Managing Sanctions Compliance Risks for Canadian Businesses

How do Canadian businesses identify sanctioned individuals and entities?

Canadian businesses identify sanctioned parties by screening their clients, vendors, and partners against the Consolidated Canadian Autonomous Sanctions List. This list, maintained by Global Affairs Canada, aggregates names of individuals and entities subject to specific restrictions under SEMA and the FAC (Magnitsky Act).

To ensure accuracy, businesses should adopt a multi-layered screening approach:

• The Consolidated List: Access the official Global Affairs Canada database to check for matches.
• Beneficial Ownership Checks: Sanctions apply not just to the entity listed, but often to any company owned or controlled (usually 50% or more) by a sanctioned individual.
• Geographic Screening: Certain regions (e.g., specific areas of Ukraine, Russia, or North Korea) are subject to broad "dealings bans" that restrict almost all forms of trade.

Screening must be an ongoing process rather than a one-time event. Because the Canadian government frequently updates these lists in response to geopolitical shifts, a partner who was "clear" yesterday could be sanctioned today.

What are the components of a robust Internal Compliance Program (ICP)?

A robust Internal Compliance Program (ICP) is a structured set of policies and procedures designed to ensure a company does not inadvertently violate export controls or sanctions. A well-designed ICP serves as a "due diligence" defense, potentially mitigating penalties if a violation occurs.

An effective ICP should also include "Red Flag" indicators, such as a customer providing vague information about the end-use of a product or a buyer requesting a payment method that bypasses traditional banking channels.

What are the reporting obligations for suspicious or sanctioned transactions?

Under Canadian law, specifically SEMA and the Justice for Victims of Corrupt Foreign Officials Act, businesses have an immediate "Duty to Report" to the Royal Canadian Mounted Police (RCMP). This obligation is triggered the moment a business determines it is in possession or control of property owned or controlled by a sanctioned person.

The reporting process involves several critical steps:

1. Asset Freezing: Immediately cease all dealings with the property. You cannot transfer, pay, or export anything related to the sanctioned party.
2. Identification: Confirm the identity of the person and the nature of the property (cash, real estate, inventory, or digital assets).
3. RCMP Notification: Submit a report to the RCMP's Federal Policing program.
4. CSIS Reporting: In certain instances involving threats to national security, a parallel report to the Canadian Security Intelligence Service (CSIS) may be required.

Unlike standard anti-money laundering (AML) reports made to FINTRAC, sanctions reporting is focused on the freezing of assets and the prevention of economic resources from reaching prohibited parties. Failure to report is itself a criminal offense.

How is sanctions due diligence conducted for cross-border M&A?

In cross-border Mergers and Acquisitions (M&A), sanctions due diligence is the process of auditing a target company to ensure it has not violated trade laws or maintained prohibited relationships. If an acquiring company buys a target with "tainted" assets or ongoing sanctioned contracts, the acquirer inherits the legal liability.

A standard due diligence checklist for Canadian M&A includes:

• Reviewing the Target's ICP: Does the target have a written compliance policy, and has it been enforced?
• Supply Chain Mapping: Trace the origin of raw materials and the destination of finished goods to ensure no sanctioned regions or "front companies" are involved.
• Past Violations Disclosure: Request a history of any voluntary disclosures or investigations by Global Affairs Canada or the Canada Border Services Agency (CBSA).
• Contractual Safeguards: Insert "Sanctions Representations and Warranties" into the purchase agreement, allowing the buyer to exit or be indemnified if a violation is discovered post-closing.

If the target company operates in high-risk jurisdictions, the due diligence should extend to "Level 3" checks, which involve deep-dive investigations into the political connections of the target's directors and major shareholders.

What are the legal consequences of facilitating sanctioned trade?

The legal consequences for facilitating sanctioned trade in Canada are among the most severe in corporate law. Canada has moved toward a "strict liability" environment where lack of intent is not always a valid defense if the company failed to perform adequate due diligence.

Penalties under the Special Economic Measures Act include:

• Criminal Prosecution: Individuals can face up to five years in prison per violation.
• Monetary Fines: Courts can impose fines at their discretion; there is no statutory maximum for some offenses, meaning fines can exceed the value of the transaction by several multiples.
• Administrative Monetary Penalties (AMPs): The CBSA can issue immediate fines for export control violations ranging from $2,000 to $500,000 CAD per infraction.
• Reputational Damage: Being named in a sanctions enforcement action often leads to the loss of banking relationships and the termination of contracts by other international partners who fear "contagion" risk.

Furthermore, companies found in violation may be placed on a "debarment list," preventing them from bidding on any federal or provincial government contracts in Canada.

Common Misconceptions About Canadian Sanctions

"Sanctions only apply to banks and financial institutions."

This is a dangerous myth. While financial institutions are highly regulated, SEMA applies to "every person in Canada and every Canadian outside Canada." This includes manufacturers, tech startups, consulting firms, and individual exporters. If you ship a product or provide a service to a sanctioned entity, you are in violation regardless of your industry.

"If a person isn't on the list, I can do business with them."

Not necessarily. Canada enforces "control" rules. If an unlisted person is acting as an agent or is 100% owned by a sanctioned person, the sanctions still apply to them. You must look past the immediate paperwork to find the "Beneficial Owner."

"Exporting to a non-sanctioned country is always safe."

Many businesses fall into the trap of "transshipment." If you export goods to a friendly nation (like Turkey or the UAE) knowing or having reason to believe the goods will be diverted to a sanctioned country (like Russia or Iran), you are liable for "circumvention" of Canadian law.

FAQ

How do I apply for a permit to trade with a sanctioned entity?

In rare cases, you can apply for a Ministerial Permit through Global Affairs Canada. These are usually granted for humanitarian aid, legal services, or the wind-down of existing contracts, but the process can take several months.

Does Canada follow US sanctions (OFAC)?

While Canada and the US often coordinate, they are separate legal regimes. A Canadian company must comply with Canadian law first. However, if your transaction involves US dollars or US-origin components, you may also be subject to US "Extra-territorial" jurisdiction, meaning you must comply with both sets of laws.

What is the difference between SEMA and the Export and Import Permits Act (EIPA)?

SEMA focuses on who you are dealing with (sanctioned people/countries), while the EIPA focuses on what you are shipping (military goods, dual-use technology, or controlled chemicals). You may need to check both before any international shipment.

How often should I screen my client list?

Ideally, screening should happen in real-time or daily via automated software. At a minimum, high-risk businesses should re-screen their entire database whenever Global Affairs Canada announces new regulatory amendments.

When to Hire a Lawyer

Navigating Canadian trade law requires more than just a checklist; it requires legal interpretation of complex statutes. You should consult a sanctions lawyer if:

• You are planning a merger or acquisition involving a company with international operations.
• You have discovered a potential violation and need to evaluate a "Voluntary Disclosure" to the government to reduce penalties.
• You are entering a market in a "high-risk" geographic region (e.g., the Middle East, Eastern Europe, or Southeast Asia).
• Your business involves "dual-use" goods-products intended for civilian use that could be repurposed for military applications.

Next Steps

1. Audit Your Current Clients: Use the Consolidated Canadian Autonomous Sanctions List to run a manual check on your top 20% of clients and suppliers immediately.
2. Draft a Compliance Policy: If you do not have a written Internal Compliance Program, appoint a compliance officer to begin drafting one.
3. Review Insurance Policies: Check if your Directors and Officers (D&O) insurance covers legal defense costs for regulatory investigations related to trade controls.
4. Consult an Expert: Reach out to a qualified Canadian trade lawyer to perform a formal risk assessment of your cross-border operations.