the Government of Canada's "Current Sanctions" webpage.

Impact on Businesses

The Amendments and Proposed Regulations represent a significant effort by the Government of Canada to strengthen Canada’s existing sanctions regimes and improve enforcement. Businesses should be aware that these new requirements will place greater demands on their compliance policies and procedures and increase the amount of risk and exposure to which they are subject.

Entities involved in the import or export of goods, even if not classified as "reporting entities" under the PCMLTFA, could still be affected by the expansive, and at present somewhat opaque, scope of the pending Amendments. Affected businesses and entities should exercise heightened diligence in their operations to ensure that all export and import transactions comply with the Act in addition to other applicable customs and trade control laws.

Failure to comply with the PCMLTFA may result in civil penalties or criminal charges. Civil penalties, commonly issued through AMPs by FINTRAC, can range from $1 to $500,000. Criminal penalties can range from fines of $250,000 to $2,000,000 and/or imprisonment from two years less a day to five years.

In light of these Amendments, businesses should review and update their AML policies to integrate the new reporting requirements for sanctions evasion offences. For more information on how these amendments affect your business or for assistance with reviewing your existing AML compliance policies, please contact the authors or any member of the Bennett Jones International Trade and Investment group or the Anti-Money Laundering group.

Authors