Economic sanctions are measures imposed by national governments on specific countries, organizations or individuals that threaten certain interests or violate international norms of behaviour, in order to try to alter their decisions or actions. 

Iran sanctions origins

Canada originally imposed economic sanctions against Iran in response to its nuclear proliferation program. As a result of the application of these sanctions, there was an effective blanket prohibition on trade with Iran.

These types of sanctions can have an impact on your business in a number of ways, including prohibiting trade or other economic activity with a foreign market, and prohibiting or restricting foreign financial transactions.

Therefore, it is important to know whether your business is transacting with countries, organizations or individuals which may be subject to economic sanctions.

Canada makes “Amendments”

The Government of Canada has recently made important changes to its economic and trade sanctions against Iran (via the “Amendments”) to allow for a controlled economic re-engagement between the two countries.

Through significant roll-backs on prior commercial and trade activity restrictions, the Amendments, which modify both the Special Economic Measures (Iran) Regulations (“SEMA Regulations”) and the Regulations Implementing the United Nations Resolutions on Iran (“UN Regulations”), have resulted in an effective repeal of the blanket prohibition on trade with Iran.

The few surviving restrictions have a much narrower scope, focusing primarily on nuclear-related activity, ballistic missile activity, and transactions involving designated or listed persons.

As a result of the Amendments, business between Canada and Iran will generally be permitted unless:

• The consumer, or any intermediary in the transaction, is a Listed Person in Schedule 1 of the SEMA Regulations, or is a restricted party designated by the United Nations;
• The product being sold is listed in Schedule 2 of the SEMA Regulations; or
• The transaction is prohibited by restrictions under the UN Regulations.

It is also important for Canadian businesses to keep in mind that the SEMA Regulations still contain:

• A prohibition for any person in Canada or any Canadian outside Canada to provide any financial or related service to a Listed Person (which includes both individuals and corporate entities appearing in Schedule 1 of the SEMA Regulations) or to a person acting for the benefit of a Listed Person (Special Economic Measures (Iran) Regulations SOR/2010-165 (s.3(d));

• A prohibition against any person in Canada or any Canadian outside of Canada to export, sell, supply or ship any of the goods listed in Schedule 2, or to transfer, provide, or disclose any technical data related to the goods listed in Schedule 2, wherever situated, to Iran, to a person in Iran, or to a person for the purposes of a business carried on in or operated from Iran (Special Economic Measures (Iran) Regulations SOR/2010-165 (s.4(1) and (2));

• Most of the goods listed in Schedule 2 are nuclear-related materials and technology, weapons, arms and related materials, as well as goods or technology in relation to Iran’s ballistic missile program.

The UN Regulations contain restrictions on:

• The provision of nuclear-related material and technology to Iran;
• The provision of goods, technology, technical assistance, financial or related services in relation to Iran’s ballistic missile program and to the development of nuclear weapon delivery systems;
• The availability of property or financial services to Iran for the purpose of investing in specified nuclear-related activities in Canada;
• The provision of heavy arms and related material to Iran or services related to Iran’s use of such arms and related materials; and
• The procurement of arms and related material from Iran.

Canadian businesses, proceed with caution

Although it seems as though the doors may be open for Canadians looking to do business with or in Iran, it is important for Canadian businesses to keep in mind that despite the Amendments, certain restrictions and prohibitions are still very much applicable.

Ignorance of these restrictions and actions taken that violate the existing prohibitions under the sanctions could lead to serious consequences for those involved.

It is critical for businesses to keep in mind that diligence will absolutely be required in screening potential suppliers, partners and/or customers against Listed Persons to ensure proper compliance.

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In the years to come, we will look back on these days as the beginning of a new era of sanctions enforcement.

It all began with the banks

For the last few years, the financial industry has been the focus of aggressive sanctions enforcement, particularly foreign-based financial institutions.

These international banks regularly evaded United States sanctions by stripping and masking financial transactions for the financial benefit of their business operations. These were relatively easy cases to develop and brought the government huge fines.

The risk of criminal sanctions enforcement against global banks took a new twist with the BNP Paribas case, in which BNP Paribas was required to plead guilty to a criminal offense and pay total fines and penalties nearing $8.9 billion.

Justice Department officials subsequently explained that BNP Paribas’ failure to cooperate constituted obstruction of justice because the Justice Department was barred by the statute of limitations from prosecuting otherwise culpable individuals.

Cooperate or face the consequences

The consequences of failing to cooperate was underscored again when Commerzbank was forced to pay fines and penalties totaling $1.4 billion for evading sanctions in conducting numerous financial transactions.

Commerzbank has to report every quarter to the DOJ and OFAC on its progress in implementing enhanced compliance procedures.

The BNP Paribas and Commerzbank cases underscore this new era of sanctions enforcement, and demonstrate that the Justice Department and OFAC will use all the tools available, if necessary, to resolve an investigation.

The significance for international businesses

Perhaps more important for global businesses, however, was the recent resolution involving Schlumberger Oilfield in which the company paid $232 million in fines and penalties for violating applicable sanctions.

The implications of the case are significant for all international businesses. U.S. sanctions apply to U.S. entities and persons.

In certain circumstances, some companies will seek to continue business operations with prohibited countries or individuals by conducting business outside the United States. This requires careful consideration of legal and compliance issues.

A company, at least theoretically, can provide otherwise prohibited products or services, so long as the activities do not involve any United States entities or persons. In theory, it may sound doable, but in practice it is extremely difficult to ensure that no aspect of a business touches a United States entity or person.

Get familiar with the prohibition against facilitation

Another way to explain the law is to focus on the prohibition against facilitation of a sanctions violation. Not all sanction regimes are the same with regard to prohibiting facilitation conduct – the Iran sanctions seek to enforce this prohibition to the maximum extent permitted under Due Process requirements of our Constitution.

The Iran, Syria, Cuba and Sudan-related programs prohibit U.S. persons from “facilitating” prohibited transactions.

In other words, sanctions programs prohibit U.S. persons from doing indirectly what they cannot do directly.

In announcing its settlement with Schlumberger, the DOJ embraced the facilitation prosecution theory and charged Schlumberger with failing to segregate foreign operations from U.S. operations.

Specifically, Schlumberger’s U.S. operations routinely approved capital expenditure requests, provided strategic direction, and supplied technical support for Schlumberger’s operations in Iran and Sudan. Schlumberger’s U.S. employees sought to conceal the locations of the sanctioned countries to which they provided support.

Review your sanctions compliance program

Global companies that seek to conduct business in prohibited countries have to re-examine their sanctions compliance program to ensure they do not run afoul of the facilitation limitation.

A specific review of various functions should be conducted to ensure that U.S. officers, supervisors and employees do not:

• Approve, finance, insure or guarantee any transaction they themselves could not conduct directly;
• Provide services in support of a prohibited activity
• Provide merchandise as part of a prohibited transaction
• Refer business to a foreign person that would involve a prohibited transaction

The DOJ has sent an important message to global companies subject to U.S. sanctions.

Global companies that want to conduct business with U.S-sanctioned entities have to ensure that no part of its U.S. operations is used to provide goods or services to a prohibited business.

Want to read more about ethics and compliance?

“My hope is that my contribution can lend some weight to an already significant revolution in corporate governance — the rise of the compliance professional and the dedication of corporate leaders and organizations to ethics and compliance.” Michael Volkov

The Revolution in Ethics and Compliance includes a collection of recent essays and blog posts aimed at encouraging corporate leaders to understand how a culture of compliance is not only the best best protection against code of conduct and legal violations, but also how such a culture creates sustainable financial benefits to a company and its employees.

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