How Canadian companies can avoid the sanctions snare

Moscow
Moscow

Arkady Rotenberg is a greying, avuncular-looking man with a broad face, broad smile and broad shoulders. He also has a broad reach into Russia’s political structures and business empires. This is a man who, besides owning a bank and a controlling interest in Stroygazmontazh Corporation, a major construction company involved in building Russia’s oil infrastructure, has literally flipped President Vladimir Putin onto his back plenty of times.

For that he’s been rewarded with more than $28 billion in government contracts since 2008.

A 63-year-old billionaire worth approximately US$2 billion, according to Forbes magazine, Rotenberg and his billionaire brother Boris were judo sparring partners with Putin for years. The three body-slamming buddies remain close. Why should Canadian companies pay close attention to some billionaire black-belt enjoying a little bushido now and then with Russia’s leader? Because maybe, just maybe, you’re doing business with the man.

And that could get your company flipped on its back by Canadian authorities because Canada has decided there’s something wrong with the Rotenbergs. Especially Arkady. He’s currently subject to trade and travel sanctions by Canadian, US and EU governments. (Boris got off lighter; the EU has yet to impose sanctions on him, though Canada and the US have.)

Before bullets and bombs fly, sanctions are used as a financial weapon to punish and push countries towards diplomatic solutions before wars break out. Putin’s actions – aggression against Ukraine, slicing off Crimea and tucking it into Russia’s pocket – prompted a slew of international sanctions against the country’s banks, oil companies and Putin’s political, military and business cronies.

Canada initiated its sanctions against Russia on March 17, 2014, under the Special Economic Measures Act (SEMA). There have been 11 amendments since, piling more individuals and companies onto the list. The latest were on December 19, mostly targeting supplies and equipment needed for the Russian offshore and Arctic energy industry, including pipeline manufacturers such as Arkady Rotenberg. It all has Canadian companies in a host of sectors, but mainly energy and finance, ringing up legal advisors for help figuring out if their businesses are at risk of breaching sanctions and what to do if they are.

Canada currently has sanctions against 22 countries, including Belarus, Côte d’Ivoire and Sudan. Many are countries we’ve had little trade with. But the Russian/Ukrainian sanctions, says Vince DeRose, national leader of the Defence and Security Industry Group at Borden Ladner Gervais LLP in Ottawa, greatly sharpened the focus and anxiety of Canadian companies on the potential impact of sanctions.

“I think there has been a convergence of a number of factors in 2014 that has led to Canadian companies looking internally and taking their export compliance much more seriously than we have in the past,” he says. One factor has been the growing realization in Canadian industry that the swelling sanctions against Russia – where Canadian companies do much more business than they did with other sanctioned countries – create a wide, sticky web that can be hard to spot.

For example, a Canadian company exporting drilling equipment to a Russian buyer – equipment that might contain even just a small component or two from a US supplier – could be breaching US sanctions and subject to penalties under those rules. “We have found over the past year that a number of our clients really didn’t appreciate the reach of US laws,” says DeRose. “And we found ourselves working hand-in-glove with US counsel so that we would develop compliance policies and procedures in a manner that would address both US and Canadian sanctions.”

Then there’s the evidence that the Canadian government, as never before, will crack down on companies breaching Canadian sanctions. Few Canadian lawyers have seen that evidence more closely than Kristine Robidoux, a partner at Gowling Lafleur Henderson LLP in Calgary. Robidoux, transforming from criminal-defence lawyer into one of the top practitioners in international corporate risk and compliance, defended the first prosecution ever brought against a Canadian company under SEMA.

On April 14, 2014, Lee Specialties Ltd., a private Red Deer, Alberta company, pleaded guilty to shipping about $15 worth of Viton O-rings to Iran. Export of the 30-cent O-rings to that country – potentially useful in the nuclear industry – was prohibited under SEMA regulations. It was the first time since enactment in 1992 that the federal government had charged and prosecuted any Canadian company under SEMA. (Lee was also charged under the Customs Act and United Nations Act.)

Robidoux – who also defended the first two Canadian companies ever charged under the Corruption of Foreign Public Officials Act (CFPOA) – negotiated a plea agreement for Lee. The company paid a $90,000 fine.

The Lee and CFPOA cases, along with the ever-evolving list of prohibitions against business with Russia, have triggered a noticeable uptick in calls to Canadian corporate law firms about how to cope with sanctions.

“There is no question that enforcement is ramping up, that the Canadian enforcement agencies are using a broader set of tools,” says Robidoux. She says Canadian enforcement agencies are working more closely with foreign counterparts and have developed mutual agreements to share information. There has also been an increased use of electronic surveillance.

And let’s not forget the aggressive words of Prime Minister Stephen Harper on the subject himself. At the G20 conference in Brisbane, Australia last November, after bluntly telling Putin “you need to get out of Ukraine,” Harper joined with US President Barack Obama, UK Prime Minister David Cameron and German Chancellor Angela Merkel in warning Russia more sanctions were forthcoming unless it withdrew its covert secessionist activities in Eastern Ukraine. Canada has actually enacted more sanctions against Russia than either the US or EU.

“On enforcement we are not going to see a decrease, we will see an increase,” asserts Robidoux. As well, she adds, corporate boards had better understand now that under fiduciary obligations they face personal criminal liability if they fail to take steps to ensure their company is complying with all applicable Canadian and international sanctions.

 

Cross-sanctions

The trouble though, says Richard Wagner, a senior partner with Norton Rose Fulbright Canada LLP in Ottawa, is that many companies aren’t quite sure just how to do that. Companies that have done business with Russia or Ukraine for years have never experienced such a sanctions environment. They don’t know how to institute compliance programs or how to look for the red flags that might indicate a foreign business transaction has bumped over a sanction. “Now sanctions come in, and, oops, I think every executive has to say, ‘Am I doing business with Russia?’”

If the answer is yes, says Wagner, a company has some thorough investigative work it must do quickly: Are they doing business directly or indirectly with an individual or foreign company on a sanctions list? Do they possibly hold assets of a named individual? How might that affect their business?

Those aren’t easy questions to answer. Canadian sanctions can intertwine and overlap with US, UK or EU sanctions — all potentially affecting a company’s dealings directly or indirectly with a targeted country. And compared to corporations in other nations, especially the US, Canadian industry – not to mention Canadian law firms – gets weak guidance from the federal government on how to reduce risk exposure to Canadian sanctions.

That can make it harder to look for red flags, for example a request to ship unusual goods to Dubai, known as a pipeline for sneaking internationally sanctioned goods into targeted countries such as Iran. Lee Specialty was sending those sanctioned O-rings to Dubai, where, through a duplicitous middleman, they would have wound up in Iran if not intercepted by the Canada Border Services Agency before they originally left Canada. “If you sell certain goods not endemic to Dubai,” says Richard Wagner, “you have to wonder, why is this winter equipment being sent there?”

Canadian economic weapons against foreign nations, notes Shawn Neylan, a partner with Stikeman Elliott LLP in Toronto, come under four different statutes: SEMA, the CFPOA, the United Nations Act and the Export and Import Permits Act. Then there are additional restrictions imposed under anti-terrorism provisions of the Criminal Code. “It’s kind of messy in the sense of there are a lot of different Acts to consider,” he says.

It’s a different story in the United States. There, says Neylan, you can go online and find a single searchable document the Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals and Blocked Persons list. At the moment, the SDN, as it’s known, is 937 pages. It lists thousands of names or entities.

John Terry practises international trade and investment law as a partner with Torys LLPfmi in Toronto. He says the US has built up a significant bureaucracy and more thorough guidance around its sanctions programs to help lawyers and companies comprehend them. “There’s no guidance that can be obtained for Canada’s sanctions,” he says. “Basically it is up to you as legal counsel to review them and to give the best advice you can for your clients.

“There is a certain amount of uncertainty that is generated by the fact that, unlike the US regime, you can’t call someone up in government and say: ‘What were you guys intending to get at here? Here is my situation and would these sanctions apply?’” In fact, Foreign Affairs, Trade and Development Canada has a big disclaimer on its online list of sanctions warning it won’t advise companies whether a specific transaction contravenes sanction laws.

The Lee case illustrates how knotty it can be to avoid breaching sanctions. That’s why well-designed compliance programs are now a necessity for any company exporting products abroad. “This was not ammunition, or weapons, this was rubber rings,” says Robidoux. “What this case did was communicate to other companies that sanction compliance is complex. And the rules change with some frequency.” Viton O-rings were not originally a listed item when it came to Iran; they were added in July 2010, four years after Canada began imposing trade and travel bans against Iran under the United Nations Act.

 “A lot of companies look at the facts of the Lee case and realize this is a sensitive trip wire,” says Robidoux, who is seeing Canadian and US sanctions against Russia impact her clients in the mining and energy space. Some of her clients have done business with Russia’s four biggest oil companies, including Gazprom and Rosneft.

 

Compliance by design

A company’s first step, if doing or contemplating business in a target zone such as Russia, says Milos Barutciski, a Toronto partner and Co-chair of Bennett Jones LLPs International Trade and Investment Practice, is to conduct thorough due diligence on the people they’re dealing with, checking what entities and individuals they may be connected to.

“When I say in the target zone, there is a certain amount of tea-leaf reading going on by people, both political scientist and economic experts, who are looking at what the likely targets are for expanded sanctions. What can we do as lawyers – and we are not the only experts working on this – we can and do listen to and consult with economists, political experts, regional experts, and so forth, and try to give our clients a sense of whether their existing or proposed investments might be next in line” for sanctions risks, says Barutciski.

Another element is careful legal interpretation of the rules. A company might have an existing joint venture with, say, a Russian entity, and suspect their partner is linked to sanctioned person. “Then you dig in to understand what that link is and then review and interpret the legislation to determine whether or not your client’s transactions with that entity are lawful. And if they are not, try and help them unentangle themselves in a way that is lawful.”

Robidoux says for a compliance program to work, it’s critical a company make its chief compliance officer, in effect, an officer of the board. “That person needs to be of recognized respect in the company. It can’t be a low-level schmo whom other employees may not listen to.”

For Robidoux, a good compliance program includes a comprehensive compliance policy manual “that gives an overview of sanctions and export controls, identifies responsible positions within the company, establishes training requirements, sets out record-keeping and audit requirements, the handling of voluntary disclosures, and the general procedures that are in place for screening and export classifications.”

Another important component is a detailed procedures document setting out, among other things, how controlled and restricted goods and destinations will be identified, how permits are obtained and reporting accomplished. Those were some elements of the components Gowlings installed at Lee Specialties.

The big challenge, says DeRose, is figuring out “how much compliance is enough compliance? In a perfect world you can go out and pay an enormous amount of money for an external third-party provider to screen every single transaction you have against every single designated person in the world. Those services exist but can be cost prohibitive.”

Companies such as OCR Services, Inc. or eCustoms offer customizable web-based denied or restricted party screening and export licence management. But as Barutciski notes, “At some point a human being has to eyeball and integrate the information.” If a transaction is suspect, a lawyer should be consulted.

DeRose believes Canadian companies are now shifting to an attitude American companies have had for 10 or 15 years. There, almost every company exporting out of the US has some form of compliance program to address sanctions, foreign corruption and export controls. “In Canada those three areas have historically not been at the forefront of corporate compliance. But they are now seen as a priority for many Canadian companies.”

Still, at the end of the day, he says, there are many “Canadian companies that do not realize the impact sanctions have on their businesses.” It’s not that those companies are not consciously breeching sanctions: “It is simply a lack of understanding and a lack of awareness.”

Not that that will get you off the hook. While a conviction can’t occur if a violation was the result of what a court determines is a reasonable or unknowing error, willful blindness can still result in a conviction.

 
Self-disclosure

DeRose advises clients to design their compliance program as if the RCMP might come and look at their operations at any time and dig into their records. Even in the case of a breach, he says, “If it’s clear you have asked all the right questions and done everything you reasonably could, you will either likely not be charged or if you are you will have a good defence. But if there are transactions that you were willfully blind on and elected not to ask further questions on because you didn’t want the answers, you will be charged.”

Unfortunately, adds DeRose, unlike the US, Canada does not have a formalized process of deferred prosecution agreements to mitigate penalties in the event a company self-discloses its own sanction violations. “That would be something that would be welcome by Canadian companies.”

In the Lee case, the court showed leniency because the company, with the help of Robidoux and Gowlings, installed a robust compliance program to prevent further inadvertent sanction breaches. In the US, companies that self-disclose breaches are, through standing deferred prosecution agreement legislation, automatically channelled down a different path in the court system where they get automatic fine reductions. In past cases the reduction represents a 25 per cent discount off the bottom range of prescribed fines.

No such option here. But Robidoux has also seen evidence of leniency due to self-disclosure in a well-known case she defended in Alberta, R. v. Griffiths Energy International Inc. Under former management, Griffiths, a small Calgary oil and gas firm, was convicted in 2013 of one count of bribing a foreign official to the tune of $2 million plus a number of shares. The late financier Brad Griffiths and a business partner had offered the bribe, in the guise of consulting contracts, to the wife of Chad’s ambassador to Canada in 2011. Griffiths had hoped to curry favour with the ambassador as Griffiths Energy sought oil and gas concessions in Chad.

To date the $10.35-million fine imposed by Justice Scott Brooker in January 2013 is the largest penalty imposed in Canada under the CFPOA. But the penalty could have been worse.

Though in the United States pre-charge negotiated fines for self-disclosure by corporations are common, Griffiths was the first such case in Canada. After new management had taken over from Brad Griffiths, it discovered evidence of the bribe and reported it to the RCMP.

Griffiths was very noteworthy because it involved an incredible leap of faith by the company,” says Robidoux. “It had uncovered unlawful conduct by its previous management and previous board. And when we were asked [by the company] what to do with the information, you can imagine what it was like to give advice on voluntary disclosure when it hasn’t been done in the corruption context before.”

Griffiths’ bribes might have gone unnoticed if not for self-disclosure. So, says Robidoux, recalling the difficult decision counsel and the new managers had to make, “We were essentially marching the company into court. You are marching them towards a conviction for an indictable offence. That was a big deal and a risky undertaking.” There was no certainty Griffiths’ cooperation with the Crown and good corporate conduct since discovering the corruption would result in any mitigation by the court. But it did.

Despite the size of the fine, Justice Brooker chose not to order further probationary oversight for Griffiths, which was significant. The judge said by self-reporting and even providing privileged information, Griffiths had saved the Crown significant costs in investigating and prosecuting the case. “Further,” he added, “I am satisfied from the representations made to me that Griffiths has instituted an effective, comprehensive and robust anti-corruption program such that it is unlikely that there will be any repetition of such illegal conduct.”

Those comments, says Robidoux, will serve as a precedent for companies facing a similar situation in the future. With the right guidance, advice and tools, then, sanctions – which, combined with slumping oil prices have had a huge impact on Russia’s economy – become part of a risk-management exercise like any other. “It might seem daunting at first,” says Robidoux. “But over time it becomes woven into the fabric of a company’s compliance culture.”

Anthony Davis is a freelance business and investigative writer based in Calgary.