Over the past month, the Government of Canada has implemented wide-ranging economic sanctions and other measures targeting Russia in connection with the conflict in Ukraine. We summarized the initial wave of measures in our February 28, 2022, bulletin. This update highlights key developments in March and offers an overview of all Canadian measures currently in place in respect of Russia. In short, there continue to be frequent changes, with which Canadians are required to comply.
NEW MEASURES INTRODUCED IN MARCH 2022
After the initial round of amendments to the Special Economic Measures (Russia) Regulations (Russia Regulations), which are summarized in our prior bulletin, the Canadian government introduced the following new measures in March 2022:
A significant number of additional individuals and entities have been designated under Schedule 1 of the Russia Regulations, including persons that have beneficial interests in businesses operating in Canada. The amendments also modified the operative provision of the Russia Regulations to extend the prohibition against dealing in property that is held, owned or controlled by or on behalf of a designated person. These designations and changes to the legislative text underscore the importance for Canadian companies to diligence existing and new transactions for compliance with current sanctions at the time of the transaction.
On March 3, 2022, Canada removed the entitlement of Russia and Belarus to the Most-Favoured-Nation Tariff treatment under the Customs Tariff.
On March 8 and 16, 2022, Canada amended the Special Economic Measures (Belarus) Regulations (Belarus Regulations) to add new designations and expand the existing restrictions in respect of Belarus.
On March 10, 2022, Canada introduced a new prohibition against importing, purchasing or acquiring petroleum products from Russia.
On March 24, 2022, Canada prohibited the export or supply to Russia of goods and technologies identified on the Restricted Goods and Technologies List, subject to exceptions discussed below.
On March 24 and 21, 2022, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) published a Special Bulletin on Russia-linked money laundering related to sanctions evasion and Advisory to Canadian Businesses on Canada’s Sanctions Related to the Russian invasion of Ukraine – Russian invasion of Ukraine detailing its expectations for financial institutions and other reporting entities with respect to detecting potential money laundering structures to evade sanctions.
Given the evolving nature of the Canadian government’s response to Russia’s actions in Ukraine, Canadian businesses with existing or potential connections to Russia (including via shareholdings, suppliers, customers and lenders, as well as indirect ownership by prominent Russian individuals) should monitor amendments to the regulations carefully to ensure their compliance controls are updated promptly to reflect new requirements as they are issued.
An overview of the current measures in respect of Russia, including the recent developments highlighted above, are set out below.
Like all Canadian sanctions regulations, the sanctions prohibitions described in this bulletin apply to all Canadian-incorporated entities and Canadian citizens, whether they are domiciled in Canada or elsewhere, and to all entities and individuals in Canada. The sanctions apply immediately.
Financial institutions, securities dealers, portfolio managers, fund managers, custodians and other participants in the capital markets and financial services industry, as well as all Canadian businesses dealing with businesses based in Russia or owned or controlled by Russians, should ensure that their sanctions screening and compliance programs take into account the expanded lists of designated persons, new prohibitions with respect to debt and restricted goods, and the newly targeted regions.
In addition, although the Russia Regulations do not apply to foreign subsidiaries of Canadian businesses, any Canadian citizen employees of foreign entities are required to comply with the Russia Regulations. Accordingly, Canadian and foreign businesses should be careful to ensure that their Canadian citizen employees working outside Canada are not exposed to the risk of violating Canadian sanctions laws including provisions that prohibit facilitation of restricted activities.
PROHIBITIONS BROADLY TARGETING RUSSIAN FINANCIAL SECTOR
Most major financial institutions in Russia are currently designated under Schedule 1 of the Russia Regulations. Institutions and persons listed in Schedule 1 are subject to a comprehensive ban that prohibits the provision of any financial or related services to, and most dealings in property owned, held or controlled by or on behalf of these designated entities. The Russian financial institutions that were added to Schedule 1 include five of the six major banks in Russia that were designated before February 24, 2022, under Schedule 2 of the Russia Regulation and were subject to sectoral sanctions prohibiting dealings in specified debt and equity securities only. Under the new sanctions program, almost all transactions with these financial institutions will be prohibited, including correspondent banking services, lending and investments. Canadian businesses will also need to reassess their existing or anticipated transactions with counterparties that rely on financing or services from these designated financial institutions.
Similarly, many of the Russian energy companies that were listed in Schedule 3 of the Russia Regulations prior to February 24, 2022, were moved to Schedule 1, bringing them into the comprehensive prohibition framework.
The Russia Regulations also lists the Russian central bank, sovereign wealth fund and ministry of finance under Schedule 1, effective February 28, 2022. In an earlier version of the amended Russia Regulations, issued on February 24, these government entities were listed under a separate schedule and were subject to a prohibition that was limited to dealings in new debt issued by these entities. However, with their subsequent listing under Schedule 1, almost all dealings with the Russian central bank, sovereign wealth fund and ministry of finance are now prohibited. This measure is intended to prevent Russia from deploying its international currency reserves. In this respect, the Bank of Canada was added to the list of financial institutions that are required to screen and report on the property of designated persons under the Russia Regulation.
Over the past month Canada has continued to add new persons to the list of designated persons under the Russia Regulations. As of March 29, 2022, there are 729 individuals and 135 entities listed as designated persons in Schedule 1, including many members of the Russian government, major Russian companies, businesspersons, their relatives and related businesses.
The prohibitions in respect of Schedule 1 designated persons do not expressly extend to their subsidiaries but Canadian businesses engaging in transactions with entities that have a connection to a designated person will need to assess carefully the impact of the connection on compliance with the prohibitions.
Canada and the other G7 countries also announced that several Russian banks have been expelled from the SWIFT payment messaging system.
REGIONS OF UKRAINE
Amendments to the Special Economic Measures (Ukraine) Regulations (Ukraine Regulations) prohibit activities in connection with specified regions in eastern Ukraine, referred to in the regulations as “the so-called Donetsk People’s Republic and the territory it controls in the Donetsk oblast of eastern Ukraine” and “the so-called Luhansk People’s Republic and the territory it controls in the Luhansk oblast of eastern Ukraine”) (DNR and LNR).
These restrictions largely mirror the prohibitions in place in respect of Crimea and prohibit Canadians and persons in Canada from engaging in the following activities:
Making an investment that involves dealing in property located in DNR or LNR that is owned, held or controlled by such a region or a person there
Providing or acquiring financial services or related services with respect to an investment in DNR or LNR
Importing, purchasing, exporting or selling goods to or from DNR, LNR or any person there
Providing technical assistance to DNR, LNR or any person there
Providing or acquiring financial or other services related to tourism to DNR, LNR or any person there
IMPORTS AND EXPORTS
The Russia Regulations prohibit the export or supply of specified goods and technologies to Russia and persons in Russia, including electronics, telecommunications equipment, sensors and lasers, navigation and avionics equipment, marine equipment, aerospace and transportation products. These goods and technologies are listed in the Restricted Goods and Technologies List published by Global Affairs Canada. This prohibition is subject to several exceptions, including goods for use by the Government of Canada or a partner country listed in Schedule 6 of the Russia Regulations, and for computers, mobile phones, televisions and other consumer communication devices generally available to the public.
The Russia Regulations also prohibit importing, purchasing or acquiring from Russia or any person in Russia petroleum products that are listed in Schedule 5 of the Russia Regulations.
Canada has also cancelled all existing export permits issued prior to February 24, 2022, under the Export and Import Permits Act for exporting or brokering items to Russia, and halted issuance of all future export permits. This means that any item on Canada’s Export Control List requiring an export permit cannot be exported to Russia as of February 24, 2022. There is no exception that would permit the exportation of items under pre-existing contractual agreements or previously issued export permits. Only export permit applications related to narrow end-uses such as medical supply and humanitarian needs will be considered on a case-by-case basis going forward. In addition, pre-existing prohibitions under the Russia Regulations on the exportation, sale, supply or shipment of goods for offshore, Arctic, or shale oil exportation or production continue in effect.
Canada has also removed Russia and Belarus’s entitlement to the Most-Favoured-Nation Tariff treatment under the Customs Tariff. This means that the “General Tariff” is to be applied to goods imported into Canada that originate from Russia or Belarus. Under the “General Tariff”, a tariff rate of 35 per cent is to be applied on virtually all imports from Russia and Belarus. These countries join North Korea as the only countries whose imports are subject to the General Tariff.
The Russia Regulations also prohibit the docking in or passage through Canada by ships registered in Russia or used on behalf of or for the benefit of Russia, a person in Russia, or a person designated under the Russia Regulations.
FINTRAC, the regulator charged with administering Canada’s anti-money laundering legislation, has published several documents to communicate information related to use of money laundering and sanctions evasion in connection with the Russian invasion of Ukraine.
On March 24, 2022, FINTRAC published a Special Bulletin on Russia-linked money laundering related to sanctions evasion to provide reporting entities with information on and known characteristics of Russia-linked money laundering. The FINTRAC Bulletin states that Russia-based individuals and entities sanctioned by the Government of Canada, particularly those whose financial assets have been acquired through illegal activity, are likely to deploy established money laundering techniques and channels to evade sanctions.
In particular, the FINTRAC Bulletin refers to the use of shell companies, correspondent banking, complex corporate structures and cryptocurrency transactions linked to Russia or Belarus as potential key features of Russia-linked money laundering and sanctions evasion. The Bulletin also notes that the use of SPFS, a Russian alternative to SWIFT, may be an indicator of money laundering or sanctions evasion following the expulsion of several Russian banks from SWIFT. Financial institutions and reporting entities should consider the FINTRAC Bulletin when assessing whether an attempted or completed transaction involving a sanctions issue warrants filing a suspicious transaction report.
On March 21, 2022, FINTRAC published an Advisory to Canadian Businesses on Canada’s Sanctions Related to the Russian invasion of Ukraine – Russian invasion of Ukraine that encourages reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to consider links to designated persons under the Russia Regulations, Belarus Regulations and other Canadian sanctions legislation when assessing client risk, fulfilling applicable know-your-client requirements and monitoring for suspicious transactions.
On March 16, 2022, FINTRAC also published a statement of intent that describes the establishment of an international task force comprised of the G7 and other countries to coordinate efforts and enhance the sharing of financial intelligence with respect to sanctions evasion, money laundering and other illegal activities in connection with the conflict in Ukraine.
Given that Canada is in many ways a trading nation, the recently announced measures will require Canadian businesses to carefully assess their business relationships and transactions to ensure compliance with the broad new scope of the Russia prohibitions.