Russia: Canada’s Sanctions Whetstone

Russia: Canada’s Sanctions Whetstone

Itai Gibli*

 

Russian actions, at home, in Ukraine, and beyond, have for many years been a whetstone on which Canada has sharpened its domestic sanctions regime. This blog post will describe how Canada’s domestic sanctions regime has evolved to face challenges posed by Russian state behaviour. It will then investigate how Canadian courts have interpreted these legislative developments.

The Canadian sanctions regime is comprised of international sanctions—sanctions Canada is obligated to institute under the UN Act because of United Nations Security Council (UNSC) resolutions—and domestic sanctions (which Canada may institute unilaterally or multilaterally with likeminded states). Before 1992, Canada had no legislation to institute unilateral sanctions against foreign actors.

The Special Economic Measures Act (“SEMA”) was passed in 1992 to enable the Government of Canada to take economic measures against certain persons where (1) international organizations or associations of states to which Canada is a member calls on it to do so or, in response to (2) grave breaches of international peace and security, (3) foreign states’ gross and systematic human rights violations, and (4) significant corruption involving a foreign national.[1] States themselves may also be sanctioned under SEMA. Canada applied SEMA sparingly in the years leading up to the Russia-Ukraine conflict but has invoked it to implement significant sanctions in response to Russian breaches of international peace and security and human rights law.

The domestic sanctions regime continued to expand. In 2011, Canada passed the Freezing Assets of Corrupt Foreign Officials Act (“FACFOA”). FACFOA empowers the Canadian government, at the written request of a foreign state, to freeze the assets of, or prohibit dealings with, persons who misappropriated or inappropriately acquired the property of the foreign state by virtue of their office or a personal business relationship.[2] This Act would be used to implement the first Canadian sanctions relating to the Russia-Ukraine conflict.

 

The Crimea Crisis

 

In November 2013, then-Ukrainian President Viktor Yanukovych abruptly refused to sign a landmark association agreement with the EU, setting off major protests in Kyiv. The Russian annexation of Crimea followed soon after these protests. The Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations, prompted by a request from the new Ukrainian government, were made effective on March 5, 2014.[3] Promulgated in concert with the European Union and the United States of America, these regulations enabled Canada to direct banks, trust companies, insurers, and other federally regulated financial institutions to immediately freeze assets located in Canada belonging to the former Ukrainian president, Viktor Yanukovych, and his close associates and family members. The regulations also imposed searching, freezing, monitoring, disclosure, and due diligence obligations on all Canadians.

In March 2014, Russia occupied the Crimean Peninsula. Soon after, pro-Russian separatists in the Donbas region in Eastern Ukraine held referendums and declared independence from Ukraine. This led to widespread clashes between the Ukrainian military and Russian separatist groups in the Donbas. In response, on March 17, 2014, the Special Economic Measures (Russia) Regulations[4] (“Russia regulations”) and Special Economic Measures (Ukraine) Regulations[5] (“Ukraine regulations”) came into force. The Russia regulations were amended ten times that year and the Ukraine regulations were amended eight, with each amendment adding more targeted individuals or otherwise expanding the scope of the sanctions. These regulations-imposed restrictions on Canadians doing business with various Russian or Ukrainian individuals, businesses, political parties, and military groups who had been implicated in the conflict in Eastern Ukraine. For example, the Russia regulations prohibited persons in Canada and Canadians abroad from dealing in any property—wherever situated—held by, or on behalf of, designated persons. These regulations also prohibited persons from providing financial or related services, whether directly or indirectly, in respect of such property; making any goods available to designated persons; and providing financial or related services to or for the benefit of the designated persons. The Russia regulations also prohibited any person within Canada and Canadians outside Canada from in any way causing, assisting, or promoting any of the prohibited activities.

Perhaps most significantly, Canada targeted Russian state-owned energy giants Gazprom, Gazprom Neft, Surgutneftegas, and Transneft, adding them and their corporate leadership to the list of designated persons. Canada also targeted the Russian finance market by restricting the transaction of various financial instruments and Russian debt and capital financing. On December 19, 2014, Canada enacted amending regulations setting out new sanctions and clarifications. These included prohibitions against new contracts for the export, sale, supply, or shipment of certain goods to Russia for use in deep-water, arctic, or shale oil exploration and production, along with a prohibition against the provision of services related to these goods.[6]

While in the past the Russian UNSC veto power would have left Canada with no legal mechanism through which it could institute these sanctions, SEMA and FACFOA gave Canada tools to act unilaterally or in concert with allies independently of the UN. Motivated by Russian actions beyond the Ukraine conflict, Canada would enact further legal mechanisms to institute sanctions. For example, the Justice for Victims of Corrupt Foreign Officials Act (“JVCFOA”), passed in 2017, empowers the Government of Canada to take restrictive measures against foreign nationals responsible for gross violations of internationally recognized human rights, and to make related amendments to SEMA. Its preamble cites numerous Russian violations of human rights and the rule of law as necessitating its enactment. While Canada previously had discretionary powers to sanction any government, the JVCFOAgives the government further powers to freeze assets owned by individuals if the Government of Canada believes them to be involved in corruption, money laundering, or human rights abuses in their own countries – even if that conduct has no connection with Canada.[7]

 

The Russian Invasion of Ukraine

 

On February 21, 2022, Russia signed a decree recognizing the “independence” and “sovereignty” of the so-called Luhansk People’s Republic (LNR) and Donetsk People’s Republic (DNR) regions. Immediately following this formal recognition of the LNR and DNR, President Putin ordered Russian forces to perform peacekeeping functions in the regions. On February 22, Russia’s Duma gave President Putin permission to use military force outside the country, and on February 24, 2022, Russian forces initiated a comprehensive invasion of Ukraine. The attacks caused widespread devastation of Ukrainian infrastructure, property, and civilian life.

In response to this aggression, Canada rolled out expanded sanctions.[8] Canadians and persons in Canada were prohibited from buying Russia’s sovereign debt, including government bonds or other efforts by the Russian State to raise capital. Canadians and persons in Canada were also prohibited from dealing with various Russian banks. Canada sanctioned all members of the Russian State Duma who voted in favour of recognizing the independence of the Ukrainian territories, over 350 Russian politicians. Canada has continuously expanded this list as the conflict has progressed. Attempting to limit Russian trade, Canada, along with European allies and the United States, opted to remove select Russian banks from the Society for Worldwide Interbank Financial Telecommunication .[9]

After the initial wave of sanctions following the Russian invasion, Canada made more structural changes to its domestic sanctions regime. On June 23, 2022, Canada substantially amended SEMA[10] and the JVCFOA.[11] The amendments followed Canada’s participation in the Russian Elites, Proxies, and Oligarchs Task Force, an international task force aimed at accelerating efforts to seize oligarch assets in response to the Ukrainian war. Canada amended SEMA and the JVCFO to redefine “property” to expressly include intangible or incorporeal assets—including digital assets and virtual currency—and to grant the federal government a new power to apply for a forfeiture order of seized or restrained property. The amendments also mandated information sharing between ministries and other government agencies, including the Office of the Superintendent of Financial Institutions, the Canada Border Services Agency, the Canadian Security Intelligence Service, and the Royal Canadian Mounted Police, to aid in the administration and enforcement of SEMA. Finally, the amendments established authority to compel information that is relevant to making, administering, or enforcing orders and regulations issued under SEMA.

Ukraine has been able to regain control over most of its territory, but armed conflict continues in the heavily-populated Eastern Ukraine as parties vie for control of the Donbas region. The latest amendments to the Russia regulations came on December 7^th, 2022.[12] Thirty-two more individuals have been added to the sanctions list. Canada has sanctioned over 1500 individuals and entities in Russia, Belarus, and Ukraine since the start of the crisis under SEMA. Canada moved ahead with a prohibition on the import of three distinct types of oil products, including crude oil, from Russia. Canada revoked Russia’s most favoured nation status, resulting in a 35% tariff on most imports from Russia, and Russian ships are also barred from docking at Canadian ports.

 

Implications for Arbitration

A recent Alberta Court of King’s Bench case, Angophora Holdings Limited v Ovsyankin (“Angophora”)[13], provided guidance on the practical application of the Russia regulations. It sheds light on how courts will determine whether Canadian domestic sanctions prohibit a company from dealing with entities owned or controlled by persons listed on the Consolidated Canadian Autonomous Sanctions List. 

On December 15, 2020, the London Court of International Arbitration granted an award in favour of Angophora against Mr. Ovsyankin. On September 10, 2021, the Alberta Court of King’s Bench granted the recognition and enforcement order of the arbitration award. Mr. Ovsyankin was a judgement debtor to Angophora in the sum of $59,552,405 CDN. When the case was heard, Ovsyankin had paid Angophora nothing in respect of the award.

Angophora is a wholly owned subsidiary of the Luxembourg investment fund MIR Capital SICAR (SCA), the operations of which are conducted by a Luxembourg company MIR Capital Management (SA). Both the company and fund are owned equally by an Italian bank, and Gazprombank JSC – a bank based in Russia. While Angophora was not a designated person on the Consolidated Canadian Autonomous Sanctions List, Gazprombank JSC was.

The respondent sought to stay that order in the present case. The respondent argued the enforcement order would result in the liquidation and payment of assets located in Alberta to the appellant, which would contravene the Russia regulations instituted after the Russian invasion of Ukraine.[14] Angophora argued that even if the sanctions applied, they would not prevent the execution of the award because the Russia regulations only applied to assets “owned, held, or controlled by a designated person”, and Angophora did not own, hold, or control assets in Alberta.[15]

The Court lamented that the Russia regulations do not provide a definition of control, “leaving the issue of whether a non-designated person is controlled by or acting on behalf of a designated person as a factual issue to be determined by the circumstances”.[16] The Court therefore turned to other jurisdictions for guidance on the question of control.

US guidelines suggest Angophora would be considered a blocked person, as according to them, “an entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person”.[17]

The UK is somewhat stricter, deeming control established where the sanctioned entity “holds, directly or indirectly, more than 50 percent of the shares…of the entity at issue”.[18] The UK also recognizes control where “it is reasonable, having regard to all the circumstances, to expect that the sanctioned entity would (if it chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of the entity in question are conducted in accordance with sanctioned entity’s wishes”. While the Court accepted Angophora would not meet the control test through its share ownership, it suggested it could meet the control test under the second route.

The European Union’s Commission Opinion on the issue of control provides that “if the designated person is determined to have control over the Entity, it can be presumed that the control extends to all assets nominally owned by the latter…[which] must be frozen…otherwise, designated persons could circumvent the asset freeze imposed on them by continuing to have access to funds or economic resources through the non-designated third parties that they control”.[19] This is described as a factual approach relating to whether the designated person has a de facto control over the entity.

The Court held Gazprombank did not have structural control of Angophora, as it could not unilaterally act to direct Angophora’s investments.[20] Moreover, because the relationship between Gazprom and Angophora were in place for years before the enactment of the Russia regulations, it could not be said to be structured to avoid the sanctions.

The Court rejected the stay application but found a strong prima facie case that the Angophora, the party to which the arbitral award was granted, might be controlled by or acting on behalf of a corporation subject to the Russia regulations. The Court noted that the 50% ownership set out under the US regulations was met and there were various factors to suggest Angophora was subject to Gazprombank’s functional control.

While the Court emphasized it was not making a final finding on the issue of control, the case provided useful guidance on the wider question of whether an entity is owned or controlled by a sanctioned person.

 

Final Thoughts

Canada’s domestic sanctions regime has evolved significantly because of relations with Russia. This relationship has prompted the creation of new legislation to give the Government of Canada more teeth in deterring Russian behavior. Canada has seen various acts expanded and clarified for more effective sanctioning, which has led to better coordination with Canada’s allies beyond the sometimes-limited leadership of the United Nations Security Council.

Russia has played this “whetstone” role for a variety of geo-political reasons. On one hand, Russia has been the West’s main military antagonist since World War II. It should not be surprising then that they have drawn the ire of Western states, including Canada. At the same time, Canada is not significantly economically dependent on Russia. This means Canada can pursue these expanding sanctions without suffering much consequential economic pain.