On February 5, 2016, Canada's Minister of Foreign Affairs, Mr. Stéphane Dion, and Canada's Minister of International Trade, Ms. Chrystia Freeland, announced the easing of Canada's economic sanctions against Iran and signalled Canada's willingness to resume dialogue with Iran. The announcement followed Mr. Dion's statements a few days earlier on the willingness of Canada to lift certain economic sanctions on Iran following confirmation by the International Atomic Energy Agency that Iran had fulfilled certain necessary commitments under the Joint Comprehensive Plan of Action (the "Iran Nuclear Deal"). (For an analysis of the Iran Nuclear Deal and Canada's sanctions regime prior to the recent amendments, please consult our previous article on the matter The Iran nuclear deal and economic sanctions: 5 key points for Canadian businesses.
Canada's easing of Iran-related sanctions paves the way for new opportunities for Canadian businesses who are looking to expand their business to the Iranian market or to re-enter the Iranian market after a period of absence due to the sanctions. As the Minister of International Trade stated, "with these amendments to Canadian sanctions against Iran, Canadian companies will now be able to position themselves for new trade opportunities," but the Government "will also maintain rigorous controls on any exports that raise serious proliferation concerns." In fact, while the sanctions against Iran have been relaxed, certain Iran-related transactions remain subject to sanctions and export control rules, and it is therefore crucial for Canadian businesses to proceed with caution and perform necessary due diligence to ensure that their intended transactions are compliant with the current applicable rules.
While the following list is not exhaustive, Canadian businesses should keep the following tips in mind in their Iran-related transactions.
- Perform a thorough due diligence with respect to the parties involved in the transaction in order to avoid any illegal dealings with designated and listed persons
Canada currently has two sets of regulations that impose Iran-related sanctions: those that reflect the U.N. sanctions regime and Canada's own set of unilateral sanctions.
Pursuant to the Iran Nuclear Deal, the U.N. sanctions have been lifted by the U.N. Security Council, although certain specific restrictions, such as those relating to the transfer of proliferation sensitive goods, continue to apply. In conformity with the U.N. Security Council actions, Canada has amended its Regulations Implementing the United Nations Resolutions on Iran (the "Iran UN Regulations") accordingly. Following these amendments, certain dealings and activities involving specific persons and products related to Iran's nuclear proliferation and arms industry remain prohibited. It is prohibited, among other things, for any person in Canada to deal in any property in Canada that is owned or controlled by a "designated person" or by a person acting on behalf of or at the direction of such person. The term designated person refers to persons designated as such by the Security Council under certain of its resolutions concerning the Iran nuclear program.
The amended Special Economic Measures (Iran) Regulations (the "SEMA Regulations"), which outline the Canada-specific sanctions against Iran, also include Canada's own list of designated persons, referred to in the regulations as "listed persons". The SEMA Regulations prohibit any person in Canada and any Canadian outside Canada to, among other things and subject to certain exceptions, deal in any property, wherever situated, that is owned, held or controlled by a listed person or a person acting on behalf of a listed person, to facilitate or enter into such transaction, provide any financial or related service in respect of such transaction, to make any goods available to a listed person or provide any financial or related service for the benefit of such person. The listed persons identified in the SEMA Regulations include certain important Iranian institutions, such as certain major banks and aerospace-related entities. It is therefore essential for Canadian businesses to perform proper due diligence with respect to the parties involved in any potential dealings involving Iran in order to avoid illegal transactions with designated and listed persons.
- Ensure that the transaction does not involve sanctioned goods and services
Following the recent amendments to the SEMA Regulations, Canada has significantly scaled back its Iran-related sanctions. Canada has removed the blanket prohibitions on import, export and investment involving Iran and has replaced them with a prohibition on transactions involving specific goods listed in Schedule 2 to the SEMA Regulations. The said schedule lists goods of various nature, and includes goods ranging from raw gold to smelting machinery and products, riot gears and explosive release devices. Under the new rules, it is prohibited for any person in Canada and any Canadian outside Canada to export, sell, supply, or ship goods listed in Schedule 2 to Iran, to a person in Iran or to a person for the purposes of a business carried on in or operated from Iran or to transfer, provide or disclose any technical data related to such goods to Iran or any person in Iran. Any assistance or facilitation, including financing, of these sanctioned acts or an intention to do so are also prohibited under the amended rules.
The Iran UN Regulations, as amended, also provide for prohibitions on transactions involving certain specific products and services related to such products, including products specifically identified under U.N. documents, certain military vehicles and equipment and ballistic missile technology and certain sensitive items on the Dual-use List and Munitions List of Canada's Export Control List. The said regulations also include prohibitions on the provision of products, services and financing pertaining to uranium mining and nuclear materials and technologies.
- It is possible to apply for an authorization to the Canadian Government for transactions that would otherwise be illegal under the sanctions
As it had been the case before the recent amendments, it is possible to request a permit from the Minister of Foreign Affairs to carry out a sanctioned activity or transaction under the SEMA Regulations. While there are no formalized procedures or timelines for permit applications and issuance, it remains to be seen whether, in the future, the processing time for such permit applications will be shortened in practice following the removal of the blanket prohibitions on Iran-related transactions.
Under the Iran UN Regulations, the Minister of Foreign Affairs may issue a certificate to authorize an activity restricted by the regulations, on a case-by-case basis, provided that certain requirements are respected.
- Beware of export control rules and the recent amendments to such rules with respect to Iran
In addition to sanctions, transactions with Iran are also subject to export control rules. Canada's export control regime is intended to control the export of sensitive equipment, software and technology to promote national security interests and foreign policy objectives.
On February 5, 2016, Global Affairs Canada issued a Notice to Exporters noting changes regarding the export of items to Iran.1 The Notice indicated that applications for export permits for all items listed on the Export Control List2 will be considered on a case-by-case basis. However, applications to export "sensitive items" will normally be denied. Such items include nuclear goods and technologies, as well as goods and technologies which could assist the development of Iran's ballistic missiles program. A full list of such sensitive items is provided in the Notice. Canadian businesses intending to explore opportunities in Iran are advised to consult the Notice to ensure the list does not cover any products intended for export.
- Beware of applicable foreign sanctions and restrictions
While the European Union and the U.S. have lifted select sanctions against Iran, Canadian businesses need to remain vigilant as to whether they are subject to foreign sanctions laws when dealing with Iran. When structuring a deal, the currency will need to be considered: U.S. dollar transactions continue to be virtually prohibited because no payments linked to Iran may be processed through the U.S. financial system.
Similarly, non-U.S. persons are still prohibited from engaging in any conduct that seeks to evade or circumvent U.S. sanctions laws, including the re-export of U.S. origin goods and technology to Iran. At the same time, Canada's Export Controls List requires an export permit for the re-export from Canada of U.S. origin goods. Complications arise due to the fact that the U.S. and Canada define "U.S. origin" goods differently, with the U.S. imposing a lower threshold of U.S. origin content for the good or technology to be captured by their laws.
As a result, a Canadian entity could unwittingly be subject to foreign sanctions laws as well as Canadian laws and businesses may need to seek European Union or U.S. legal advice if there is a risk that the transaction may also be subject to foreign sanctions laws.
- Verify whether insurance and financial institutions will provide the necessary support services for the contemplated transaction
While Canada's blanket restrictions on financial transactions involving Iran have been replaced by the less stringent rules explained above, many financial and insurance service providers may favor a cautious approach and refuse to process payments or offer support services for Iran-related transactions. The potential for increased trade with Iran depends largely on the willingness of banks and insurance providers to facilitate processing of payments. At present, it is uncertain whether and how financial and insurance services providers will adjust to the new realities associated with the easing of sanctions against Iran by Canada and its peers.
- Seek legal advice regarding the contemplated transaction to ensure that it complies with Canadian and foreign applicable laws
Canada has significantly relaxed its sanctions on Iran. However, certain Canadian and foreign sanctions and export controls by Canada and its peers (including the U.S.) remain in place and violating such restrictions can have grave consequences. It is therefore essential for Canadian businesses to seek legal advice from Canadian and, where foreign laws may be applicable, foreign legal experts to ensure that their contemplated transactions are compliant with all applicable legislation.
Businesses who intend to engage in Iran-related transactions are also advised to perform thorough due diligence and obtain all required information with respect to the parties involved, including their full name, the name of their parent entities and the identities of their shareholders and directors as well as a complete list of goods to be shipped pursuant to the transaction, the ultimate purpose of the purchase and the modalities of any financing that may need to be provided. Detailed background information on the transaction allows for a more accurate evaluation of the legality of the contemplated transaction.
- Have the following due diligence checklist in mind when contemplating a transaction with an Iranian individual or entity
In light of the above, when contemplating a transaction with an Iranian person or entity, here are the preliminary questions to ask:
- Is the other party a designated person under the Iran UN Resolutions?
- Is the other party a listed person under the SEMA Regulations?
- Is the good or service to be delivered subject to the Iran UN Regulations or the SEMA Regulations?
If you answered yes to any of the above questions, you are likely prohibited from entering into a business arrangement with that person or entity, unless a permit authorizing the transaction is obtained from the Minister of Foreign Affairs.
- Is the good or service subject to Canada's Export Control List?
If the item is only covered by the Export Control List, then you may be able to apply for an export permit. It is also essential to look into the possibility of whether or not the transaction is subject to foreign sanctions and restrictions.