Contributing Lawyers


Cyndee Todgham Cherniak

United States

Susan Kohn Ross


Andrew Hudson

Risky Business: Doing Business in Failed States and Failing States

The uprisings in Tunisia, Egypt and Libya and the actions of the failing regimes have created legal issues for businesses that have established businesses in those failed states and for businesses that wish to continue to do business in those failed states. Businesses cannot be blind to what has occurred and need to be watching world events carefully as other regimes in the Middle East (e.g., Yemen, Oman, Jordan, Morocco, Saudi Arabia, etc.) may fail in the future. There are also failing regimes (also known as rogue regimes) in Iran, Burma, North Korea and the Ivory Coast who are unpredictable.

What is predictable is that the world (and Canada in particular) may impose measures prohibiting or restricting business with the failed states and failing states. For example, in the last 12 months, Canada has imposed severe export controls and economic sanctions against Libya, Iran, Burma, and North Korea in the recent past:

  • On February 27, 2011, the Regulations Implementing the United Nations Resolution on Libya and Taking Special Economic Measures entered into force.
  • On July 13, 2010, North Korea was added to Canada's Area Control List.
  • On June 18, 2010, the Regulations Amending the Regulations Implementing the United Nations Resolution on Iran came into force.
  • On July 30, 2009, the Regulations Amending the Regulations Implementing the United Nations Resolution on the Democratic People‚Äôs Republic of Korea came into force.

Canada imposes export controls and economic sanctions against failed and failing regimes in order to change negative behaviours of those regimes. What this means to business is that an activity that was legal one day may become illegal or prohibited in the future. When doing business with a failed regime or failing regime, strong internal controls are a necessary to immediately react to such changes in the law.

The economic sanctions may relate to specific goods (e.g., arms and ammunition) or to any and all dealings whatsoever. the economic sanction may cover services (e.g., advice, air transportation and shipping, etc.) and financial transactions.

In addition, Canada may stop issuing export permits under the Export and Import Permits Act to Canadian exporters of goods, services, and technical data to the leaders, family members of the regime, government departments, and government institutions. Canada may announce the changes to Canadian law (e.g., placing a country on the export control list) and may make administrative changes. For example, Canada has severely restricting its approvals of export permits to failed and failing regimes.

We have learned from the news reports from the recent crimes against humanity in Libya. The reason why Canada may stop granting permits to failed and failing regimes is that such regimes may be or may become desperate. Such regimes may use controlled goods (e.g., arms, ammunition and (heaven forbid) chemical and biological waepons) against their people, committing crimes against humanity. If the controlled goods are not sent to the failing regimes, then they cannot be used to kill innocent civilians.

Increased scrutiny of business with failed and failing regimes will put the activities of Canadian businesses under a microscope. Since many of the economic sanctions are intended to prevent the leaders in failed an failing state from stealing the money of citizens of the failed or failing regimes and sending the money to foreign banks, financial transactions will be carefully watched. This means that any past bribes of foreign public officials may be uncovered and current bribes may be detected.  "Just do not do it" should be the motto of the day.

This is the time for Canadian companies to update their compliance programs and codes of conduct. An internal audit of internal controls is a prudent step to take to ensure that businesses can react quickly to news about or relating to failed or failing regimes.

The list of legal issues relating to doing business with failed regimes and failing regimes is long. Contractual provisions for allowed business must be adjusted. Additional steps may be necessary to ensure payment for allowable goods and services to be delivered. Since a significant portion of business in the Middle East and North Africa is with the government in some form or fashion, the failure of the regime may affect that business (not unlike a domestic bankruptcy - which is admittedly similar, but different).

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168.

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