Managing Conflicting Obligations: Compliance with Canadian Law and Policy on Trade with U.S.-Sanctioned Countries

1. Managing Conflicting Obligations: Compliance with Canadian Law and Policy on Trade with U.S.-Sanctioned Countries John W. Boscarioljboscariol@mccarthy.caDay 2 - May 16, 2007 American Conference Institute’s 10th National Forum on Export Controls and Global Compliance Strategies May 15 -17, 2007 Washington D.C.

2. 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. 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:

4. 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. 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. 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. 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. 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. 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. The 1996 FEMA Order • notification obligation • non-compliance obligation • violation - FEMA penalties of up to CDN$1.5 million / 5 years imprisonment

11. 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. 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. 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. 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. 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. 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. 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. 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. Public Examples of Conflict • lessons learned • Wal-Mart’s Cuban pyjamas • Bro-Tech and James Sabzali

20. 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. 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? • Is your client a “Canadian corporation” as defined in the FEMA Order? • If goods are to be supplied to Cuba, what is their U.S.-origin content? Have they been sufficiently transformed outside Canada?

22. Examples of Conflicts

23. Examples of Conflicts (cont’d)

24. Examples of Conflicts (cont’d)

25. Examples of Conflicts (cont’d)

26. Examples of Conflicts (cont’d)

27. Examples of Conflicts (cont’d)

28. Examples of Conflicts (cont’d)

29. 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. Provincial Discriminatory Business Practices Legislation • Discriminatory Business Practices Act (Ontario) • prohibits refusing to engage in business with others where: • 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 • 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. 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. 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. BoscariolPartner McCarthy Tétrault LLPSuite 4700Toronto Dominion Bank TowerToronto-Dominion CentreToronto, Ontario M5K 1E6www.mccarthy.caDirect Line: 416-601-7835 E-mail:jboscariol@mccarthy.ca

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