Lawyers Say to Expect More US Entity Listings, Call for Canadian Sanctions Guidance

Larry Ward, a trade lawyer with Dorsey & Whitney, said he’s expecting an “aggressive” U.S. approach to the Entity List in 2024. He noted that the U.S. in recent years has heavily focused on export controls to target China instead of financial sanctions, and “we’ll likely continue to see Chinese companies added on that side,” he said.

Ward, speaking during the American Bar Association’s annual economic sanctions year-in-review event, also said to expect more export control enforcement cases out of the Commerce Department’s and DOJ’s joint Disruptive Technology Strike Force (see 2402090042). He also said Treasury likely will issue more individual Chinese designations, and it’s “always a possibility” the agency adds to its list of Chinese military companies subject to certain investment restrictions

But Ward said he’s not expecting the U.S. to create any new sanctions regime this year to rival the size and scope of its Russia restrictions. “I'm doubtful that we would see anything like that,” he said.

Trevor Schmitt of Arnold & Porter agreed, although he did mention a potential Chinese invasion of Taiwan, which could spark a host of U.S. sanctions against Beijing (see 2401220060). “Barring a Taiwan-related action, it seems unlikely,” Schmitt said. “Export controls seem to be the preferred method of economic diplomacy in many respects when it comes to China.”

The lawyers were also briefly asked about export licensing issues. Both Schmitt and Tim O’Toole of Miller & Chevalier said they have seen the Bureau of Industry and Security approve export licenses for certain controlled medical devices to Russia, including items listed under Chapter 90 of the Harmonized Tariff Schedule, which are subject to licensing requirements.

Although O’Toole said he hasn’t seen “a broad enough swath of licenses with BIS to be able to give an opinion one way or the other on how frequently they're issuing licenses,” his firm has had “some good luck on that front.” The agency’s licensing policy on medical devices has been a “little bit more lenient than it is with other goods,” he said.

“We've certainly seen some good fortune on that front as well,” Schmitt said. “So it seems BIS is considering such license applications very thoughtfully.”

John Boscariol, a trade lawyer with McCarthy Tétrault, touched on sanctions developments in Canada. He said the government hasn’t yet offered clarity on its broad new deemed ownership rules introduced last year, which continues to pose due diligence challenges for companies trying to comply with the country’s sanctions laws.

Canada in June enacted several significant changes to its sanctions laws, including one that mimics the U.S. Treasury Department’s 50% rule and another that allows Canada to establish that a sanctioned person has “effective control” over a business if it’s “reasonable to conclude that the person is able to direct the entity’s activities.”

Law firms warned that doing due diligence for these new deemed ownership tests could prove nearly impossible (see 2304280013). More than six months later, those challenges remain, Boscariol said. He said bar associations and other groups in Canada asked the government a “number of times” to not release the new rules before issuing compliance guidance.

“Unfortunately, there's zero guidance right now issued by the Canadian government on what these rules mean,” he said. “It's creating some challenges for us.”

Boscariol specifically pointed to a change made by the rule that says a sanctioned person has “effective control” over a business if that person is able to, directly or indirectly, “change the composition or powers” of that entity’s board of directors. He said that language is “much more broad” than U.S. sanctions rules.

“It's not ‘changed the majority,’ it's not ‘appoint or remove the majority of the board.’ It's the ability to change the composition,” he said. “You can imagine it's created a bit of concern here.”

Another change recently introduced by Canada allows the country to seize the property of someone added to a sanctions list without showing any “criminality” or proving that party’s “connection to the proceeds” of a crime. “I think it's very much the case that the world is watching right now to see how this develops,” Boscariol said.

He added that Canada lacks resources to effectively implement and provide guidance on its sanctions regimes. Although enforcement has gotten better, the country still hasn’t “devoted enough resources to building an infrastructure for it here in Canada,” Boscariol said.

A Canadian official in November said the government is working on sanctions guidance (see 2311080013), and Boscariol said he has noticed the country devote more resources to enforcement. He said Global Affairs Canada has recently used some of its ‘new enforcement powers to request information with respect to enforcement and administration of sanctions.”

But the country can do more, he said. “Over the years, as Canada expanded its sanctions measures, I really don't think it devoted enough resources to building an infrastructure for it,” he said. Canada doesn’t issue frequently asked questions, rulings or “opinions” on sanctions issues, Boscariol said, so companies sometimes struggle to understand the government’s compliance expectations.

“We don't have deferred or non-prosecution agreements either, so there isn't an ability to seek a settlement without a criminal charge of some kind,” he said. “We don't get a lot of published settlements or any published settlements, really, that would help give guidance as to how the government's interpreting these provisions or what Canadian companies can do to comply.”

Asked whether Canada may consider using secondary sanctions to better enforce some of its financial restrictions or expand their reach, Boscariol said “anything is on the table,” but he doubts that happens anytime soon.

“I mean, they haven't even given us guidance on how they interpret the sanctions for Canadian companies, let alone doing that in the context of secondary sanctions,” he said. “So although I think the door is open, and it's on the menu, it'll be a while until we see something like that.”

He also said Canadian companies want the country to better align its sanctions with allies, including with the U.S. sanctions. Canadian sanctions “are the most aggressive on paper,” Boscariol said, adding that the country lists many parties that aren't designated by other trading partners. He also said many Canadian sanctions don’t have general licenses or other exemptions.

“And so a lot of the cases we're dealing with are situations where U.S. parties were permitted to deal with these sanctioned parties, either because they weren't sanctioned or there was a general license, and on the Canadian side, there's no such exception for that,” he said.