Canadian Sanctions Laws: Key Considerations for Lending Transactions

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In response to the Russian invasion of Ukraine, many countries, including Canada, quickly imposed sanctions against Russia. A key element of the sanctions is the prohibition on providing financial services to designated persons or entities in sanctioned jurisdictions. Such a prohibition increases sanctions compliance risks for lending transactions involving entities whose transactions may be subject to sanctions. In this article, we discuss Canadian sanctions laws and issues that may affect parties to a loan transaction. Canada’s anti-money laundering and anti-corruption requirements under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Corruption of Foreign Public Officials Act will also be relevant but are outside the scope of this article.

Overview of Canadian Sanctions Laws

Canada has a wide range of economic sanctions laws targeting designated terrorist jurisdictions, individuals and groups. These laws apply to persons in Canada (including individuals and businesses) and to all Canadians outside Canada (including Canadian citizens or companies doing business outside of Canada). The general features of Canadian sanctions laws are

  • prohibitions on dealing with named persons or with certain jurisdictions or in specific sectors of certain jurisdictions (for example, in the Crimea region of Russia, or in relation to oil and gas equipment with certain countries, etc.)[1]
  • asset screening, reporting and freezing obligations imposed on prescribed entities (which may include banks, insurance companies, trust and loan companies and investment managers)
  • exemptions through discretionary permits/certificates and general exemptions for the supply of goods and services that are otherwise restricted if they are for certain purposes (e.g. humanitarian aid)
  • penalties, including fines and jail time

There are five main laws under which Canada’s sanctions are implemented: the United Nations Act (the United Nations Act), the Special Economic Measures Act (SEMA), the Justice for Victims of Corrupt Foreign Officials Act (the JVCFO law), the Freezing Assets of Corrupt Foreign Officials Act (FACFO law) and the criminal code.

Additionally, while not strictly sanctions laws, there are other Canadian sanctions laws that may restrict or otherwise be relevant to a loan transaction, including

  • the Export and Import Permits Actwhich allows the Government of Canada to restrict exports and imports of specific goods and goods from specific jurisdictions
  • the Foreign Extraterritorial Measures Act (FEMA), which is Canada’s “blocking law” with respect to the extraterritorial application of certain foreign laws

Practical Considerations

Lenders must ensure that entering into a loan transaction will not violate Canadian sanctions laws. Given the generally broad application of Canadian sanctions, this concern will be particularly relevant where the lending transaction involves (i) a borrower who is, or whose corporate group includes, either a Canadian person or a non-Canadian person company operating in Canada or (ii) a lender that is a Canadian person or a non-Canadian person carrying on business in Canada.

Due diligence

To ensure that a lending transaction does not violate any sanctions (in particular, prohibitions on providing financial services to sanctioned persons), lenders will need to conduct due diligence as part of their “know your customer” procedures and of combating money laundering. At a minimum, this should involve consulting the lists of persons sanctioned under the various Canadian sanctions laws.[2]

Representations/Warranties and Sanctions Clauses

In addition to due diligence, compliance with sanctions is generally addressed through representations and warranties and covenants customary in loan documents. A borrower’s sanction statements generally confirm that

  • (i) the Borrower and all other relevant entities in its corporate group comply with applicable sanctions and (ii) none of such entities or their respective directors or officers or, to the knowledge of the party making the representation, any employee or agent are natural or legal persons subject to sanctions or organized or residing in a sanctioned jurisdiction
  • for facilities with outstanding advances where representations and warranties are repeated with each drawdown, the borrower has not used the proceeds of an advance in violation of the sanctions

Penalty clauses can include positive and negative clauses

  • comply with all applicable sanctions laws and maintain internal sanctions compliance policies and procedures
  • not become a sanctioned person
  • ensure loan proceeds are not used to violate applicable sanctions
  • provide certifications or other evidence that the lender may request to confirm compliance with the sanctions clauses

To ensure that sanctions-related representations, warranties and covenants are sufficiently robust with respect to Canadian sanctions, definitions of “sanctions”, “sanctions laws” or any equivalent term should include “the applicable Canadian sanctions laws, including criminal codethe United Nations Actthe Special Economic Measures Actthe Justice for Victims of Corrupt Foreign Officials Actthe Freezing Assets of Corrupt Foreign Officials Act and all regulations, orders, rules and interpretations made thereunder or relating thereto. Any reference to sanctions enforcement authorities should also include the Government of Canada and, in particular, Global Affairs Canada, which are the primary Canadian sanctions enforcement authorities.

SEMA Exemptions for Certain Lending Transactions

Regulations under SEMA generally include exemptions for certain transactions related to lending transactions.[3] Typical exemptions include

  • payments made by or on behalf of a registrant that are due under a contract the registrant entered into before becoming a registrant, provided that the payment is not made to a registrant or a person acting on behalf of a registrant person (e.g. pre-existing charges and interest payments)
  • transactions with a registered person (e.g., a sanctioned guarantor) required in respect of loan repayments made to any person in Canada, or to any Canadian abroad, for loans made with any person other than a registrant (i.e. the borrower), and for the execution and realization of security relating to such loans, or payments by guarantors guaranteeing such loans
  • transactions with a registrant (e.g., sanctioned borrower or guarantor) necessary in respect of loan repayments made to any person in Canada, or to any Canadian abroad, for loans made with that registered person before becoming a listed person (i.e., only in respect of pre-existing loan obligations), and for the enforcement and realization of security relating to such loans, or payments by guarantors guaranteeing such loans

Safeguard provisions regarding the freezing of assets

Some of Canada’s sanctions laws allow the Government of Canada to order the seizure, freezing or sequestration of specific assets of sanctioned persons. However, in the case of SEMA, JVCFO, and FACFO, there are safeguard provisions regarding existing secured and unsecured rights and interests in frozen property held by persons other than the person sanctioned.[4] For example, the saving provision of the JVCFO statute provides that such rights and interests shall have the same rank to which they would have been entitled had the freezing order not been issued.

Foreign Extraterritorial Measures Act

Under FEMA, the Attorney General of Canada may, with the concurrence of the Minister of Foreign Affairs, by order, prohibit any person in Canada from complying with any measure of a foreign state affecting the international commerce of a nature or in a manner which has damaged or is likely to damage important Canadian interests relating to international trade or trade in business conducted, in whole or in part, in Canada, or which has otherwise damaged or is likely to undermine Canadian sovereignty.[5] A borrower who is, or whose corporate group includes, an entity that is the subject of a restraint order under FEMA will need to carefully review the penalty provisions to ensure that such entities will be able to provide the requested representations and warranties and to comply with the covenants. .

Recent changes

The Government of Canada recently passed amendments to sanctions laws to implement Canada’s commitment as a member of the Joint Task Force on Russian Elites, Proxies and Oligarchs to “find, retain, freeze , seize and, where appropriate, confiscate or confiscate the property of those persons and entities that have been sanctioned in connection with Russia’s premeditated, unjust and unprovoked invasion of Ukraine.

Bill C-19 (Budget Implementation Act No. 1 of 2022), which received Royal Assent on June 23, 2022, amended SEMA and the JVCFO Act to redefine “ownership” to expressly include intangible or intangible assets, including digital assets and virtual currency, and grant the federal government a new power to seek a forfeiture order of seized or restrained property. Notably for lenders, the bill amended the safeguard provisions of SEMA and the JVCFO statute for secured and unsecured rights and interest in frozen or immobilized assets. Under the amendments, these interests will lose their pre-existing rank if the property is forfeited to the federal government. However, the new forfeiture order provisions allow such persons to apply for a court order declaring that their interest or right is not affected by the forfeiture, declaring the nature and extent of the interest or right and directing the Minister to pay the person an amount equal to the value of their interest or right.

Conclusion

As mentioned above, Canadian sanctions create significant compliance risks in lending transactions. Lenders and borrowers should be aware of the above issues when doing “know your customer” due diligence and negotiating loan documents. Osler professionals are experienced in advising clients on sanctions-related issues in lending transactions.

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