On June 22, 2023, significant amendments (the Amendments) to the Special Economic Measures Act (SEMA) entered into force. The Amendments fundamentally alter the notion of ownership in Canadian sanctions, particularly through a new deemed control provision (the Provision). Notably, the Provision differs from other common legal definitions of control included in other Canadian legislation like the Competition Act or the Income Tax Act.
Among other things, the Amendments add the following definition to section 2 of SEMA:
Deemed ownership
2.1 (1) If a person controls an entity other than a foreign state, any property that is owned — or that is held or controlled, directly or indirectly — by the entity is deemed to be owned by that person.
Criteria
(2) For the purposes of subsection (1), a person controls an entity, directly or indirectly, if any of the following criteria are met:
- the person holds, directly or indirectly, 50% or more of the shares or ownership interests in the entity or 50% or more of the voting rights in the entity;
- the person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; or
- it is reasonable to conclude, having regard to all the circumstances that the person is able, directly or indirectly and through any means, to direct the entity’s activities.
The concepts of ownership and control are significant in Canada’s sanctions regimes because the specific regulations adopted under SEMA typically prohibit dealings in property owned, held or controlled by sanctioned persons. For example, section 3 of the Special Economic Measures (Russia) Regulations provide in part as follows (emphasis added):
3 It is prohibited for any person in Canada and any Canadian outside Canada to
- deal in any property, wherever situated, that is owned, held or controlled by or on behalf of a designated person whose name is listed in Schedule 1;
[…]
While the new definition of “deemed ownership” was presented as an attempt to clarify the concept of control as used in sanctions adopted under SEMA, it actually creates more uncertainty and diverges from the sanctions practice of Canada’s allies. We break down the key considerations raised by the Amendments.
a) 50% Ownership
Ownership is now deemed when a sanctioned party directly or indirectly holds 50% or more shares or ownership interest in an entity. This appears to set a clear ownership threshold and to provide some needed clarity. However, there remain some uncertainties. For example, it is unclear how the 50% threshold might apply to entities down below in the ownership structure of a group of companies that may not be directly held by a sanctioned person or entity, or that may be 50% or more collectively owned by more than one sanctioned person. To the extent certain entities down the ownership structure have a diluted ownership that results an ownership threshold under 50%, such entities are likely outside the scope of the 50% ownership deeming provision. Whether or not a particular scenario presents uncertainties in the application of the 50% threshold, the following control criterion must also be considered.
b) Changes to composition of powers of a board
Criterion (b) remains the most challenging deeming provision of the Amendments. This criterion prescribes that an entity is deemed to be controlled by a sanctioned person, if the sanctioned person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors. The full scope of this criterion is unclear. In particular, the phrase “change the composition of the board” could be interpreted in different ways. In the extreme case, it could be argued that if a non-controlling sanctioned shareholder is able to appoint even one director (out of many) to the board of an entity (for example, pursuant to a shareholders agreement), the sanctioned person is able to “change the composition” of a board and, therefore, is deemed to control the entity. Such an interpretation would expand the concept of control well beyond its established meaning and it is hoped that Global Affairs will adopt a more measured interpretation.
So far, no guidance has been issued by Global Affairs Canada in relation to this new legal test for control (although officials have suggested that guidance may be issued before the end of 2023). From a compliance perspective, the change presents challenges. Information relating to the authority of shareholders to change the composition of a board is often not public and even the most sophisticated screening tools generally do not detect this information. It may, therefore, be prudent to update Know Your Client questionnaires to ensure that this new deeming provision is taken into account.
c) De facto control
De facto control has generally been understood to form part of the concept of control as used in Canadian sanctions. This was recently confirmed by the Alberta Court of King’s Bench in Angophora Holdings Limited v. Ovsyankin (para 34). The new amendment codifies the generally accepted interpretation of the sanctions (that an entity controlled by a sanctioned person is the property of that sanctioned person and, therefore, subject to dealings prohibitions prescribed in sanctions adopted under SEMA). In this regard, criterion c) provides a useful clarification and articulation of the control in fact test to be applied.
d) Foreign state exemption
In addition to the above, the new provisions include a foreign state exemption. As defined in SEMA, a “foreign state” means a country other than Canada, including:
- Any political subdivision thereof;
- The government and any department, of a foreign state or of a political subdivision thereof; and
- Any agency of a foreign state or of a political subdivision thereof.
A person who controls a “foreign state” (including a government department or ministry) will not be deemed to own any property that is owned – or that is held or controlled, directly or indirectly – by that entity. For example, if a minister is sanctioned, ownership interests made or held by a ministry in third party entities will benefit from this exemption.
e) Magnitsky Act & Proceeds of Crime (Money Laundering) and Terrorist Financing Act
In addition to the above, similar changes have been made in relation to the Justice for Victims of Corrupt Foreign Officials Act.
Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act were also included in the omnibus budget bill that has now entered into force. These amendments provide further clarity on sanctioned asset reporting obligations under the various statutes, and expands the list of other Canadian government departments with whom Global Affairs Canada coordinates and shares information on sanctions matters. More generally, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act is undergoing a significant consultation at the moment, that includes potential further amendments relating to sanctions.
To the extent you have any questions related to the above, please reach out to the authors, Paul Lalonde, Sean Stephenson and Daniela Acevedo, or a member of Dentons Canada’s Sanctions Team.
