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UPDATED Canadian Sanctions Targeting Russia, Belarus and Separatist Territories in Ukraine Expanded in Response to the Russian Invasion of Ukraine

August 08, 2023

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Written By Jessica Horwitz, George Reid, Sabrina Bandali, Mitchell Dorbyk and Serge Dupont

This blog was originally published on February 25, 2022, and has been updated to reflect further developments.

On February 21, 2022, Russia formally recognized the purported independence of two regions in Eastern Ukraine, Donetsk and Luhansk. The next day it ordered Russian troops into the separatist-occupied territories, and the incursion escalated into a multi-pronged invasion of Ukraine on February 24, 2022. Canada swiftly announced a wide-ranging expansion of its sanctions that target Russia and the occupied Ukrainian regions, as it warned it would do if Russia were to continue its aggressive policies against Ukraine.

Prime Minister Trudeau announced on February 22, 2022, that Canada would, in coordination with like-minded NATO partner states, issue additional sanctions targeting Russia, Belarus and the separatist-controlled territories of Ukraine. Since February 24, 2022, Canada has implemented a series of escalating restrictions on trade and financial transactions with these regions, including some that leverage seldom used legal mechanisms beyond economic sanctions legislation. Canada's new sanctions include the following measures:

The listed person restrictions are subject to grandfathering clauses, which authorize payments by a listed person to a non-listed person owed under a contract that was entered into before the person was listed (in the case of Russian Schedule 1, Belarus Schedule 1 and Ukraine Schedule sanctions), the performance of contracts entered into before the sanctions came into force (in the case of the the Crimea region geographic sanctions) or for 30 days after entry into force (for the Donetsk, Luhansk, Kherson and Zaporizhzhia geographic sanctions). However, no new transactions or business is permitted with these individuals, entities or regions.

In the June 2022, the Government of Canada amended the Special Economic Measures Act to add the world's first known forfeiture mechanism. The mechanism creates the potential for property owned or controlled by persons subject to a sanctions asset freezing order to be seized through a court-supervised process and forfeited to the Canadian government for use in: (a) the reconstruction of a foreign state adversely affected by a grave breach of international peace and security; (b) the restoration of international peace and security; and (c) the compensation of victims of a grave breach of international peace and security, gross and systematic human rights violations or acts of significant corruption. We described these amendments in another blog post, Canada's Federal Budget 2022 and Canadian Sanctions Implications. In December 2022, Canada announced its intention to pursue, as a test case, forfeiture of certain assets held in Canada by an entity allegedly controlled sanctioned Russian billionaire Roman Abramovich. The case remains in development.

On June 22, 2023, Canada passed legislative amendments as part of the 2023 Federal Budget omnibus bill, Bill C-47, to introduce a definition of "deemed ownership" to the Special Economic Measures Act. The definition expands application of dealings bans to property held by entities in which a sanctioned person either legally holds, or otherwise exercises in practice, a controlling interest. Canada's definition is currently broader than the approach taken by other countries, which, in the absence of interpretive guidance to clarify the scope of the rule, has created confusion and interpretive ambiguity particularly for companies navigating compliance with multiple sanctions regimes. The amendments also enabled Canada to list individuals and entities located in third countries on a particular sanctions list under the Special Economic Measures Act where the third country actor has helped other listed persons to evade sanctions—introducing the possibility of Canadian 'secondary sanctions'. We discuss these amendments in other blogs posts, Canadian Government Introduces Legislation to Add Sanctions 50% Rule and Update Rules on Ownership and Control and New Canadian Economic Sanctions "Deemed Ownership" Rule Now in Force.

FINTRAC released a Special Bulletin (which is updated from time to time) highlighting the risk that Russia-linked money laundering may be connected to the evasion of sanctions. The Bulletin notifies reporting entities under Canada's anti-money laundering laws of characteristics associated with Russia-linked money laundering, including the involvement of firms in offshore jurisdictions that have "historically specialized in Russian clientele or in transactions associated with Russian elites and their associates", a sudden rise in transactions to offshore jurisdictions associated with Russian financial flows, and certain cryptocurrency transactions, such as transactions emanating from IP addresses in Russia, or "chain hopping", involving transfers from one virtual currency to another.

International Impact

Canada acted in coordination with like-minded security partners to develop these sanctions. The European Union, United Kingdom, United States, Japan, South Korea, Switzerland, Australia and other countries have also implemented broad and steadily expanding sanctions over the past year, although it is important to note that despite similarities in breadth, the sanctions of these other jurisdictions are not precisely aligned with Canada's. Some of Canada's sanctions are broader than equivalent ones in those other countries, and there are also examples of instances in which Canada's sanctions are narrower. It is important not to assume that Canada's sanctions are the same as those of other jurisdictions (for example the United States); separate sanctions analysis and due diligence should be conducted for each jurisdiction of relevance to your business or transaction.

On June 7, 2022 the Canada border Services Agency and the United States Bureau of Industry and Security announced new cooperative measures in the area of Russia sanctions and export control enforcement. The two agencies began sharing more information, conducting pre and post verification audits of goods, detaining and seizing shipments and coordinating on investigation or enforcement actions. By cooperating, the departments hope to "stop critical goods and technologies from falling into Russian hands."

One non-Canadian measure that has implications for Canadian businesses is the United States' imposition of "foreign direct product rules" to supplies or transfers of goods and technology to Russia and to Russian military end users or end uses. This prohibits, under U.S. law, the supply of goods or technology made outside of the United States that were produced using specified categories of U.S. origin software or technology, such as testing or production equipment, or in a plant or "major component" of a plant located outside the United States that is itself a direct product of specified categories of U.S. origin software or technology. In certain circumstances and depending on available license exemptions, U.S. foreign direct product rules can have the effect of making a broader range of items manufactured wholly outside the United States subject to U.S. export control laws when being exported to Russia and imposing significant U.S. export license requirements when these items are exported from third countries (such as Canada) to Russia. The U.S. Department of Commerce has granted Canada a license exemption in connection with the Russia-related foreign direct product rules because Canada has committed to implementing substantially similar export controls in connection with supplies of export controlled goods and technology to Russia. Exporters should confirm their eligibility for this license exemption with U.S. trade counsel to ensure that it applies in their particular circumstances.

Russian Central Bank and SWIFT Sanctions

Sanctions on Russia were toughened significantly further to a February 26, 2022 joint statement by authorities from the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States. Specifically, Canada and its partners together committed to sanction the Russian central bank, preventing it from deploying its international reserves to contain the effects of sanctions on its economy and financial system. They also agreed to block selected Russian banks from accessing the global inter-bank messaging system SWIFT, disconnecting the targeted institutions from the global financial system. The EU later extended the SWIFT ban to certain Belarussian banks. Earlier U.S. actions, among other effects, had cut off Russia’s two largest banks Sberbank and VTB—with a combined value of assets representing more than half of the total banking system in Russia—from processing payments through the U.S. financial system. The U.S. steps have severely constrained the capacity of Russian financial institutions to conduct foreign exchange transactions globally, 80 percent of which are in U.S. dollars.

While the SWIFT-related measures affect mostly financial institutions, not specifically Canadian businesses engaged in trade and investment with Russian entities or subsidiaries of Russian entities, the measures have worked their way through many channels to all parts of the Russian financial system, its economy and beyond. For example, the measures against the Russian central bank have impeded its ability to protect the value of the ruble, to sustain a flow of imports into the economy, and to control domestic interest rates. Early consequences were a freefall of the ruble and a spike in domestic interest rates. Sanctions also forced restrictions on the transfer of foreign currency abroad (capital controls) by Russia on February 28, 2022. Meanwhile, the Russian banks targeted by the sanctions  incurred liquidity shortages of hard currencies and are unable to process international transactions for their clients. The Russian government has implemented a number of restrictive measures in response, including, among others, an "exit tax" payment required in transactions in which foreign investors are seeking to divest Russian assets. Issues concerning such payments should be evaluated carefully with the advice of Russian legal counsel as well as sanctions counsel of applicable local jurisdictions.

The bottom line is that the sanctions have been felt by virtually all Russian entities and their subsidiaries funded by, or exposed, to the Russian financial system, and by commercial actors dealing with these Russian entities. Canadian businesses are advised to assess their direct and indirect exposure to this risk in their commercial dealings.

Next Steps

These sanctions imposed by Canada and other countries have had a profound and wide-ranging effect on the operations of many Canadian businesses that trade with, provide services to or engage in financial transactions with Russia or Ukraine. Businesses should evaluate their current exposure in these regions and monitor developments closely. Canada and its allies have indicated that they could further expand the sanctions.

These are complex and rapidly evolving matters, with significant exposure risks. The Bennett Jones International Trade group is available to assist companies to evaluate risk exposure, develop response plans, and advise on the impact of Canadian sanctions on Canadian and foreign businesses.

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