Forbidden Compliance: The Application of EU and Canadian Anti-Boycott … · 2015. 1. 29. · John...

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

John W. Boscariol

January 29, 2015

Forbidden Compliance: The Application ofEU and Canadian Anti-Boycott and BlockingMeasures to U.S. Economic Sanctions and

Export Controls

http://www.americanbar.org/groups/international_law.html

McCarthy Tétrault S.E.N.C.R.L., s.r.l. / mccarthy.caJohn W. Boscariol, McCarthy Tétrault LLP, International Trade and Investment Law Group

Navigating Between Conflicting U.S.and Canadian Trade Controls

¬ navigating Canadian and U.S. trade controls

¬ generally close alignment of policies

¬ adoption of most stringent rules

¬ critical exceptions

¬ U.S. ITAR/EAR licensing

¬ Cuban trade or investment opportunities

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The United States, Canada and Cuba

¬ problem, whether or not you trade with Cuba

¬ Canada’s expanding economic relationship withCuba

¬ Canada is one of Cuba’s largest trading partners¬ Canadian exports to Cuba - machinery, agrifood products,

sulphur, electrical machinery, newsprint

¬ Canadian imports from Cuba - ores, fish and seafood, tobacco,copper and aluminum scrap and rum

¬ Canada is one of Cuba’s largest source of foreigndirect investment

¬ Canadian FDI - nickel and cobalt mining, oil and gas, powerplants, food processing

Slide 3


The United States, Canada and Cuba

¬ expanding extraterritorial reach of U.S trade embargo

¬ 1962 – imposition of full trade embargo under TradingWith the Enemy Act

¬ 1975 – elimination of general license allowing trade byforeign non-banking entities

¬ had to apply for specific license and demonstrate independent operationre decision-making, risk-taking, negotiation and financing

¬ 1990 – Mack Amendment proposed outright prohibitionon issuance of licenses to foreign affiliates of U.S. firms

¬ 1992 – Cuban Democracy Act¬ 1996 – Helms-Burton Act extends aspects of Cuban embargo

to non-U.S. companies that have no connection withU.S. entities

Slide 4


Current U.S. Measures vs. Cuba¬ Cuban Assets Control Regulations

¬ administered by U.S. Treasury’ Office of Foreign Assets Control

¬ prohibition on foreign entities owned or controlled by U.S. persons from doingbusiness with Cuba

¬ Export Administration Regulations

¬ administered by the U.S. Department of Commerce’s Bureau of Industry andSecurity

¬ requires that a re-export license be applied for where U.S. content is 10% or more

¬ Helms-Burton Act

¬ Title III – private right of action vs. “traffickers” in “confiscated property” (rightsuspended)

¬ Title IV – bar on entry in the United States for traffickers, their spouses and minorchildren

Slide 5


Canadian Response to U.S. TradeEmbargo of Cuba

¬ diplomatic

¬ NAFTA/WTO?

¬ primarily FEMA and the 1996 FEMA Order

Slide 6


The Foreign Extraterritorial MeasuresAct

¬ extraterritorial anti-trust motivations

¬ authorization for Attorney General to make orders where foreignstate or tribunal takes measures impairing Canada’s interestsregarding international trade or infringing on Canadiansovereignty

¬ Canadian Attorney General can

¬ prohibit production or disclosure of records before foreigntribunals

¬ declare that judgements of foreign tribunals not be recognizedor enforceable in Canada

¬ require notification of directives or other communicationsrelating to such measures

¬ prohibit compliance with such directives or measures

Slide 7


The Foreign Extraterritorial MeasuresAct (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

Slide 8



¬ also used to block other extraterritorial measures

¬ January 19, 2015 FEMA order against application ofBuy America rules to U.S. procurement

¬ $15 million upgrade of British Columbia ferry terminalleased by State of Alaska from Prince Rupert PortAuthority

¬ prohibits any person in Canada from complying with BuyAmerica requirements or any directives, intimations ofpolicy or other communications supporting theapplication of these requirements

¬ on January 21, 2015, Alaska cancelled the project

Slide 9



¬ 1996 “blocking” order

¬ obligation to notify Canadian Attorney Generalof certain communications

¬ prohibition against complying with certain U.S.trade embargo measures

¬ penalty exposure: up to $1.5 million and/or 5years imprisonment

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¬ applies to

¬ any “Canadian corporation” - a corporation thatis registered or incorporated under the laws ofCanada or of a province and that carries onbusiness in whole or in part in Canada

¬ and its directors, officers, managers andemployees in a position of authority

Slide 11


The Notification Obligation

“Every Canadian corporation and every director andofficer of a Canadian corporation shall forthwith givenotice to the Attorney General of Canada of anydirective, instruction, intimation of policy or othercommunication relating to an extraterritorial measureof United States in respect of any trade or commercebetween Canada and Cuba that the Canadiancorporation, director or officer has received from aperson who is in a position to direct or influence thepolicies of the Canadian corporation in Canada.”

Slide 12


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.”

Slide 13


What is an “Extraterritorial Measure ofthe United States”?

¬ defined as the U.S. Cuban Assets Control Regulationsand any law, ruling, guideline or other communicationhaving a purpose similar to that of the CACRs “to theextent that they operate or are likely to operate so asto prevent, impede or reduce trade or commercebetween Canada and Cuba”

¬ “trade or commerce between Canada and Cuba”defined as trade (i) between Canadian entities andCuban entities and (ii) between Canadian entities andCanadian nationals or corporations that aredesignated as Cuban nationals or corporationspursuant to an extraterritorial measure of the UnitedStates (e.g., “specially designated nationals”)

Slide 14


What is an “Extraterritorial Measure ofthe United States”? (cont’d)

¬ U.S. laws that may be considered “extraterritorialmeasures of the United States”:

¬ Cuban Assets Control Regulations

¬ Export Administration Regulations

¬ Helms-Burton (?)

¬ other

Slide 15


FEMA Enforcement Experience (or lackthereof)

¬ there has never been an attempted prosecution under theCanadian blocking order

¬ no case law or administrative/prosecutorial guidelines

¬ no guidance from the Canadian government

¬ numerous investigations - American Express, Eli-Lilly, Heinz, RedLobster, Wal-Mart and others

¬ Wal-Mart’s Cuban pyjamas

¬ nationalistic sensitivities

Slide 16


Canadian Controls on U.S.-Origin Items

¬ FEMA and Canadian restrictions on supplyingU.S.-origin goods and technology to Cuba

¬ U.S.-origin goods and technology (ECL item5400) – “designed to ensure Canada is notused as a diversionary route to circumvent

U.S. embargoes”

¬ includes U.S. trade embargoes of Cuba, Iran,

Syria and North Korea

Slide 17


Canadian Controls on U.S.-Origin Items(cont’d)

¬ ECL item 5400: a permit is required for theexport of all U.S.-origin goods from Canada

¬ excludes “goods that have been furtherprocessed or manufactured outside of theUnited States so as to result in a substantialchange in value, form or use of the goods or inthe production of new goods”

¬ old 50% rule of thumb rule

Slide 18



¬ available GEP No. 12 permits export ofU.S.-origin goods and technology to alldestinations except Belarus, Cuba, NorthKorea, Iran and Syria

¬no written DFATD policy for granting permitsfor export of U.S.-origin goods andtechnology to these countries

Slide 19



¬ experience suggests DFATD’s administrative policycurrently permits U.S.-origin goods and technology tobe transferred to Cuba in three circumstances:

¬ a U.S. licence has been obtained or

¬ humanitarian purposes (for the “basic necessities ofhuman life”) or

¬ in support of a previously permitted export or Canadianoperations

Slide 20


Resolving Conflicts between Canadianand U.S. Law on Cuba

¬ when apparent conflicts arise, key issues to beaddressed include:

1. Is the U.S. measure at issue subject to the FEMAOrder?

- is it an “extraterritorial measure of the United States”?

2. Does the U.S. measure operate or is it likely to operateto reduce or impede trade or commerce betweenCanada and Cuba?

- compliance with the U.S. measure may not reduce tradeor commerce between Canada and Cuba

Slide 21


Resolving Conflicts between Canadianand U.S. Law on Cuba (cont’d)

3. Is the communication at issue in the nature ofa directive or intimation of policy?

- depending on the context, a simple statementas to what U.S. law provides regarding tradewith Cuba may not be notifiable

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4. Is the source of the communication in aposition to direct or influence the policies ofthe Canadian corporation in Canada?

- consider the position or authority of the personthat has made the communication to theCanadian entity

Slide 23



5. Does the Canadian entity’s act or omissionconstitute “compliance”?

- by following a particular course of action, is the Canadianentity actually complying with applicable U.S. law?

- what is the reason for the act or omission?

- is the reason compliance with Canadian law?

- are there other reasons unrelated to the U.S. tradeembargo?

Slide 24



6. If the issue concerns goods or technology tobe supplied to Cuba, what is their U.S.-origincontent?

- if they are of U.S.-origin, Canadian law may notallow for their export to Cuba

- need to consider and possibly apply forCanadian export permit

Slide 25


Managing the Relationship Between U.S. andCanadian Export Controls and Trade Sanctions

¬ critical conflict points

¬ training programs

¬ compliance manuals

¬ communications and instructions

¬ server accessibility

¬ meetings and telephone conversations

¬ M&A due diligence

¬ contracts – e.g., supply agreements with U.S. companies,intercompany agreements, purchase orders, etc.

¬ end-use certificates

Slide 26


Managing the Relationship Between U.S. andCanadian Export Controls and Trade Sanctions(cont’d)

¬ cannot simply adopt U.S. trade control policiesfor Canadian operations

¬ export control and trade sanctions compliancemanuals and any related directives should be“home grown”

Slide 27


Managing the Relationship Between U.S. andCanadian Export Controls and Trade Sanctions(cont’d)

¬ when potential conflicts arise:

¬ case-by-case analysis, very context-specific

¬ addressing exposure of U.S. citizens in Canada

¬ involvement of Canadian and U.S. counsel

¬ cultural - sovereignty issues particularlysensitive

Slide 28


Canadian Rules on Boycotts andDiscriminatory Practices

¬ in addition to export controls, trade embargoes, assetfreezes and blocking orders

¬ Canada’s federal boycott policy

¬ provincial discriminatory business practice legislation

Slide 29


Canada’s Boycott Policy

¬ October 21, 1976 federal policy; does not prohibitcompliance with international economic boycotts

¬ identifies “unacceptable” activities taken in connection withsuch boycotts

¬ requiring a firm or individual to engage in discriminationbased 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 refrainingfrom purchasing from any country

¬ restricting commercial investment or other economic activityin any country

¬ sanction is denial of government support and assistance insuch transactions

Slide 30


Provincial Discriminatory BusinessPractices 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 dobusiness; and

¬ refusal “is a condition of the engaging in business” of thecompany making the refusal and another person

¬ prohibits entering into a contract in which one party refuses toengage in business with another person on account of anattribute of that other person or of a third person with whom thatperson conducts business

¬ prohibits seeking or providing negative statements of origin

¬ requires reporting of requests to engage in discriminatorybusiness practices

Slide 31


Provincial Discriminatory BusinessPractices Legislation (cont’d)

¬ penalty/sanction exposure

¬ cause of action for damages against person whocontravenes

¬ banned for providing goods or services to Ontariogovernment for five years

¬ up to $100,000 fine

Slide 32


Slide 33

John W. BoscariolMcCarthy Tétrault LLPInternational Trade and Investment Law Groupwww.mccarthy.caDirect Line: 416-601-7835

E-mail: [email protected]: www.linkedin.com/in/johnboscarioltradelawTwitter: www.twitter.com/tradelawyer

McCarthy Tétrault S.E.N.C.R.L., s.r.l. / mccarthy.ca

Examples of Conflicts

Example 1:A U.S. company conducts export compliance training atits Canadian subsidiary. U.S. staff travel to Canada,provide employees and officers of the Canadiancompany with export control manuals and trainingsessions which identify Cuba, among other countries,as being subject to the OFAC rules. Is the Canadiancompany required to make a notification to theAttorney General?


Slide 34


Examples of Conflicts (cont’d)

Example 2:

A European-based company has a subsidiary in theUnited States and a subsidiary in Canada. The CEO ofU.S. subsidiary advises her Canadian counterpart thather company should not be supplying products toCuba. Is the Canadian subsidiary required to notifythe Attorney General?


Slide 35



Example 3:The Canadian subsidiary in Example 2 uses the systems ofits U.S. sister company to process orders that it receives.In order to avoid penalties under the CACRs, the Canadiansubsidiary develops a new order system that red flagsCuban orders so that they are processed in Canada. Hasthe Canadian company violated the non-complianceobligation?


Slide 36



Example 4:An Asian multi-national has a subsidiary in the United Stateswhich in turn has a subsidiary in Canada. The Canadian companyreceives a request to provide engineering services to a Cubanmining project. The Canadian company refuses because theCACRs prevent U.S.-owned foreign subsidiaries from doingbusiness with Cuba. However, another Canadian company, adirect subsidiary of the Asian parent, steps in to provide theservices. Is there a requirement to notify the Attorney Generalof any directions that may have been given to the Canadiancompany that refused the order? Is there a violation of thenon-compliance obligation?


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Example 5:

A Canadian investor participating in an hotel project inCuba backs out of the deal when she realizes that thefinancial terms are not worth the risk, and she fearsexposure to Title III actions under Helms-Burton. Hasthe Canadian investor violated her non-complianceobligation?


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Example 6:

A Canadian distributor sources widgets from the UnitedStates and receives an order to ship to Cuba. Heapplies for a U.S. re-export license, perhaps in thehope that they are considered medical supplies, but isrefused. He advises his customer that he is unable toship. Has he violated the non-compliance obligation?


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Example 7:

A Canadian manufacturer uses U.S.-origin componentsto produce widgets. The components comprise over 50percent of the value of the widgets. It refuses apurchase order for Cuba assuming the shipment wouldnot qualify for a Canadian export permit. Could thisconstitute a violation of the non-complianceobligation?


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