When Canada introduced its first sanctions against Russia, back in March of 2014, it was the big players like Bombardier and Kinross Gold that landed on the radar screen.
Investors looked askance at Kinross, which has significant operations in Russia, even as the miner insisted that the new rules did not affect its business, and within months, plane and train maker Bombardier Inc. put a high profile $3.4 billion airplane assembly project on hold.
“It was a mixture of many things,” Daniel Desjardins, general counsel and corporate secretary for Quebec-based Bombardier, says of the decision not, for now, to go ahead with the project to assemble Bombardier’s Q400 turboprop planes in Russia. “Obviously the sanctions did affect the project, but also the state of the economy in Russia right now is a cause for the delay of the project. Right now we are pausing and we will stay tuned. And obviously if the environment changes, both from a sanctions point of view and from an economy point of view in Russia, we will start to reengage.”
Yet it’s smaller Canadian companies that have often found it the most challenging to cope with the rapidly changing export and financing curbs, especially after a December 2014 amendment that introduced new restrictions on exports to big sections of Russia’s energy sector.
While U.N. sponsored sanctions against smaller countries like Burma or Iran had only a limited impact in Canada, the Russia-focused restrictions on trade and investment have already affected a surprisingly large portion of the Canadian economy. That reflects Russia’s size and its position as a producer of energy and other resources, as a still underdeveloped consumer market and as an overseas investor in its own right. Banks must weigh ownership closely in all financial transactions relating to Russia and Russian entities and companies must pore through opaque documents to be sure they are not poised to deal with a partner named in the sanctions lists.
“With Russia this is probably one of the first times where the measures have a broad effect across the economy just because of the business, and Russia’s involvement around the world. It’s not just the territory of Russia, but its dealings with Russian banks, Russian multinationals,” says John Boscariol, head of the international trade and investment section at McCarthy Tétrault LLP, where he focuses on enforcement and compliance, anti-corruption laws, and economic sanctions.
“Canadian companies are now realizing that you need to do due diligence on who you are doing business with abroad. You need to investigate who stands behind those companies, who owns the companies you are doing business with. Is the company owned or controlled by a blacklisted person? Who else will be involved in the transaction? You should be screening everyone who is involved in the transaction to see if they are on those lists.”
Desjardins, who is responsible for Bombardier’s corporate governance and head of its legal team, credits the firm’s in-house export control department with enabling Bombardier to stay abreast of the sanctions imposed by Canada, the United States, and the European Union, all areas where the Canadian firm has subsidiary operations and deep business ties.
“Sanctions between states are part of today’s life,” he says. “And since we are a global corporation, we have to be mindful not just of the Canadian sanctions but [also] sanctions in Europe and sanctions in the United States, because we’ve got subsidiaries around the world that are governed by the laws in those jurisdictions.”
“You’ve got to have a good process and system . . . and make sure you map who is responsible to make sure that you follow up on the list and make sure that the updates are communicated. It doesn’t happen by magic. But if you do take the time to map the responsibilities and what to communicate internally, then you’ve come a long way to make sure that you can sleep better.”
For others, the challenge has become one of keeping up with the level of sanctions.
“We live in interesting times with Russian business — we have to understand each country’s sanctions,” says Hartland Paterson, general counsel, chief compliance officer & secretary with CAE Inc. in Montreal. CAE is a manufacturer of simulation technologies and training services to airlines, aircraft manufacturers, defence, and mining companies.
CAE’s business with Russian companies has predominantly involved pilots of Russian companies using CAE’s civil aircraft training centres in Europe. “It’s not really a big sanctions issue, you just need to look at whether the airline company is sanctioned or not by Canada, the host country or the training centre. If they’re not sanctioned it’s not illegal and I don’t know that it’s immoral — I think the world has a vested interest that civil aircraft flown by Russian pilots are flown safely.”
There’s also the issue of payments — are they going to be able to get the hard currency to pay?
Paterson says some Russian customers are looking at clauses to protect them from their inability to perform due to sanctions. “They are transferring, in a way, the risk of the sanction through that proposed clause back to CAE in the sense that we would be the ones who lost out if there was some change.”
Many companies seeking to do business in Russia find it hard to create and update in-house compliance programs and to train managers and sales staff about the changing rules. Some have abandoned the hope of new business in a country that, more than two decades after the collapse of the Soviet Union, remains a challenging place to work.
“Self-sanctioning is something that a number of Canadian and other western companies have done,” says Lou Naumovski, director general of the Kinross Moscow office and chairman of the board of directors of the Canada Eurasia Russia Business Association, a trade organization that has spoken out frequently against the economic sanctions. “Basically, companies not willing to contend with the analysis and preparatory work . . . have taken the decision not to seek out new business, or in a number of cases not to continue to try to do business with Russia.”
Naumovski notes that the sanctions are both focused and specific, and most business between Canada and Russia is likely not affected. But companies must still monitor things carefully, and perhaps see if it’s possible to get supplies from non-sanctioning jurisdictions. Support from internal and external counsel is “critical to ensure that there is a clear understanding of all of the potential risks,” he adds by e-mail.
Kinross has not been affected. “On an operational level our business remains unaffected by the sanctions,” he says. “The relationships required to do good business in mining, such as with suppliers, federal regulators and other public officials, local administrators, and stakeholders, remain strong. We have not experienced any fallout at an operational level, despite Canada’s sanctions.”
Canada introduced its first batch of sanctions against Russia last March, in response to what Foreign Affairs describes as “Russia’s violation of the sovereignty and territorial integrity of the Ukraine.” The first document listed companies and individuals that Canadians may not sell to or have business dealings with, but the prohibitions have been amended many times, rolling in first some lending and capital investment and, last December, a ban on specified exports to parts of the Russian energy sector: offshore, Arctic, and shale oil production. It’s a development that hits Calgary’s energy companies hard. “From the perspective of seeing our Calgary-based clients reel from the impact, it’s clear that in respect of oil exploration and production and in connection with our service company clients, it is impacting their business and the way they pursue additional business in Russia,” says Kristine Robidoux, a partner at Gowlings in Calgary and a member of the firm’s white collar defence and investigations group. “If you are a Canadian company looking to provide services in Russia, then one of the key considerations that you would look to, and I would suggest that it should be done early, is the application of U.S. sanctions and Canadian sanctions against Russia.”
There are both similarities and differences between Canada’s sanctions and those imposed by the United States and the European Union, and the rules change frequently, with a dozen amendments to the Canadian lists alone. Nobody expects the curbs will stay the same for long, given pressure from some quarters to ease the restrictions and from others to tighten them in response to the still tense political situation in eastern Ukraine. Canada has been relatively hard line, perhaps reflecting a large Ukrainian diaspora that’s very sensitive to the issue.
“Part of the very aggressive rhetoric that we see from [Prime Minister Stephen] Harper . . . is in large part motivated by that bloc of Ukrainian voters we have here, but I’m not saying that it’s the only reason,” says Boscariol. “There are legitimate reasons under international law for imposing sanctions measures of some kind to address what’s happened in Ukraine.”
The intense focus on compliance and due diligence from Canadian companies looking at trade with Russia has spawned an industry ready to help. Service providers like Dow Jones and Thomson Reuters offer software for compliance checks, and Canadian companies may ask their trade partners to certify that they are not working with any of the entities — banks, companies, and individuals — included in the sanctions lists. Law firms offer training sessions to teach companies’ managers and sales staff about the sanctions, and about the questions that they need to ask of would be trading partners.
If the risk is high — a Russian partner company with ties to the sprawling military industrial complex perhaps — the due diligence will likely be more extensive, perhaps including background checks and work by private investigators. But for a smaller trade partner with no obvious ties to the Kremlin or the military, it may be enough to check names against sanctions lists and ask for some sort of assurance that proscribed partners are not involved.
“What we have found is that while over 2014 sanctions have become more known in the public, there are still a large number of companies or managers who just simply don’t appreciate what the nature of the sanctions are, what they mean and how they work,” says Vincent DeRose, a partner at Borden Ladner Gervais LLP in Ottawa, where he is also national leader of the firm’s defence and security industry group. “You need to use good judgment and you need to trust your employees and your sales force, and if you have a manager that’s in charge of exporting, you have to train them and give them the tools to recognize when they should raise an issue up the management chain.”
He adds: “There’s no-one-size-fits-all, it depends on what you are selling and who you are selling to. But there are a few general undertakings that companies have to do. When they enter into a contract, they have to develop a screening mechanism to ensure that they are not directly or indirectly doing business with any of the designated persons, the prohibited persons.”
But just as a weak screening process brings unacceptable short- and medium-term risks, stepping back from the Russian market could also have a lasting impact. “The level of trust that you need to develop with business in Russia is not something that you can develop in a week or a month or maybe even a year,” DeRose says. “There is no doubt that you need a long lead time to develop your relationship and the existence of the sanctions can undermine those relationships very quickly. It takes years to build them up, and it doesn’t take years to bring them down.”
Lawyers working in the compliance/sanctions sector note that anyone seeking to do business in Russia must weigh the cost and inconvenience of due diligence against the opportunities. And even though the Canadian sanctions are restricted to name individuals, well-described funding methods, and — since December — those clearly defined aspects of energy sector development and equipment, Paul Drager, a senior partner at Norton Rose Fulbright in Calgary has also seen self-sanctioning.
“What we’re seeing in a sense is also a lot of self-sanctioning by companies and certainly by the financial industry, which because of the way sanctions are enforced, it makes it much easier for them to say ‘no we are just not going to get involved’ rather than figuring out exactly what they could do,” says Drager, who has been involved with Moscow since 1985, first as a diplomat and now as a lawyer.
He admits the sanctions have been “a very cold shower” for companies seeking to develop closer ties with a vast, cold, resource-rich country that has many of the same infrastructure needs as Canada. But he says there are still opportunities for companies who are prepared to follow the rules.
“These may be some of the better times to be involved in the Russian market. Because so many companies have pulled back it does open the space for others. It’s looking at the glass half full,” he says. “They are very specific sanctions. . . . The flip side of that is that there are a substantial number of other areas that are permitted, even in the oil and gas sector. The difficulty here is getting certainty in relationship to what the government is expecting.”
Another challenge, says Robidoux, is the one that comes with dealing with Russia itself, where corporate registries may be vague and there is “a great deal of legwork that has to be done.”
“There is registry information available, but there are other searches that have to be undertaken,” she says. “You have to trust but verify. The level of verification really depends on the circumstances of each case. You do not want to do business in a country that is known for some opacity in its corporate registries and be given information that is either vague or opaque or somehow not believable and simply close your eyes to the risk that this might actually be a transaction with a prohibited person or in respect of one of the prohibited activities. That constitutes wilful blindness.”
Robidoux says the December amendments have expanded both the sanctions themselves and the type of due diligence that companies need to do to be sure that they are not breaking the rules.
It means assessing carefully what imports to Russia can be used for, and seeking confirmation that an importer won’t use a particular type of equipment, for example, in one of the proscribed forms of energy exploration.
The frequent changes to the rules are also an issue, and because each change takes effect immediately, companies and their advisers often have to scramble to interpret and communicate each new ruling.
“One of the challenges that many companies have been finding is just keeping up with the frequent changes,” says Riyaz Dattu a Toronto-based partner at Osler Hoskin & Harcourt LLP, where he focuses on international trade and market access. “Many of the changes get announced without much information in advance; they are effective as of that date. And that’s caused some clients to be fairly concerned because they need time to implement the sanctions and it puts them at risk. Many of the organizations we deal with are large organizations and the communication internally takes a while, and while that communication is going on the sanctions are in effect as amended. And typically the sanctions are announced on a Friday afternoon, late.”
The sanctions have also changed the game for the financial sector, with the compliance departments of the banks and other financial institutions very much on the front line. Pension funds, for example, may choose not to expand a capital investment in an emerging market if there’s a risk of inappropriate Russian involvement, and a bank may block a financial transaction from a client if it’s unclear who is involved or where the money is going to go.
“The Canadian banks are probably at the forefront of understanding what these measures mean and having the proper compliance measures to deal with them,” says Boscariol. “Often we find that when a Canadian company first learns that they may have a sanctions issue, they are learning it from their bank because the bank is stopping a payment, or the bank realizes the payment involves a blacklisted entity or involves financial services being provided.”
Just as Canada’s sanctions are subtly different to those introduced in Europe or the United States, Canada’s approach to violations is different too, making it hard to compare enforcement in the two countries.
Lawyers note that Canada does not publicize administrative penalties it imposes on companies that breach sanctions, whether by accident or by design, while the United States traditionally publicizes any breach, as well as offering different rules on whistleblowers and voluntary disclosure. But they highlight the case of Lee Specialties, an Alberta company that mistakenly sent 30-cent O rings to Iran, as evidence that the Canadian enforcement authorities are starting to crack down.
Lee, which said the shipment happened because of a mailroom mix-up, was fined $90,000 last April.
“That was a very expensive ‘oops,’” says DeRose, who says the firm understands that the number of investigations by the Canada Border Services Agency has increased quite dramatically over the last couple of years.
“I’m not aware of any Russian cases, but it does not mean they are not being investigated. Normally they would not become public until charges are laid,” he says. “We are now nine months into the sanctions existing and it is not surprising to me that there have been no formal charges. These types of investigation tend to occur over a long period of time. It doesn’t mean that there have not been investigations or that companies have not worked with the Canadian government to voluntarily disclose inadvertent breaches. Where voluntary disclosure occurs, those are not published.”
Drager also notes there’s less publicity about enforcement in Canada than in the United States, but he says Canada has been “quite assiduous” in being able to enforce its anti-sanctions laws, using both the Canadian Border Services Agency and export controls. “I’m not making any comment on whether that’s occurred or not occurred, but we’ve certainly seen in other cases with sanctions and have been involved in other cases with sanctions that the CBSA can enforce it quite diligently,” he says. “And it doesn’t need the press.”
As for companies like Bombardier, it’s a question of waiting to see what governments come up with next, lobbying and making representations to try to prevent the worst, and hoping that the changes everyone expects won’t be too painful.
“Generally the corporate world is on the sidelines,” says Desjardins. “It is a state-to-state discussion and national policy, and you may want to comment on it and try to influence it, but at the end of the day you have to comply with it, whether you like it or not.
“Like any global corporation, we like a level playing field, we like open markets where we can do business. It’s good for our country and it’s good for our employees in Canada. But if there’s a case where we cannot do business in a country, we will respect that.”