Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Canada Imposes New Export Controls & Economic Sanctions Against Iran Affecting the Oil & Gas Industry

Any business in Canada's oil & gas sector who were/are doing business with Iran needs to look at the new rules as the landscape has changed dramatically. In June/July 2010, the Government of Canada promulgated the following regulations that impose new export controls & economic sanctions against Iran:

1. Regulations Amending the Regulations Implementing the United Nations Resolutions on Iran, SOR/2010-154 (June 17, 2010);

2. Special Economic Measures (Iran) Regulations, P.C.2010-952 (July 22, 2010) (to be published in the Canada Gazette on August 3, 2010 as SOR/2010-165)

3. Special Economic Measures (Iran) Permit Authorization Order, P.C.2010-953 (July 22, 2010) (to be published in the Canada Gazette on August 3, 2010 as SOR/2010-166)

Only part of each of these regulations are aimed specifically at the oil & natural gas sector. That being said, the prohibitions may have a serious impact on existing and future business arrangements. Business is conducted in a variety of ways and the new prohibitions may be broad enough to cover a business activity.  Therefore, the new export controls & economic sanctions must be reviewed carefully and if there is any doubt as to whether the new prohibitions apply, questions should be raised sooner rather than latter.

A) Special Economic Measures (Iran) Permit Authorization Order

I will start with the good news - there may be relief available. This regulation allows for Canada's Minister of Foreign Affairs to grant a special permit to conduct any activity that is prohibited pursuant to the Special Economic Measures (Iran) Regulations. The Special Economic Measures (Iran) Permit Authorization Order provides as follows:

Her Excellency the Governor General in Council on the recommendation of the Minister of Foreign Affairs, pursuant to subsection 4(4) of the Special Economic Measures Act, hereby authorizes the Minister of Foreign Affairs to issue to any person in Canada or any Canadian outside Canada a permit to carry out a specified activity or transaction, or any class of activity or transaction, that is restricted of prohibited pursuant to the Special Economic Measures (Iran) Regulations.

Based on the foregoing, even if the discussion in section (B) below applies to prohibit certain activities, there may be an opportunity to obtain an export permit to authorize such activities in the oil & natural gas sector.

I have spoken with a representative of the Department of Justice and he has informed me that the Government of Canada understands that Canadian businesses have been engaged in legal business activities with persons in Iran and the new export controls and economic sanctions represent a significant change. The Government of Canada is willing to consider applications for permits to conduct positive business activities. However, no promises are made since the economic sanctions are being put in place for a reason --- to change behaviour determined to be a serious concern in Iran.

No process has yet been developed at this time for such permit applications. That being said, permits applications would be filed with the Department of Foreign Affairs, Export Controls Division (ECD)

(B) Special Economic Measures (Iran) Regulations

The Special Economic Measures (Iran) Regulations are made pursuant to the Special Economic Measures Act (Canada) and establish a number of new prohibitions that go further than the United Nations Security Council Resolutions 1929 (2010), 1803 (2008), 1737 (2006), and 1747 (2007). The Special Economic Measures (Iran) Regulations establish new prohibitions that affect Canadian suppliers in the oil & natural gas sector.

The new prohibitions are:

1. Paragraph 3: Any person in Canada and any Canadian outside Canada is prohibited from engaging in certain activities with specified persons in Iran that are listed in Schedule 1 to the Regulations;

2. Paragraph 4(1)(b): Any person in Canada and any Canadian outside Canada is prohibited from exporting, selling, supplying, or shipping to Iran or any person in Iran any goods used in the refining of oil or the liquefaction of natural gas;

3. Paragraph 4(1)(b): Any person in Canada and any Canadian outside Canada is also prohibited from dealing with any goods used in the refining of oil or the liquefaction of natural gas where the goods are destined for Iran or any person in Iran;

4. Paragraph 4(1)(c): Any person in Canada and any Canadian outside Canada is prohibited from exporting, selling, supplying, or shipping to Iran or any person in Iran any of the goods listed in Schedule 2 to the Regulation;

5. Paragraph 4(1)(c): Any person in Canada and any Canadian outside Canada is also prohibited from dealing with any of the goods listed in Schedule 2 to the Regulation where the goods are destined for Iran or any person in Iran;

6. Paragraph 4(1)(d): Any person in Canada and any Canadian outside Canada is prohibited from exporting, selling, supplying, or shipping to Iran or any person in Iran any of the goods listed export control list (excluding certain goods);

7. Paragraph 4(1)(d): Any person in Canada and any Canadian outside Canada is also prohibited from dealing with any of the goods listed export control list (excluding certain goods) where the goods are destined for Iran or any person in Iran;

8. Subsection 4(2): Any person in Canada and any Canadian outside Canada is prohibited from providing any financial or other service to or for the benefit of, or on the direction or order of any person in Iran in respect of any of the goods in prohibitions 2-7;

9. Subsection 4(2): Any person in Canada and any Canadian outside Canada is prohibited from acquiring any financial or other service from or for the benefit of, or on the direction or order of any person in Iran in respect of any of the goods in prohibitions 2-7;

10. Subsection 4(3): Any person in Canada and any Canadian outside Canada is prohibited from transferring, providing or communicating to Iran any technical data required for the processing, storing or handling of liquid natural gas;

11. Subsection 4(3): Any person in Canada and any Canadian outside Canada is prohibited from transferring, providing or communicating to Iran any technical data in respect of goods in prohibitions 2-7;

12. Paragraph 5(a)(i): Any person in Canada and any Canadian outside Canada is prohibited from providing or acquiring financial services or any other services to, from or for the benefit or on the direction or order of any person in Iran for the purposes of establishing a financial institution in Canada or a Canadian financial institution in Iran;

13. Paragraph 5(a)(ii): Any person in Canada and any Canadian outside Canada is prohibited from providing or acquiring financial services or any other services to, from or for the benefit or on the direction or order of any person in Iran for the purposes establishing a branch, subsidiary or representative office or an Iranian financial institution in Canada or a Canadian financial institution in Iran;

14. Paragraph 5(a)(iii): Any person in Canada and any Canadian outside Canada is prohibited from providing or acquiring financial services or any other services to, from or for the benefit or on the direction or order of any person in Iran for the purposes of acquiring a significant interest in an Iranian or Canadian financial institution;

15. Paragraph 5(c): Any person in Canada and any Canadian outside Canada is prohibited from purchasing any debt obligation issued by the government of Iran;

16. Subsection 6(1): Any person in Canada and any Canadian outside Canada is prohibited from making an investment in an entity in Iran that is owned or controlled by another entity in Iran and is engaged in the oil or natural gas industry;

17. Subsection 6(2): Any person in Canada and any Canadian outside Canada is prohibited from providing financial or other services to or for the benefit of or on the direction or order of a person in Iran for the purposes of investing in the oil or natural gas industry in Iran;

18. Subsection 6(2): Any person in Canada and any Canadian outside Canada is prohibited from acquiring financial or other services from or for the benefit of or on the direction or order of a person in Iran for the purposes of investing in the oil or natural gas industry in Iran;

19. Section 7: Any person in Canada and any Canadian outside Canada is prohibited from knowingly providing a vessel that is owned or controlled by, or operating on behalf of, the Islamic Republic of Iran Shipping Lines with insurance services, or stevedoring, bunkering and lighterage and similar services for the vessel’s operation or maintenance; and

20. Section 8: Any person in Canada and any Canadian outside Canada is prohibited from doing anything that causes or assists or promotes, or is intended to cause, assist or promote, any act or thing prohibited by the above prohibitions.

These prohibitions are effective as of July 22, 2010.

These new measures are broad in their application in certain respects and limited in others. While there may be legal arguments whether a particular good is captured by a prohibition (e.g., the good is used in the oil and natural gas sector, but is not used in the refining process), the Canada Border Services Agency (CBSA) is stopping most (if not all) goods destined for Iran (and intermediary shipping points, such as the United Arab Emirates). The CBSA is the gate-keeper and will require detailed technical data concerning the goods, the buyer, the end-use, etc. Even if the end use is not in a specific industry (e.g. refining of oil), if the good may be used in a manner that is prohibited, it may be caught by the new prohibitions.

As a result, we recommend that Canadian oil and natural gas businesses take a conservative approach and engage in discussions if they plan to export goods to Iran. We recommend that such businesses obtain pre-approval by way of a ruling or an export permit prior to attempting to export a good without a permit. The upfront request and permission process may be controlled better than reversing a detention by the CBSA. Further, if a mistake is made, penalties may be imposed and, depending on the activity, a prosecution may ensue. In addition, if the CBSA has a record of a breach of any of the prohibitions by a company/individual, they may detain goods destined for other locations in order to determine whether the goods are ultimately destined for Iran.

(C) Regulations Amending the Regulations Implementing the United Nations Resolutions on Iran

On June 17, 2010, the Government of Canada added goods that are subject to United Nations Security Council Resolution 1929 (2010) to the existing list of prohibitions in the Regulations Implementing the United Nations Resolutions on Iran made pursuant to the United Nations Act (Canada). Few of these goods are connected to the oil and natural gas industry.

The new prohibitions are:

1. Paragraph 3(a): Any person in Canada and any Canadian outside Canada is prohibited from knowingly selling, supplying or transferring to any person in Iran, directly or indirectly, wherever situated, products that appear in sections 2 to 7 of Annex B of Information Circular INFCIRC254/Rev. 9/Part 1, entitled “Communication Received from Permanent Mission of Brazil Regarding Certain Member States Guidelines for the Export of Nuclear Material, Equipment and Technology";

2. Paragraph 3(a): Any person in Canada and any Canadian outside Canada is prohibited from knowingly selling, supplying or transferring to any person in Iran, directly or indirectly, wherever situated, products that appear in Security Council on the United Nations document S/2010/263;

3. Paragraph 3(g): Any person in Canada and any Canadian outside Canada is prohibited from knowingly selling, supplying or transferring to any person in Iran, directly or indirectly, wherever situated, any battle tanks, armoured combat vehicles, large caliber artillery systems, combat aircrafts, attack helicopters, warships, missiles or missile systems as defined for the purposes of the United Nations Register of Conventional Arms, or related material including spare parts or other items as determined by the Security Council or the Committee established pursuant to Security Council Resolution 1737;

4. Paragraph 3(h): Any person in Canada and any Canadian outside Canada is prohibited from knowingly selling, supplying or transferring to any person in Iran, directly or indirectly, wherever situated, any technology in respect of any activity related to ballistic missiles capable of delivering nuclear weapons, including launches using ballistic missile technology;

5. Section 7: Any person in Canada and any Canadian outside Canada is prohibited from knowingly procuring arms and related material or any items that appear in INFIRC/254/Rev.9/Part 1. INFCIRC/254/Rev.7/Part 2 or United Nations Security Council documents S/2010/263, wherever situated, from any person in Iran or any person acting on behalf of, at the direction of, or for the benefit of, Iran;

6. Section 8: No owner or master of a Canadian vessel, within the meaning of section 2 of the Canada Shipping Act, 2001, and no operator of an aircraft registered in Canada and no Canadian owner or master of a vessel or operator of an aircraft shall knowingly carry, cause to be carried or permit to be carried arms and related material or any of the items that appear in INFIRC/254/Rev.9/Part 1, INFCIRC/254/Rev.7/ Part 2 or United Nations Security Council documents S/2010/263, wherever situated, destined for any person in Canada and procured from any person in Iran or any person acting on behalf of, at the direction of, or for the benefit of, Iran;

7. Paragraph 9(d): Any person in Canada and any Canadian outside Canada is prohibited from knowingly making any property or financial or other service or other related service available to a designated person, to a person acting on behalf of, or at the direction off, a designated person, to a person owned or controlled by a designated person or to a person determined by Security Council of the United Nations or by the Committee of the Security Council to have assisted a designated person in evading the sanctions or violating the provisions contained in the Security Council Resolutions;

8. Section 9.1: Any person in Canada and any Canadian outside Canada is prohibited from knowingly making any property available to (i) Iran, (ii) any person in Iran, (iii) any body corporate incorporated in Iran or subject to its jurisdiction, (iv) any person acting on behalf of or at the direction of a person in (ii) or (iii), or (v) any person owned or controlled by Iran or by a person in (ii) or (iii)for the purposes of investing in any commercial activity in Canada involving uranium mining, production or use of nuclear material and technology listed in INFIRC/254/Rev.9/Part 1;

9. Section 9.1: Any person in Canada and any Canadian outside Canada is prohibited from knowingly making any financial service or other related service available to (i) Iran, (ii) any person in Iran, (iii) any body corporate incorporated in Iran or subject to its jurisdiction, (iv) any person acting on behalf of or at the direction of a person in (ii) or (iii), or (v) any person owned or controlled by Iran or by a person in (ii) or (iii) for the purposes of investing in any commercial activity in Canada involving uranium mining, production or use of nuclear material and technology listed in INFIRC/254/Rev.9/Part 1;

10. Subsection 9.2(1): Any person in Canada and any Canadian outside Canada is prohibited from knowingly providing a vessel that is registered in Iran or that is contracted to Iran with goods, materials or services for the vessel’s operation or maintenance, including in respect of insurance, stevedoring, bunkering and lighterage if there is reasonable grounds to believe that the vessel is carrying prohibited products; and

11. Section 8: Any person in Canada and any Canadian outside Canada is prohibited from doing anything that causes or assists or promotes, or is intended to cause, assist or promote, any act or thing prohibited by the above prohibitions.

It is important to note that these prohibitions are not made pursuant to the Special Economic Measures (Iran) Regulations and, therefore, cannot be the subject to an authorization by the Minister of Foreign Affairs under the regulations discussed in (A) above.  In other words, it is unlikely that the Minister would override these prohibitions if asked as he does not have legal authority to do so. This makes sense because the United Nations is concerned about Iran'a nuclear ambitions.

It is also important to note that the existing export controls rules with respect to goods on the Export Control List continue to apply. The new regulations add to the existing rules and do not override them to permit more exports. The purposes of the regulations is to restrict exports further by establishing an outright prohibition on certain exports that previously could have been approved by way of a specific export permit.

If you are in the Canadian oil & natural gas business, we would be pleased to discuss your export plans with you and our discussions will be subject to solicitor-client privilege. Please call Cyndee Todgham Cherniak at 416-307-4168.

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