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Managing Conflicting Obligations: Compliance with Canadian Law and Policy on Trade with U.S.-Sanctioned Countries Day 2 - May 16, 2007 John W. Boscariol.

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Presentation on theme: "Managing Conflicting Obligations: Compliance with Canadian Law and Policy on Trade with U.S.-Sanctioned Countries Day 2 - May 16, 2007 John W. Boscariol."— Presentation transcript:

1 Managing Conflicting Obligations: Compliance with Canadian Law and Policy on Trade with U.S.-Sanctioned Countries Day 2 - May 16, 2007 John W. Boscariol Day 2 - May 16, 2007 American Conference Institute’s 10th National Forum on Export Controls and Global Compliance Strategies May , 2007 Washington D.C.

2 Slide 1John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

3 Slide 2John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

4 Slide 3John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

5 Slide 4John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

6 Slide 5John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

7 Slide 6John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

8 Slide 7John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

9 Slide 8John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

10 Slide 9John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group The 1996 FEMA Order notification obligation non-compliance obligation violation - FEMA penalties of up to CDN$1.5 million / 5 years imprisonment

11 Slide 10John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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.”

12 Slide 11John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

13 Slide 12John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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.”

14 Slide 13John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

15 Slide 14John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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”)

16 Slide 15John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

17 Slide 16John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

18 Slide 17John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

19 Slide 18John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group Public Examples of Conflict lessons learned Wal-Mart’s Cuban pyjamas Bro-Tech and James Sabzali

20 Slide 19John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

21 Slide 20John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

22 Slide 21John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

23 Slide 22John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

24 Slide 23John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

25 Slide 24John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

26 Slide 25John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

27 Slide 26John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

28 Slide 27John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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?

29 Slide 28John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

30 Slide 29John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

31 Slide 30John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

32 Slide 31John W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group 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

33 John W. Boscariol Partner McCarthy Tétrault LLP Suite 4700 Toronto Dominion Bank Tower Toronto-Dominion Centre Toronto, Ontario M5K 1E6 Direct Line:

34 Vancouver P.O. Box 10424, Pacific Centre Suite Dunsmuir Street Vancouver BC V7Y 1K2 Tel: Fax: Calgary Suite – 7th Avenue SW Calgary AB T2P 4K9 Tel: Fax: Toronto Box 48, Suite 4700 Toronto Dominion Bank Tower Toronto ON M5K 1E6 Tel: Fax: Ottawa The Chambers Suite Elgin Street Ottawa ON K1P 5K6 Tel: Fax: Montréal Suite De La Gauchetière Street West Montréal QC H3B 0A2 Tel: Fax: Québec Le Complexe St-Amable 1150, rue de Claire-Fontaine, 7 e étage Québec QC G1R 5G4 Tel: Fax: United Kingdom & Europe 5 Old Bailey, 2nd Floor London, England EC4M 7BA Tel: +44 (0) Fax: +44 (0)


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