Unpacking Canada's Economic Sanctions Guidance Refresh

Global Affairs Canada ("GAC") has updated its guidance on its interpretation of Canada's economic sanctions and its expectations regarding compliance and due diligence. These updates include new interpretive guidance for compliance with Canada's sanctions regimes (the "Updated Guidance"), expanded Frequently Asked Questions (the "FAQs"), and limited due diligence and compliance program content.

The Updated Guidance includes sanctions compliance scenarios and reiterates GAC's broad interpretation of the 2023 deemed ownership rule under the Special Economic Measures Act ("SEMA") and Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) ("JVCFOA"). GAC has additionally released sector-specific modules for the academic, financial, real estate, and humanitarian sectors, emphasizing enhanced due diligence, indirect-ownership risks, and rising enforcement expectations, including FINTRAC reporting and new requirements that became effective last year. The updated FAQs also address how the sanctions regime is being enforced, the application of the Special Economic Measures Act (SEMA) – Russia Regulations (the "SEMA (Russia) Regulations"), including dealings in securities issued by listed entities, and the application of sanctions to academic institutions.

While the Updated Guidance provides incrementally more detailed direction than previously published by GAC, its practical value lies primarily in confirming two realities for the business community: (1) GAC continues to interpret sanctions obligations broadly and conservatively, and (2) it has at least in some respects responded to longstanding requests from industry and the international trade community for clearer, more practical compliance guidance.

1. The Updated Guidance

Expanded focus on practical scenarios relating to ownership and control

The most significant addition to the Updated Guidance reflects an effort to anticipate questions that arise in the practical application of various sanctions measures. Several of these issues are addressed in a new section titled "Common Scenarios or Questions". In particular, the Updated Guidance highlights the broad interpretation GAC continues to accord to the deemed ownership rule introduced into the SEMA and the JVCFOA in 2023 (the "Deemed Ownership Rule"). For a more detailed explanation of the Deemed Ownership Rule, see our previous alert here.

As a refresher, the Deemed Ownership Rule in the SEMA provides as follows:

The Updated Guidance reproduces a hypothetical scenario previously published in the FAQs, in which GAC takes the position that having "...considerable influence over [an entity's] strategic decision-making..." would be sufficient to trigger paragraph (c) of the Deemed Ownership Rule. Notably, this language appears nowhere in either the SEMA or the JVCFOA, and this interpretation arguably broadens the scope of the plain language in the statutes.

The Updated Guidance also introduces a new hypothetical, Scenario 3, intended to further illustrate the application of the Deemed Ownership Rule in dealings with subsidiaries of a listed company. The scenario reads:

This particular hypothetical begins to recognize some of the much more nuanced real-world situations in which companies are required to navigate their sanctions compliance obligations.

GAC emphasizes that the Canadian seller is responsible for conducting sanctions compliance screening of the beneficial owner of its goods — in this case, the shell company on whose board a listed person sits — and that this transaction would be prohibited under Canadian sanctions. GAC further notes that freight forwarders are expected to satisfy themselves that the sellers of the goods they are transporting have undertaken appropriate due diligence to ensure the sale respects Canadian sanctions.

Notably, in this scenario GAC also appears to be of the view that the presence of a listed person on the board of an entity could amount to control of that entity by the listed person within the meaning of the Deemed Ownership Rule.

Due diligence recommendations

The Updated Guidance also provides examples of the due diligence measures that GAC recommends be taken when assessing sanctions compliance. These are relatively elementary, and generally appear to be a repackaging of the information previously made available in the FAQs.

However, GAC has also separately published a detailed non‑exhaustive list of due diligence "red flags" that may signal sanctions evasion or violations reflecting the expectation that businesses look beyond name screening and assess ownership/control, end‑use, payment flows and routing. Where one or more red flags are present, organizations should treat the activity as higher risk and undertake enhanced due diligence before proceeding. These include:

• Business changes and ownership: Sudden or unexplained changes in business activity, ownership/control, or corporate structure — particularly following new sanctions or export controls — such as restructuring to fall below 50%, recent ultimate beneficial owner changes, or use of complex proxies/structures.
• Designated person links: Direct or indirect links to listed persons or entities (current or former), including through affiliates, directors, intermediaries, or other connections of concern.
• Dual‑use/high‑risk goods: Requests for sensitive, dual‑use or otherwise high‑risk goods/technology inconsistent with the customer's profile or prior purchasing history, including anomalous spikes in volumes or new demand routed through third countries.
• End‑user/end‑use: Obscure, undisclosed or inconsistent information about the ultimate end‑user or end‑use, including reluctance to provide supporting documentation or a credible commercial rationale.
• Location: Parties, transit points, or activities involving sanctioned jurisdictions or diversion‑risk third countries, especially where routing or counterparties appear designed to avoid scrutiny.
• Financial: Unusual or opaque payment arrangements (e.g., unrelated third‑party payers, multiple intermediaries, sudden changes in payment instructions, or non‑standard methods) that may conceal the true parties or destination of funds.
• Shipping: Complex or inconsistent shipping/logistics patterns (e.g., circuitous routes, documentation discrepancies, frequent last‑minute changes, or efforts to conceal origin/destination) suggesting potential diversion.

GAC's red‑flag guidance reinforces a proactive, risk‑based approach to sanctions compliance. If a transaction triggers red flags, it would be prudent to pause, escalate, document the rationale, and seek legal advice before proceeding in order to mitigate criminal, regulatory and reputational risk.

Limited substantive changes — and persistent operational challenges

Although the Updated Guidance largely restates the limited interpretive guidance previously issued by GAC, it does provide organizations with some insight into the Canadian government's expectations for sanctions compliance and due diligence policies and procedures. It also confirms that GAC continues to apply an expansive interpretation of certain sanctions provisions, particularly the Deemed Ownership Rule, and highlights a number of prohibitions specific to Canada's sanctions against Russia, which remain the most high-profile sanctions currently in effect.

Finally, the Updated Guidance offers only a brief acknowledgment of one of the most significant challenges that sanctions compliance poses for Canadian businesses: the exceptionally long timelines for obtaining a response to an application for a permit. GAC confirms that it cannot provide timelines for receiving Ministerial responses to an application.

2. Sector-specific Sanctions Guidance

In addition, GAC has just published sector-specific sanctions compliance guidance on its "Information and Guidance" page, with dedicated modules for the academic and research, financial, real estate, and humanitarian sectors.

Financial sector guidance

Of these, the financial sector guidance is the most detailed and has been significantly expanded from prior materials. Recognizing that sanctioned actors frequently rely on intermediaries, opaque ownership structures, and complex transactions to conceal their involvement, GAC emphasizes that a basic "name-screening" approach is not sufficient. Financial institutions are expected to conduct enhanced due diligence to identify indirect links to listed persons, assess whether payments may involve sanctioned jurisdictions, and determine whether a proposed activity could constitute facilitation of a prohibited dealing. The guidance also confirms that the prohibitions apply broadly to financial and related services, including wire transfers, investment services, insurance, letters of credit, tax and accounting services, and asset management.

Enforcement expectations are rising correspondingly. Entities subject to FINTRAC reporting obligations must file Suspicious Transaction Reports where activity relating to sanctions evasion offences is suspected and must submit Listed Person or Entity Property Reports when they are in possession or control of property owned or controlled by listed persons. Importantly, the guidance incorporates complex hypotheticals illustrating how sanctions risk can arise even where listed persons are neither counterparties nor named participants—for example, through intermediary freight forwarders, shell companies, or indirect board-level involvement.

Notably, both the academic and research sector guidance and the financial sector guidance add that "any suspect sanctions evasion should be reported to the RCMP," a statement that did not appear in previous guidance and is not a statutory requirement under either the SEMA or the JVCFOA. This is also repeated in the Updated Guidance.

Academic and research sector guidance

For the first time, GAC now provides detailed compliance guidance for universities and other academic institutions. Key points include:

• Dealing with researchers or students from listed institutions: Universities must conduct due diligence to ensure that admissions or collaborations do not result in prohibited dealings with listed entities. This includes evaluating ongoing affiliations and potential technical knowledge transfers.
• Previous research and publications: Continuing work or publishing prior research linked to listed institutions is not automatically prohibited, but universities must ensure that no ongoing dealings or benefits accrue to the listed entity.
• Documentation and screening: Institutions are encouraged to maintain sanctions screening policies and document steps taken to sever ties with listed entities before engaging prospective students or researchers.
• Responsibility for non-compliance: Enforcement authorities assess responsibility on a case-by-case basis, potentially implicating institutions, faculty, or individuals depending on their role.

3. Updates to the FAQs

The updates to Canada's sanctions FAQs represent a substantial expansion, with new answers addressing how the sanctions regime is being enforced, the application of the SEMA (Russia) Regulations and the application of sanctions to academic institutions.

The FAQs now clarify how Canada's sanctions regime is enforced. Enforcement is shared among the RCMP, the Canada Border Services Agency ("CBSA"), and FINTRAC. Sanctions violations are criminal offences, investigated and enforced primarily by the RCMP and CBSA, and may result in border seizures, forfeitures, and other penalties.

The updates also highlight new reporting obligations to FINTRAC for sanctions-evasion offences under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, reflecting changes introduced by Bill C-59. Notably, violations of these sanctions-related reporting obligations can attract civil administrative monetary penalties or AMPS which — unlike sanctions offences under the SEMA and the JVCFOA — do not require enforcement authorities to demonstrate that such violations were wilful.

Further notable inclusions in the updated FAQs are:

• An entire section with specific answers regarding the SEMA (Russia) Regulations clarifies that the section 3 list-based prohibitions apply broadly, even when transactions are initiated outside Canada or by non-Canadian parties, including indirect dealings through third parties.
• Pre-existing contracts with listed entities may be fulfilled as long as no payment benefits the listed person.
• Secondary-market trading between non-sanctioned parties in securities issued by sanctioned entities can trigger the list-based prohibitions on the basis that "such dealings can create a demand for the shares or debt of the listed entity, can assist the listed entity in raising funds, and can influence the valuation of the listed entity".
• For the purposes of trade sanctions regulations, Column 1 descriptions in HS Code schedules govern import and export prohibitions, with Column 2 codes provided for reference only. Companies are advised to consult customs guidance for goods spanning multiple HS categories or lacking assigned codes.
• Canadians employed abroad may be liable if they hold decision-making powers or control roles at non-Canadian entities that engage in activities violating Canadian sanctions.

Conclusion

McCarthy Tétrault's International Trade and Investment Law Group has deep experience advising on Canadian and global sanctions compliance and will continue to monitor developments as the sanctions landscape evolves. If you have questions about how GAC's updated guidance may affect your organization, or require support in navigating sanctions risk and compliance obligations, please contact a member of our team.

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