By Kim Walsh and Olivia Bungay

Canadian sanctions targeting Russia in relation to Russia’s ongoing invasion of Ukraine were significantly expanded over the past year.

Critical to compliance with Canada’s sanctions targeting Russia, individuals and businesses must determine whether they are dealing in property owned or controlled by a designated person under Schedule 1 of the Special Economic Measures (Russia) Regulations. The Regulations prohibit dealing in property of any kind that is owned, held or controlled by a designated person, regardless of where the property is located.

As it stands, there is no formal guidance on what qualifies as ownership or control in the context of Canadian economic sanctions. The result is ambiguity and confusion in efforts to avoid breaching the Regulations, particularly when dealing with companies that may be either indirectly or partly owned/controlled by a shareholder that is a designated person.

The first Court interpretation of ownership and control in the context of sanctions was the Court of King’s Bench of Alberta decision Angophora Holdings Limited v Ovsyankin, 2022 ABKC 711. In that case, Angophora was a subsidiary wholly owned by a private equity fund equally owned by two banks. One of the owners, Gazprombank, was a Russian bank that was listed as a designated person. The Court was tasked with determining whether Angophora was controlled by, or acting on behalf of, Gazprombank. Absent a definition of controlled by or acting on behalf of a designated person, the Court held that control should be assessed as a factual issue determined by the circumstances, particularly focusing on whether there is de facto control. The Court considered the following factors to find that there was a strong prima facie case that Angophora was controlled by or acting on behalf of Gazprombank:

1. Corporate decision-making in Angophora required unanimity between both owners’ nominees, which allowed Gazprombank to prevent actions from being taken,
2. Gazprombank exerted a high level of functional control over Angophora and was integrated in its affairs, and
3. The corporate structure of Angophora met the U.S. sanction law definition of control (i.e. 50% or more of Angophora was indirectly owned by Gazprombank).

Angophora is currently the only interpretation on ownership and control in Canadian economic sanctions laws, however further guidance is coming. The Canadian Government has recently introduced Bill C-47 (the 2023 Budget Implementation Act) which, if passed, will amend its economic sanctions laws to include criteria for ownership and control.

The Bill, as drafted, will deem a designated person to control an entity if:

• the person holds, directly or indirectly, 50% or more of the shares or ownership interests in the entity or 50% or more of the voting rights in the entity;
• the person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; or
• it is reasonable to conclude, having regard to all the circumstances, that the person is able, directly or indirectly and through any means, to direct the entity’s activities.

Moreover, the Bill introduces a deeming provision which states that a person who controls an entity according to the criteria above will be deemed to own it.

If passed, Bill C-47 will provide more guidance on the issue of ownership and control in terms of compliance with Canadian sanctions. However, the draft legislation itself provides insight into the relevant factors that indicate control.

Sanctioned ship-owners continue to leverage the use of obscure ownership structures, shell companies registered in third countries, and reflagging tactics to evade sanctions. Businesses should conduct due diligence based on these guiding factors to ensure that they are not dealing in property owned or controlled by designated persons. Special caution should be allotted to identify beneficial owners, or those with indirect control over an entity.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact the author.

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