Managing Conflicting Obligations:
Compliance with Canadian Law and Policy on
Trade with U.S.-Sanctioned Countries
John W. Boscariol
jboscariol@mccarthy.ca
Day 2 - May 16, 2007
American Conference Institute’s 10th National Forum on
Export Controls and Global Compliance Strategies
May 15 -17, 2007
Washington D.C.
Canada’s Export Control and
Trade Embargo Regime
• Canadian export control and trade embargo
regime based on international commitments
• Wassenaar (Conventional Arms and Dual-Use Goods
and Technologies)
• Missile Technology Control Regime
• Australia Group, Chemical-Weapons Convention
• Nuclear Non-Proliferation Treaty, etc.
• United Nations resolutions
• U.S.-origin goods
• agreement with United States concerning USML
goods
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 1
Canada’s Export Control and Trade
Embargo Regime (cont’d)
• countries/groups subject to Canadian
sanctions or controls under Area Control
List and United Nations Act:
Myanmar (Burma)
Belarus
Al-Qaida and Taliban
Côte d'Ivoire
Democratic Republic
of the Congo
Iraq
Iran
Liberia
North Korea
Rwanda
Sierra Loene
Sudan
terrorist individuals
and groups
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 2
Identifying and Managing Conflicting
Obligations
• potential for conflict between Canadian and U.S.
laws
• Foreign Exterritorial Measures Act and 1996 FEMA
Order (Cuba)
• Canada’s Boycott Policy
• discriminatory business practices legislation
• human rights legislation
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 3
The United States, Canada and Cuba
• Canada’s expanding economic relationship with Cuba
• Canada is one of Cuba’s largest trading partners
• Canadian exports to Cuba CDN$512 million in 2006 (CDN$273
million in 2003) - machinery, agrifood products, sulphur, electrical
machinery, newsprint
• Canadian imports from Cuba CDN$629 million in 2006 (CDN$371
million in 2003) - ores, fish and seafood, tobacco, copper and
aluminum scrap and rum
• Canada is Cuba’s largest source of foreign direct investment
• Canadian FDI CDN$830 million (CDN$337 million in 1998) - nickel
and cobalt mining, oil and gas, power plants, food processing
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 4
The United States, Canada and Cuba
(cont’d)
• expanding extraterritorial reach of U.S trade embargo
• 1962 – imposition of full trade embargo under Trading
with the Enemy Act
• 1975 – elimination of general license allowing trade by
foreign non-banking entities
• had to apply for specific license and demonstrate independent
operation re decision-making, risk-taking, negotiation and
financing
• 1990 – Mack Amendment proposed outright prohibition
on issuance of licenses to foreign affiliates of U.S. firms
• 1992 – Cuban Democracy Act
• 1996 – Helms-Burton Act extends aspects of Cuban embargo
to Canadian companies that have no connection with
U.S. entities
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 5
The United States, Canada and Cuba
(cont’d)
• Canadian response to U.S. trade embargo
of Cuba
• diplomatic
• NAFTA/WTO?
• primarily FEMA and the 1996 FEMA Order
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 6
Overview of the Foreign Extraterritorial
Measures Act
• extraterritorial anti-trust motivations
• authorization for Attorney General to make orders
where foreign state or tribunal takes measures
impairing Canada’s interests regarding international
trade or infringing on Canadian sovereignty
• Canadian Attorney General can
• prohibit production or disclosure of records before foreign
tribunals
• declare that judgements of foreign tribunals not be recognized
or enforceable in Canada
• require notification of directives or other communications
relating to such measures
• prohibit compliance with such directives or measures
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 7
Overview of the Foreign Extraterritorial
Measures Act (cont’d)
• “Helms-Burton amendments”
•
•
•
•
block recognition or enforcement of Title III judgements
restrict production of records for Title III actions
“clawback” of damages from successful Title III plaintiffs
recovery of defense expenses prior to Title III judgement
• criminal penalties
• corporation – up to CDN$1.5 million
• individual – up to CDN$150,000 and/or five years imprisonment
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 8
The 1996 FEMA Order
• notification obligation
• non-compliance obligation
• violation - FEMA penalties of up to
CDN$1.5 million / 5 years imprisonment
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 9
The Notification Obligation
“Every Canadian corporation and every director and
officer of a Canadian corporation shall forthwith give
notice to the Attorney General of Canada of any
directive, instruction, intimation of policy or other
communication relating to an extraterritorial measure
of United States in respect of any trade or commerce
between Canada and Cuba that the Canadian
corporation, director or officer has received from a
person who is in a position to direct or influence the
policies of the Canadian corporation in Canada.”
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 10
The Notification Obligation (cont’d)
• key elements of the notification obligation
• directive, instruction, intimation of policy or other
communication
• extraterritorial measure of United States
• in respect of any trade or commerce between
Canada and Cuba
• received by Canadian corporation, director, or
officer
• received from person in a position to direct or
influence the policy of the Canadian corporation in
Canada
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 11
The Non-Compliance Obligation
“No Canadian corporation and no director, officer,
manager or employee in a position of authority of a
Canadian corporation shall, in respect of any trade or
commerce between Canada and Cuba, comply with an
extraterritorial measure of United States or with any
directive, instruction, intimation of policy or other
communication relating to such a measure that the
Canadian corporation or director, officer, manager or
employee has received from a person who is in a
position to direct or influence the policies of the
Canadian corporation in Canada.”
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 12
The Non-Compliance Obligation (cont’d)
• key elements of the non-compliance obligation
• applies to Canadian corporation, director, officer,
manager or employee in a position of authority
• in respect of any trade or commerce between
Canada and Cuba
• extraterritorial measures of United States and
communications relating to such measures
• communication received from a person in a position
to direct or influence the policy of the Canadian
corporation in Canada
• applies in respect of any act or omission
constituting compliance, whether or not compliance
is the only purpose of the act or omission
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 13
What is an “Extraterritorial Measure of
the United States”
• defined as the CACRs and any law, ruling, guideline or
other communication having a purpose similar to that
of the CACRs “to the extent that they operate or are
likely to operate so as to prevent, impede or reduce
trade or commerce between Canada and Cuba”
• “trade or commerce between Canada and Cuba”
defined as trade (i) between Canadian entities and
Cuban entities and (ii) between Canadian entities and
Canadian nationals or corporations that are designated
as Cuban nationals or corporations pursuant to an
extraterritorial measure of the United States (e.g.,
“specially designated nationals”)
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 14
What is an “Extraterritorial Measure of
the United States” (cont’d)
• U.S. laws that may be considered “extraterritorial
measures of the United States”:
• Cuban Assets Control Regulations
• Export Administration Regulations
• Helms-Burton (?)
• other
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 15
Impact of Canadian Export Controls Over
U.S.-Origin Goods
• item 5400 of Export Control List requires permit for
the export of all U.S.-origin goods and technology from
Canada
• excludes “goods that have been further processed or
manufactured outside of the United States so as to
result in a substantial change in value, form or use of
the goods or in the production of new goods”
• 50 percent rule of thumb
• if U.S.-origin, can rely upon General Export Permit No.
12 – all destinations except Myanmar, Belarus, Cuba,
North Korea, Iran and Syria
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 16
Impact of Canadian Export Controls Over
U.S.-Origin Goods (cont’d)
• limited buffer to FEMA exposure since
• goods containing between 10 and 50 percent
U.S.-origin
• permit granted on an administrative basis
• ECD’s verbal administrative policy currently permits U.S.-origin
goods to be shipped to Cuba in three circumstances:
• a U.S. licence has been obtained or
• humanitarian purpose (“basic necessities of human life”) or
• parts intended to replace U.S.-origin parts of non-U.S. origin
goods previously permitted to be exported to Cuba
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 17
Public Examples of Conflict
• lessons learned
• Wal-Mart’s Cuban pyjamas
• Bro-Tech and James Sabzali
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 18
Key Questions in Resolving Conflicts
1. Is the U.S. measure in question covered by the FEMA
Order?
2. Does the U.S. measure operate or is it likely to operate
to reduce or impede trade or commerce between Canada
and Cuba?
3. Is the communication in the nature of a directive or an
intimation of policy?
4. Is the source of the communication in a position to direct
or influence the policies of the Canadian corporation in
Canada?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 19
Key Questions in Resolving Conflicts (cont’d)
5. Does the Canadian company’s act or omission constitute
“compliance”?
What is the reason for the Canadian company’s act
or omission? Compliance with Canadian law?
6. Is your client a “Canadian corporation” as defined in the
FEMA Order?
7. If goods are to be supplied to Cuba, what is their U.S.origin content? Have they been sufficiently transformed
outside Canada?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 20
Examples of Conflicts
Example 1:
A U.S. company conducts export compliance
training at its Canadian subsidiary. U.S. staff
travel to Canada, provide employees and officers
of the Canadian company with export control
manuals and training sessions which identify
Cuba, among other countries, as being subject to
the OFAC rules. Is the Canadian company
required to make a notification to the Attorney
General?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 21
Examples of Conflicts (cont’d)
Example 2:
A European-based company has a subsidiary in
the United States and a subsidiary in Canada.
The CEO of U.S. subsidiary advises his Canadian
counterpart that his company should not be
supplying products to Cuba. Is the Canadian
subsidiary required to notify the Attorney
General?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 22
Examples of Conflicts (cont’d)
Example 3:
The Canadian subsidiary in Example 2 uses the
systems of its U.S. sister company to process orders
that it receives. In order to avoid penalties under
the CACRs, the Canadian subsidiary develops a new
order system that red flags Cuban orders so that
they are processed in Canada. Has the Canadian
company violated the non-compliance obligation?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 23
Examples of Conflicts (cont’d)
Example 4:
An Asian multi-national has a subsidiary in the United States
which in turn has a subsidiary in Canada. The Canadian company
receives a request to provide engineering services to a Cuban
mining project. The Canadian company refuses because the
CACRs prevent U.S.-owned foreign subsidiaries from doing
business with Cuba. However, another Canadian company, a
direct subsidiary of the Asian parent, steps in to provide the
services. Is there a requirement to notify the Attorney General
of any directions that may have been given to the Canadian
company that refused the order? Is there a violation of the
non-compliance obligation?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 24
Examples of Conflicts (cont’d)
Example 5:
A Canadian investor participating in an hotel
project in Cuba backs out of the deal when she
realizes that the financial terms are not worth
the risk, and she fears exposure to Title III
actions under Helms-Burton. Has the Canadian
investor violated her non-compliance obligation?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 25
Examples of Conflicts (cont’d)
Example 6:
A Canadian distributor sources widgets from the
United States and receives an order to ship to
Cuba. He applies for a U.S. re-export license,
perhaps in the hope that they are considered
medical supplies, but is refused. He advises his
customer that he is unable to ship. Has he
violated the non-compliance obligation?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 26
Examples of Conflicts (cont’d)
Example 7:
A Canadian manufacturer uses U.S.-origin
components to produce widgets. The
components comprise over 50 percent of the
value of the widgets. It refuses a purchase
order for Cuba assuming the shipment would not
qualify for a Canadian export permit. Could this
constitute a violation of the non-compliance
obligation?
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 27
Canada’s Boycott Policy
• October 21, 1976 federal policy; does not prohibit
compliance with international economic boycotts
• identifies “unacceptable” activities taken in connecton
with such boycotts
• requiring a firm or individual to engage in discrimination based
on race, nationality, etc. of another Canadian firm
• refusing to purchase from or sell to another Canadian firm
• refusing to sell Canadian goods to any country or refraining from
purchasing from any country
• restricting commercial investment or other economic activity in
any country
• sanction is denial of government support and assistance
in such transactions
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 28
Provincial Discriminatory Business
Practices Legislation

Discriminatory Business Practices Act (Ontario)

prohibits refusing to engage in business with others where:
(i)
refusal is an account of on “attribute” (e.g., geographical location) of the
others or of a third person with whom the others do business; and
(ii) refusal “is a condition of the engaging in business” of the company making the
refusal and another person
•
prohibits entering into a contract in which one party refuses to engage
in business with another person on account of an attribute of that
other person or of a third person with whom that person conducts
business
•
sanctions
•
•
•
cause of action against person who contravenes
banned for providing goods or services to Ontario government for five years
$100,000 fine for failure to comply with an order
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 29
Strategy and Planning Points
• many investigations, no prosecutions, no judicial
consideration – presents special challenges
• limit or eliminate embargo communications between
U.S. parents and Canadian subsidiaries – use legal
counsel
• Canadian entities should have Canadian-specific export
control manuals, policies and training programs
• also review for FEMA exposure - intercompany
agreements and the Canadian subsidiary’s contracts,
purchase orders, etc. with unrelated parties
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 30
Strategy and Planning Points (cont’d)
• special consideration for executives and
officers of the Canadian subsidiary that are
U.S. citizens or residents
• also consider federal boycott policy and
provincial business practices legislation
John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group
Slide 31
John W. Boscariol
Partner
McCarthy Tétrault LLP
Suite 4700
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www.mccarthy.ca
Direct Line: 416-601-7835
E-mail: jboscariol@mccarthy.ca
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