Canadian Government Steps Up Enforcement of Economic Sanctions - Conviction under Special Economic Measures Act for attempted export to Iran valued at $15 leads to $90,000 penalty

For the first time in over 20 years since the enactment of the Special Economic Measures Act (SEMA), an Alberta-based company was charged with violating this statute by attempting to export controlled goods valued at $15 to the Islamic Republic of Iran. The company pleaded guilty and the plea agreement entered in court on April 14, 2014, required that Lee Specialties Ltd. (Lee) pay a fine of $90,000.

This Update summarizes the facts related to this conviction, the legislative basis for the conviction, the apparent increase in Canadian and international sanctions enforcement activity and the necessity for an effective export compliance program to manage the legal risks inherent in engaging in international business transactions, particularly those that are potentially subject to Canadian and international economic sanctions.

Facts Related to the Conviction

In January 2012, officers from the Canada Border Service Agency (CBSA) detained Lee’s shipment of Viton O-rings destined for Iran and, along with the RCMP, launched an investigation into the company’s attempted export. The exportation of Viton O-rings to Iran has been controlled since July 22, 2010, because of potential use in the nuclear industry.

The CBSA and RCMP executed three search warrants on Lee, and the RCMP subsequently laid charges on February 27, 2014, against the company under SEMA, the Customs Act and the United Nations Act. Lee admitted in the plea agreement that during the relevant period, “seals and gaskets made of Viton fluoro-elastomers” listed in Schedule 2 of the Iranian sanctions regulations were prohibited for export to Iran, and that the goods that Lee had attempted to export were covered by that description.

Legislative Basis for the Conviction

SEMA allows the Canadian government to implement sanctions in one of two situations: (i) to implement a decision, resolution or recommendation of an international organization of states, or association of states, of which Canada is a member, and that calls for economic measures against a foreign state; or (ii) when the Governor in Council believes that a grave breach of international peace and security has occurred that will result in a serious international crisis. The Governor in Council can make any order or regulation under SEMA that prohibits Canadians (or persons in Canada) from dealing with a foreign state or designated persons. Such regulations can prohibit Canadians from exporting goods, importing goods, transferring technical data and technology or providing services, including financial services, to the foreign state or certain designated persons.

Canada uses SEMA to advance foreign policy goals and objectives that it shares with its major trading partners such as the United States and the European Union, particularly when there is no basis under the United Nations Act for imposing Canadian sanctions (as the latter legislation requires that a UN Security Council Resolution be in place).

There are currently seven countries subject to Canadian sanctions under SEMA, with those against Iran, North Korea and Syria being the most comprehensive and those against Burma, Russia, Ukraine and Zimbabwe being more focused and targeted. Canada’s economic sanctions against Iran were first made effective on July 22, 2010 through regulations under SEMA, which have subsequently been amended and broadened on five occasions.

Other Legislative Instruments Available to the Canadian Government

In addition to SEMA, the Canadian government is able to impose various measures, including sanctions, asset freezes, ban on certain shipment of goods and services (including financial services), ban on transfer of technical data and technology, and restrictions on dealings with individual, entities and countries under the United Nations Act, the Export and Import Permits Act, the Freezing Assets of Corrupt Foreign Officials Act and the Criminal Code.

For example, the Canadian government has taken recent measures against certain former Ukrainian government officials and Russians under the Freezing Assets of Corrupt Foreign Officials and the SEMA. Regulations issued under SEMA establish lists of designated persons – individuals and entities – considered to have directly or indirectly facilitated and supported the deployment of Russian armed forces in Crimea. These regulations impose freezes on the assets of designated persons and prohibit persons in Canada and Canadians abroad from dealing with designed persons. In addition, the Regulations impose disclosure obligations on Canadians if they find that they possess or control property of designated persons. The Regulations are constantly being revised and broadened as the situation in Ukraine continues to deteriorate, and Canada has coordinated these sanctions in conjunction with similar efforts by the United States and the European Union.

Lessons from the Lee Conviction

Canadian companies should be aware that the Canadian government has stepped up enforcement of various economic crimes, which include the violation of international sanctions laws and engagement in foreign corrupt activities (see Osler Update, August 21, 2013).

In the present case, the RCMP and the CBSA aggressively investigated and laid charges, leading to a conviction and fine against Lee of $90,000 for attempting to export items that were valued at $15. This action demonstrates that the legislative measures discussed above will be more actively enforced, notwithstanding that some of these laws and regulations have been in force for many years without the enforcement authorities pursuing criminal charges. In our view, this demonstrates that, as the Canadian government has done in the area of anti-corruption violations, it will not only coordinate its implementation of sanctions with its trading partners but also enforce measures related to economic crimes as its trading partners are doing.

Companies operating abroad should therefore ensure that they have proper compliance programs in place to deal with various economic crimes, including breaches of export controls on goods and services, restrictions on transfers of technology, sanctions, anti-terrorism laws and asset freezes. Indeed, in the case of Lee, a mitigating factor in the setting of the penalty was that the company has implemented a robust compliance program, which it has undertaken to consistently keep updated according to changes in applicable Canadian laws and regulations.

Topics:  Canada, Controlled Substances, Exports, Iran, Sanctions

Published In: General Business Updates, Criminal Law Updates, Finance & Banking Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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