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THE STANDING SENATE COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

EVIDENCE

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Ottawa, Wednesday, November 16, 2022

The Standing Senate Committee on Foreign Affairs and International Trade met with videoconference this day at 4 p.m. [ET] to conduct a comprehensive review of the provisions and operation of the Sergei Magnitsky Law, and the Special Economic Measures Act.

Senator Peter M. Boehm (Chair) in the chair.

[Translation]

The Chair: My name is Peter Boehm. I am a senator from Ontario and the Chair of the Standing Senate Committee on Foreign Affairs and International Trade.

[English]

Before we begin, I wish to invite committee members participating in today’s meeting to introduce themselves.

[Translation]

Senator Gerba: Amina Gerba, from Quebec.

[English]

Senator Greene: Steve Greene from Nova Scotia.

Senator Loffreda: Tony Loffreda, Quebec.

Senator Simons: Paula Simons, Alberta, Treaty 6 territory.

Senator MacDonald: Michael MacDonald, Nova Scotia.

Senator Harder: Peter Harder, Ontario.

Senator Busson: Bev Busson, British Columbia.

Senator M. Deacon: Marty Deacon, Ontario.

Senator Richards: David Richards, New Brunswick.

The Chair: I would like to welcome all of you as well as anyone watching us across the country on Senate ParlVU.

Today we continue our review of the provisions and operation of the Justice for Victims of Corrupt Foreign Officials Act — also called the Sergei Magnitsky Law — and the Special Economic Measures Act. Today we welcome four experts on sanctions regimes all via video conference.

For the first part of our meeting we are pleased to welcome representatives from the financial sector. From the Canadian Bankers Association, or CBA, we have Angelina Mason, General Counsel and Vice-President, Legal and Risk; and from the Royal Bank of Canada, Stephen Alsace, Global Head, Economic Sanctions. Welcome to both of you. Thank you for being with us. My understanding is that Ms. Mason will make a statement of seven minutes, more or less, on behalf of both of you and then we’ll go to a question-and-answer period.

Ms. Mason, you have the floor.

Angelina Mason, General Counsel and Vice-President, Legal and Risk, Canadian Bankers Association: Thank you for inviting the Canadian Bankers Association and the Royal Bank of Canada to appear this afternoon to participate in the committee’s comprehensive review of the provisions and operations of the Justice for Victims of Corrupt Foreign Officials Act, also known as the Sergei Magnitsky Law, and the Special Economic Measures Act, or SEMA. My name is Angelina Mason and I am the General Counsel and Vice-President, Legal and Risk with the CBA. I am joined today by Stephen Alsace, Global Head, Economic Sanctions with the Royal Bank of Canada.

The CBA is the voice of more than 60 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada. Banks employ more than 275,000 people in Canada, who help drive Canada’s economic growth and prosperity. The CBA advocates for public policies that contribute to a sound, thriving banking system to ensure Canadians can succeed in their financial goals.

Sanctions laws have long been a part of Canadian law. The introduction of the Sergei Magnitsky Law in 2017 and the accompanying amendments to SEMA demonstrated the federal government’s continuing commitment to certain laudable policy goals — safeguarding of human rights, combatting significant corruption and preserving international peace and security — and it helped to further align our sanctions regime with those of our G7 allies.

Since 2017, the regime has continued to rapidly expand in response to geopolitical developments. Responding to their enactment and expansion, banks operating in Canada have invested heavily in their efforts to comply with, and thus enable, the Sergei Magnitsky Law and SEMA. Our members work extensively with Global Affairs Canada — GAC — and the RCMP to ensure broad compliance with sanction requirements. We have in place systems and procedures for managing sanctions risk and conduct active screening against sanctions lists.

In connection with this work, we recognize the value of GAC’s Consolidated Canadian Autonomous Sanctions List, as well as the increasing willingness of GAC officials to engage with stakeholders, including our members, on sanctions matters and perform public outreach. We appreciate the federal government’s announced investment of $76 million in GAC’s development of a devoted sanctions bureau and additional support to the RCMP. We view this as an important first step towards, and catalyst for, further enhancements to Canada’s sanctions regime.

Given their role within the global financial system, our members have observed several ways in which Canada’s sanctions regime should continue to evolve. Primarily, there is a need for written, publicly available guidance from GAC on the regulations associated with the Sergei Magnitsky Law and SEMA. This need was highlighted in the House of Commons’ Standing Committee on Foreign Affairs and International Development’s 2017 Report, A Coherent and Effective Approach to Canada’s Sanctions Regimes: Sergei Magnitsky and Beyond. It persists today and, indeed, it has intensified. Based on recent events, sanctions now apply to a rapidly expanding, unprecedentedly broad list of entities and individuals engrained in the global financial system, making implementation complex and generating stakeholder questions. Generally, guidance is a critical, commonplace element across Canada’s legal system, particularly in the financial services sector. It can provide important insights and clarity for stakeholders from large corporations to small- and medium-sized enterprises on how a regulator interprets and applies regulatory requirements. Recognizing this reality, sanctions authorities in other jurisdictions, such as the United States and the United Kingdom, have developed comprehensive written guidance on their respective sanctions laws.

To align with best practices of sanctions authorities in foreign jurisdictions and across Canada’s own regulatory landscape, we encourage the development of guidance for the Sergei Magnitsky Law and SEMA. Guidance will provide much-needed clarity and transparency for stakeholders — especially those that lack or cannot afford access to expensive resources to support their activities. This will mitigate the operational and regulatory risks that may flow from regulatory opacity when doing business globally. It will also help to ensure the Sergei Magnitsky Law and SEMA are implemented as intended, and that their desired and laudable policy goals are efficiently and effectively achieved.

Along with written guidance, we suggest GAC should work to educate the Canadian public on the nature, rationale and impact of Canada’s sanction laws. In the current context, private sector entities, like our members, are often required to address the questions and concerns of their clients. To ensure the public receives accurate, up-to-date information, we suggest the federal government would be best placed to answer these questions, as our members, and other stakeholders, are still working to understand the impact of the law on their businesses.

We also observe there are minor operational challenges with changes to the GAC’s sanctions list. Often, changes to the regulations are announced several days after they have been passed into law. To allow our members and the broader private sector time to adjust their systems and processes to sometimes extensive changes, we suggest notification should be provided in advance of the changes passing into law.

The permit system also requires the federal government’s attention. We understand that in other jurisdictions there are streamlined mechanisms for seeking permits or certificates to authorize certain specified activities or transactions that are otherwise prohibited. For example, the United States has provisions for general licences that authorize particular types of transactions for a class of persons without the need to apply for a specific licence. This general approach has not been used in Canada, although it is possible under the law. Given the lack of guidance and clarity in the law, we understand GAC has been flooded by permit applications. It appears this increased volume has created a backlog of applications, leaving Canadians waiting with unclear timelines for formal responses. These permits are not always sought by large corporations. Often, it is everyday Canadians seeking these permits, such as retail banking clients attempting to remit funds to family members in jurisdictions impacted by sanctions. Without seeking to undermine the policy goals of the Sergei Magnitsky Law and SEMA, we suggest GAC align with the approach taken in foreign jurisdictions. Further, we also recommend GAC hire additional resources to focus specifically on permit applications, and ideally set out a mandate to complete all permit requests within a reasonable period — for example, 30 days.

Finally, and perhaps most fundamentally, further federal government investment in GAC’s sanctions bureau is likely needed to enable the changes we have outlined today.

We appreciate and support the federal government’s previous budgetary commitments to the department. However, given the recent geopolitical developments, we are at an inflection point: The regime is under stress and it is critical that GAC remains properly resourced. As we have noted, GAC officials have shown a great willingness to engage with stakeholders. Resources should be in place to support this willingness and to ensure the increasing demands on Canada’s sanctions regime are rapidly addressed.

To conclude, we recognize the significant steps the federal government has taken in enacting the Sergei Magnitsky Law and SEMA. As the Senate proceeds with its review, we welcome opportunities to continue to engage on these issues to limit any operational impacts of the law and support its core policy goals.

Thank you, and we look forward to your questions.

The Chair: Thank you very much, Ms. Mason.

[Translation]

Colleagues, before we proceed to questions and answers, I wish to ask members and witnesses in the room to please refrain from leaning in too closely to their microphone or removing their earpiece when doing so. This will avoid any sound feedback that could negatively impact the committee staff and others in the room, as well as our interpreters. Thank you.

[English]

We will now go to questions. I wish to inform members that, as per usual, you will each have a maximum of four minutes for the first round, including your question and the answer; therefore, to members and witnesses, my wish is for you to be as concise as you possibly can. We can always go to a second round if there is time.

Senator Loffreda: Thank you to our panellists for being here today.

Given today’s geopolitical challenges and environment, are there any worrisome trends or concerns that you can share that would require or not require a government response? Also, is the engagement between Global Affairs Canada and industry stakeholders on the subject of Canadian sanctions and guidance efficient and sufficient? Do you have any improvements or recommendations on that front?

Ms. Mason: Yes, as mentioned in my opening remarks, we definitely feel there is room for improvement here, which would probably be addressed through resourcing. It’s providing clarity on how to interpret the sanctions as they’re provided. They tend to be quite broad-brushed, and we come up with various scenarios or situations that would not appear within the policy intent.

I’ll give an example. Let’s say what’s impacted is the pension funds of Canadians. That is likely not the policy intent, especially since a pension fund would be in trust and ensure monies go to the appropriate parties. It would be able to get that type of clarity, whether through guidance or if it felt it was in but needed an exemption of a permit, and we could have those types of conversations and input in a timely fashion.

Stephen Alsace, Global Head, Economic Sanctions, Royal Bank of Canada: I think Ms. Mason has answered fairly succinctly. I’ll add to that, especially on the point of guidance; there has to be a willingness on the part of Global Affairs Canada to prioritize providing public guidance in the interpretation of sanctions.

It’s not just a resourcing issue. I say that because I’ve been doing this for quite a while. I appeared back in 2016 and raised similar issues. At that time — let’s say around 2013 or 2014 — there was enhanced guidance that actually came from Global Affairs on the interpretation and the policy intent around sanctions, which has been lost over the years.

Part of it is will and part of it is a skill set.

The other thing I will mention is that Global Affairs Canada, when it comes to financial institutions, is not a regulator. They struggle a bit in providing regulatory guidance to financial institutions and perhaps the general public. It’s not an area they’re well versed in, and that could be an area where they could perhaps use some enhancement.

Senator Loffreda: Given today’s environment, challenges and the compliance burden, especially with banks — I’m familiar with it; I spent 35 years in the industry — given the trends you are seeing, does the Canadian sanctions regime create a burden? Do you have the resources to really efficiently manage what is expected of you? We have resource challenges everywhere, across every industry. Are you feeling that in your industries, and is there concern because of a lack of resources, given the increasing demand placed upon you?

Ms. Mason: We have long had the appropriate resources to manage sanctions compliance requirements. On this one, it’s more on implementing the specific requirements; it’s ensuring we get the appropriate guidance on how to implement. We have the individuals who will do that implementation. It really does come down to an interpretation and needing that support to understand how to implement.

It’s not just for banks; this impacts other Canadians and larger and smaller businesses. That’s why the guidance is really important there, because the resources go beyond simply those who would implement; it goes to how you would interpret and what gets captured.

Senator M. Deacon: Thank you both for being here today.

I am asking a part B or C to the questions that Senator Loffreda asked just now, and that is talking about this vagueness or this lack of clear policy guidance. Certainly, we heard from other speakers that it’s led institutions to perhaps over-comply so as not to run afoul of the sanctions regime.

Would both of you agree with that or support that? Is there not enough information? What are your thoughts on those comments that we have heard from others?

Ms. Mason: Mr. Alsace, did you want to take that from a practical perspective?

Mr. Alsace: Go ahead. I’ll follow it up.

Ms. Mason: It’s difficult to position it as an over-compliance issue if, on its face, something would appear to be captured. Absent someone saying that was not the intent — that, from a policy perspective, we didn’t intend to target that — as written, you technically would comply. When you analyze it from a specific facts scenario — “You really didn’t mean to capture this, did you?” — until you get that clarity and guidance, it’s hard to say it’s over-compliance because, on its face, it would appear to be captured.

Mr. Alsace: I’ll give a practical example. We have a number of clients who are Canadian hockey players playing in Europe and Russia. However, they are playing for teams owned by sanctioned entities. That’s an area where we’re asking for clarification. Presently, we have to block their payroll. That is the subject of a number of permit applications and we have asked for clarification on that. We would like a blanket clarification on that position if it is really the intent of the government to block such types of payments. That’s just one practical example I can give you.

In terms of a large scale, there are a couple of things I just want to mention. Russia as a market — it’s not just because of Canada that we were looking at potentially exiting some areas; there were other risk decisions that were made. Part of it was the exposure of the market and also other sanctions regimes that are in force in other jurisdictions. It wasn’t just because of Canada.

That was a factor, and a lot of the financial institutions took that approach after 2014 when the first round of sanctions went through. But I wouldn’t say it’s just that banks are overly cautious. I think part of the issue is that there is a lack of interpretation that has created a large number of permit applications in Canada, but then there are other risk factors that are at play here that have resulted in certain de-risking from the Russian market.

Senator M. Deacon: Thank you.

So that’s looking at the front end. If we go to the back end of this, we know that, earlier this year, these two acts were amended to allow for the forfeiture of property subject to a seizure or restraint order made under the Magnitsky Law or SEMA.

I’m trying to understand what that looks like from your end. What does it mean for the bank who might have those assets, and what does the process look like on your end should a seizure order be made?

Ms. Mason: From our perspective, we’re not unfamiliar with seizures; it’s already present in the provincial regimes. Having it appear in the federal regime is not something that presents a real challenge for us. The law has been passed and the regulations have been put in place, so it really comes down to the government invoking it. There are steps they have to take, and then we simply participate in that process.

Senator Simons: You’re not the first witnesses to come before this committee with a concern about a lack of written guidance from Global Affairs Canada. When you ask Global Affairs to provide you with that guidance, what do they say to you to explain why they won’t do it or why they haven’t done it?

Mr. Alsace: Honourable senator — if I can answer that question, Ms. Mason — in many instances, we haven’t received a response. We don’t have a reason why they can’t answer, and we’ve been waiting a long time. I say a long time because it’s not just recently that we asked for clarification; it goes back to 2016-17. I actually don’t know the answer as to why we don’t have an answer. I can’t answer that.

Senator Simons: Well, that’s a bit distressing. Ms. Mason, did you want to add anything to that?

Ms. Mason: Well, no. As we mentioned, obviously, there is a larger investment being placed in GAC to give them resources. I think that would help along the way to have the resources for that type of support.

Senator Simons: Ms. Mason, you mentioned the idea of being told in advance what laws would be changed before they pass. Of course, that’s difficult because even when a bill passes in the House of Commons, it then comes to the Senate for review and potential amendment. It’s not always easy to know when a bill will pass or what, indeed, the final form of that bill will look like. I wonder if you could explain a bit more how you would imagine it could work for the industry to be given notice in advance of a bill’s actual final passage and form.

Mr. Alsace: Honourable senator, I can field that question from an operational perspective. I think what Ms. Mason was referring to wasn’t so much about advance notice that there were new regulations that were about to be promulgated. In fact, the Government of Canada has done that with Haiti. There were announcements and we knew that was coming shortly. So that wasn’t the issue.

The issue that we have is that the way most of the updates to the Sergei Magnitsky Law as well as to SEMA are name-based — they have either individuals or entities added to the list. We call it a list-based approach. When they add names to the list, the challenge that we have is they’ll publish the update — they’re not in effect until they’re actually published — but they’re backdated. The effective date will be three days — in fact, today there was one that was four days — prior to when they’re actually published. So you don’t see the name until it has been in effect for three or four days. We will put it into operational effect immediately. We have manual processes in place because we know this is the way the Government of Canada does it. We also have automated vendors that provide us with list services, but they’re always 24 hours late. That’s just the way they operate. We kind of do both, and we have had to put in this manual process, but that is part of the frustration we have when the government does something like that.

Senator Simons: That is quite different than the passage of a law. Have the banks ever been penalized four days before for their psychic failure to predict who was going to be on a list?

Mr. Alsace: Thankfully, no, not that I’m aware of in Canada anyway. There have been enforcement actions in the United States with respect to timing and the implementation of lists.

Senator Simons: Thank you very much.

Senator Busson: My question has to do with the information the Government of Canada provides when sanctioning foreign nationals and entities under the Special Economic Measures Act. As an example, on November 4, the Minister of Foreign Affairs announced in coordination with the United States that Canada was imposing targeted sanctions under the special economic regulations and relevant subsections within the Special Economic Measures Act on two members of the Haitian political elite in response to their illicit and financial operational support of armed gangs. Only the names of the individuals, their dates of birth and a very short background of the situation in Haiti was provided by GAC. In their news release, it might be stated that this was a little less than one might want.

You stated that the information guidance provided by GAC might be insufficient. Do you have any suggestions for making the information provided in situations where foreign nationals are sanctioned clearer and more comprehensive to help the public and Canadian businesses deal with these situations?

Mr. Alsace: Thank you, honourable senator. Yes, I think that it would be helpful to have consistency in the amount of information they provide when they do have listings to provide addresses and dates of birth, if possible. That’s usually the minimum that we use to be able to positively identify those who are the intended persons on sanctions lists, and that’s what other jurisdictions typically do. That’s not always the case with Global Affairs. We don’t always get full legal names. We often do not get addresses, dates of birth or other referential information, so that makes it a bit of a struggle.

One of the other challenges we have sometimes is they don’t capitalize the surname, which makes it very difficult because we can’t differentiate between a middle name or a hyphenated name. That makes it challenging as well. Occasionally, there is a lack of consistency that does present challenges.

Ms. Mason: Just to be clear about what we do in those circumstances, it is a diligence process for us. You will get these potentially false or close matches and we will take an approach of understanding or getting more information from the specific client to eliminate potential associations.

Mr. Alsace: As a large financial institution in Canada, we invest in service providers, we have referential data sources that we subscribe to at considerable expense. Most of the large banks in Canada do that, but small businesses don’t have that luxury. They have much further limitations and it’s a much bigger struggle for them to be able to operationalize some of these sanctions lists.

We have heard from other witnesses that there is a consolidation under SEMA that they made two years ago, but it is incomplete. They don’t include the United Nations Act, the Freezing Assets of Corrupt Foreign Officials Act — FACFOA — or the Criminal Code list. There are about 600 names that aren’t in the consolidated list; although you can search the Global Affairs website, it misses names from other departments but they have equal force and effect.

Senator Busson: Is there a gateway for you to make clarification or confirmation of these entities and individuals?

Mr. Alsace: Do you mean to confirm with Global Affairs Canada? I don’t believe so. We would have to get back to you on that. I think that’s a question better answered by the department, but I don’t believe so. You can ask questions. They’ve actually been very open in the last year to public consultation and you can schedule conference calls with them if you have questions; at least, most of the banks have.

Senator Busson: Thank you very much.

[Translation]

Senator Gerba: My question is for Ms. Mason. In your introductory remarks, you stated that the United States had implemented a general licensing system for certain categories of individuals in order to limit requests for sanction exemptions.

Can you provide further details about this system? What steps are required of those seeking such licences?

[English]

Ms. Mason: It’s when you have a situation where, for example, you have a specific facts scenario that is being presented to the regulator, and in viewing that facts scenario it could be a clarification that they feel, no, that was exempt, it doesn’t need to be covered by the sanction. But in recognizing that specific fact scenario actually would apply across other situations, it’s not so unique. Literally, if you said what that particular transaction or fact scenario was, they would issue a general licence that would then address the fact that individuals would not have to get a following licence. There is a general licence; under the circumstances, this exemption is then available under this more general licence as opposed to having each party that had that fact scenario having to seek their own licence.

[Translation]

Senator Gerba: What precautions does the system have to ensure that these general licenses cannot be used to evade sanctions?

[English]

Ms. Mason: Yes, because you would have to fall squarely within the parameters of what has been licensed. If you did not meet all the requirements within those specific parameters, you would not be able to rely on that licence.

[Translation]

Senator Gerba: Thank you.

[English]

Senator Harder: Thank you to our witnesses. Ms. Mason, I particularly liked your list of suggestions as to what we could consider recommending in terms of reforms and additional measures that a government could take.

Given that the banks operate in a global environment, could you tell us what kind of relationships and experiences you have had in other jurisdictions amongst like-minded nations with respect to their regimes and whether there are some common elements that you could observe on or ways in which, in other jurisdictions, some of the concerns that you have raised are already being dealt with more effectively? What can we learn from other jurisdictions through your banking experience that would be helpful for us to understand?

Ms. Mason: One is, recently, where you have all these different global jurisdictions responding to the same geopolitical situation and enforcing sanctions. The difference is that in one jurisdiction there will be clarity that actually ends up raising questions within our jurisdiction. So their sanctions legislation is then accompanied by guidance, and then, when we look at ours, we see that there is guidance here, and that raises the question: Is that similarly the type of guidance on how it’s being impacted and what it’s intended to cover? Does it equally apply in our jurisdiction? That’s where we really get the sense of when you do provide the guidance — because we don’t have the answer — it makes us ask the question here in Canada because that further guidance has been provided.

Mr. Alsace: In the United States, the Office of Foreign Assets Control — OFAC — has more resources, but they have 1,700 frequently asked questions — and they keep adding to them — that provide a significant amount of guidance. For each sanctions regime for each country, they also publish a syllabus and a paper around the various sanctions and how they are applied.

In the U.K., the Office of Financial Sanctions Implementation — OSFI — a relatively new agency that was set up this year, they have already published over 100 pages of guidance on Russian sanctions alone.

Those are potentially two examples. We are really just looking for enhanced published guidance and interpretation of the existing regulations.

The Chair: I want to recognize Senator Woo, from British Columbia, who has joined the meeting; and Senator Housakos, from Quebec, who is also present.

Senator Greene: The overall impression that I have been left with, with the answers to questions and the questions themselves, is that the Sergei Magnitsky Law is an act of good intentions, but the implementation of it has been poor. So the intentions of the act have not been recognized, certainly not in full. I would like those around the table to react to that.

Ms. Mason: May I ask you to clarify? Are you speaking to the enforcement of it or the number of sanctions that have been issued under it?

Senator Greene: The enforcement of it.

Ms. Mason: On the enforcement, I would say that it has been enforced upon and that it is definitely being implemented. It’s just, again, clarity.

Subject to Mr. Alsace’s comments, when we talked earlier about over-compliance, the error would be on the broad brush of its application. I don’t have reason to believe that it hasn’t been enforced as intended. In fact, it may have been over-enforced, if that’s a fair way of saying it.

Mr. Alsace: Our comments with respect to interpretive guidance are less applicable to the Magnitsky Law. The Magnitsky Law is targeting individuals, for the most part, and there aren’t a lot of interpretive issues around application of those sanctions because it’s very list-based, and either you have relationships or transactions involving those parties or you don’t.

The guidance that we’re looking for is really around SEMA, particularly for Russia, because we’re dealing with targeted and sectoral sanctions that are complicated. The issues we mainly struggle with are the challenges in understanding beneficial ownership or control and our relationships with related parties or minority shareholders who could be named.

Ms. Mason: I appreciate you clarifying that, Mr. Alsace. Thank you.

Senator Housakos: My question is for any one of our witnesses here today. Would it be less onerous on banks if the government had an audit function to find assets of targeted individuals under the Sergei Magnitsky Law, or any other act, for that matter, and place that responsibility more on the shoulders of government rather than on banks in order to identify individuals that are involved in nefarious activities?

Mr. Alsace: I don’t believe so, in the sense that I think banks are in the best position to be able to identify assets that its entities hold. Global banks, typically, are established with fairly complicated structures, especially when you look at capital markets and wealth management. It would be fairly onerous to have an outside party attempt that. For us, once we have identified a party that is sanctioned, to put in place the sanctions, we do that not just for Canada but for other jurisdictions. We’re not saying that’s too onerous.

The challenge for us is the actual proper identification of parties. That’s the first piece of it. The second is when you are dealing with competing jurisdictions and, let’s say, Canadian sanctions are applying only because we’re operating as an intermediary on a correspondent bank transaction, we’re not sure if it applies or not, and that’s where we’re looking for interpretive guidance on what to do.

Ms. Mason: Even in the case when we’re not dealing with banks but private entities that are engaging in transactions, it’s fair to say that the persons who were participating in those transactions have a better sense of who they are dealing with and what assets are being dealt with than the government would have a line of sight into.

Senator Housakos: Wouldn’t you think the government, because of our intelligence capacity, would be able to identify information which the banks would not be privy to under current circumstances?

Ms. Mason: To the extent that was available and could add to the intelligence that would be provided, then yes, that would be incremental. It’s just that for us, as we manage through the specific sanctions and the names, we are not in a position to obviously detect various matches.

Mr. Alsace: We certainly would appreciate greater information sharing amongst banks and a regime that could facilitate that similar to other regimes. That definitely would assist being able to enhance sanctions evasion, at least in Canada.

Ms. Mason: Perhaps it’s more incremental than in place of.

The Chair: My question is based on the last few questions. One of the things we’re trying to get at in the hearings we have had so far is the issue of guidance — you have both addressed that — transparency and consistency.

Mr. Alsace, you represent the largest bank in the country, and you have talked about other jurisdictions and having to check. I’m assuming that, since Magnitsky-style laws are relatively new in most of the G7 countries, you have a fair amount of interaction with banks and other jurisdictions, who in turn are applying pressure on their governments for the guidance, transparency and consistency that you also seek.

Would you say that your collaboration is increasing with banks in other jurisdictions? Or is this becoming increasingly difficult in the current state of affairs where, of course, the sanctions against the Russian Federation and individuals are really unprecedented?

Mr. Alsace: Thank you for that question. Absolutely: Especially since February, with what’s happened under Russia, and I think under the Sergei Magnitsky Law as well, there has been enhanced collaboration amongst international financial institutions. I try to attend numerous conferences in other jurisdictions, and we’re saying fairly similar things. We’re all struggling around how to interpret the changes, how to best deal with it and making sure that we’re complying. How can we collaborate on best practices? One sound bite that I have heard is that, just in comparison, Canada stands out for a lack of guidance as compared to virtually every other global jurisdiction.

The Chair: That would include Germany, for example, where Deutsche Bank is a lender of choice to Russian entities.

Mr. Alsace: It would include Germany, Switzerland, Australia, United Kingdom and Ireland.

The Chair: Thank you.

Senator Richards: There has to be some measures put in place for some kind of compensation. I know it is early days, but if there was ever a mistake made with your Sergei Magnitsky Law, with the banks or the governments, is there any possible compensation? Do you have anything in place where that could happen or have you even considered that yet? I haven’t seen any law yet that hasn’t at times had a mistake made over a certain amount of time about certain individuals.

Mr. Alsace: Honourable senator, are you referring to an enforcement regime in the event that a bank errs and lets money go to an oligarch when it shouldn’t have?

Senator Richards: Yes, that, or that you target the wrong person. As you mentioned earlier, sometimes with names that are hyphenated you don’t get a handle on who they are actually after. I am wondering if there is any situation where the wrong person is blamed or targeted. Can there be any compensation for that individual, or have you considered that at all?

Mr. Alsace: We definitely consider errors. Actually, we’re very conscious about any compliance with sanctions laws because of the strict liability nature of the regime. That’s why we take such care in making sure we get it right the first time as much as possible. Although we have automated systems to do detection and screening, virtually any potential match is subject to, at least, our review. It’s fairly universal across our industry to make sure we aren’t making a mistake.

Having said that, humans are fallible and errors can occur from time to time. We’ve seen that, potentially, from enforcement. The RCMP is there to enforce against us, and I would expect that if we erred and inadvertently interrupted a client’s funds without legal right to do so, we would be subject to a claim in a court of law or a complaint to the Financial Consumer Agency of Canada — FCAC — et cetera.

Senator Richards: You mentioned that, for instance, certain hockey players playing in the former Soviet Union and Russia right now are having a problem getting their funds. It must put them in a very tenuous situation over there.

Mr. Alsace: It’s a challenge for the clients, and we do what we can for them. We have been advocating on their behalf with the department. It’s unfortunate that we haven’t received a response to date.

Ms. Mason: That’s a situation where, clearly, no error is being made. It’s a question of whether that was a permit or policy exception that would apply.

Senator Richards: I will finish up by saying I agree with that and know that, but it casts a broad net at times. That’s all I’m saying.

Ms. Mason: Agreed.

Senator Loffreda: We’ve covered a lot of ground. What is your biggest industry challenge with respect to identifying the parties to sanction? Would you say its intelligence or technology? Would it be resources or human resources, training or guidance?

I know from my experience that it sounds easy, but it’s very difficult to identify the parties. We had a lot of training with staff and what have you and were always up to date with that. If there were an area of improvement where we can get quick results, especially given today’s geopolitical environment and challenges, where would that be?

Mr. Alsace: One of the biggest challenges we have — and this is going to be very difficult to achieve — is a divergence among the G7 jurisdictions. We operate in multiple jurisdictions and having different lists apply is one of the biggest challenges that we have; different applications in different countries. Whether or not it is foreseeable in the future that we can gain some consistency amongst countries in terms of a list and information that would be included in those lists, that would certainly be helpful.

As Ms. Mason mentioned, we need guidance. That’s really causing us operational impact. If we actually have to halt payments or transactions because we don’t have clarity, it really slows down the process and it really causes strain on my staff. When the sanctions first hit from Russia back in February, I had my team working around the clock, almost 24 hours a day for weeks, just to be able to comply. We knew we had to make sure we processed payments and we got money out the door so that we weren’t impacting customers detrimentally. Part of the challenge is when the government drops large numbers of names on us, or essentially a new sanctions regime, that they perhaps give some consideration to the operational impacts of doing that and if they could possibly do it gradually.

Senator Loffreda: Ms. Mason, do you have any comments on that based on your industry experience?

Ms. Mason: I have nothing to add. I think Mr. Alsace has captured that quite well.

Senator Harder: I want to briefly follow up on my previous question, some of which we have been talking about in subsequent questions. It seems to me that where we are so engaged on ensuring that in imposing sanctions there is a broad alignment among like-minded nations, especially the G7, that there would be a concomitant coordination on the operational implementation of those sanctions across the jurisdictions. If I’m hearing from you that there isn’t, I think that should be one of the major observations of this committee, and a suggestion that the lessons learned, particularly from the Russian sanctions, might be a good way to start. I would like your reaction to that.

Ms. Mason: We are very supportive of seeing the Canadian system evolve. We obviously recognize the importance that the sanctions actually be made. The question is: What can we do to grow the system to make it more effective and efficient as we implement?

Senator Harder: Thank you.

Senator Housakos: My question has to do specifically with what mechanisms the banks currently have in place in order to track down funds that are being laundered and transferred through your institutions into Canada by various authoritarian regimes around the world, particularly when they are using family members or friends and entities that don’t necessarily carry the name of these people we have on various lists.

What mechanisms do the banks have in place in order to track down these very lucrative schemes that some of these authoritarian regimes and corrupt regimes are using to transfer their funds through family and friends into Canada?

Ms. Mason: I believe the commercial programs that we use go beyond the named individuals and attempt to get those types of associations so you can see, by flagging, if someone might indirectly be attempting to achieve the transaction on behalf of the party specifically on the list.

I will turn it to Mr. Alsace for a more practical approach.

Mr. Alsace: We can purchase enhanced lists and enhanced intelligence that we procure from third-party service providers, and we do that as part of our due diligence process, at additional cost. My team, for example, will look at social media to help detect parties who may be related or close to oligarchs or organized crime.

Quite frankly, in my view, anyway, I think it’s too late. I don’t think there is a lot of oligarch money left in Canada. If there was some, it’s gone. I think there was an RCMP report in the spring saying there is maybe $150 million or so. Compare that to the U.K. They have $18 billion, as their OFSI just reported last week.

I think that money has gone to non-rule-of-law jurisdictions that have weak compliance.

Senator Housakos: The focus seems to be on oligarchs in Russia because they are the flavour of the month, but the truth of the matter is there are more regimes around the world that are corrupt and authoritarian in scope than there are democracies.

Above and beyond oligarchs, we have heard from sources how family members of the Iranian regime are laundering money through Canada; some of them are already in Toronto. We have heard through media sources of a number of operations and entities that are funding electoral campaigns here in Canada — even CSIS has brought it to the attention of the Prime Minister — and influencing our elections.

On the one hand, it’s great to say that the banks are confident there is not a lot of oligarch money left in Canada, but based on what CSIS has been saying to the Prime Minister’s Office, the parliamentary committees and our intelligence forces, Canada seems to be a place that is attracting money from regimes in places like Haiti, Iran and other places around the world. I can go through the list.

Besides Google searches and the due diligence you are taking to deal with the process from what I have heard from you, are there any other measures of tangible cooperation with our security forces? When they go to the Prime Minister’s Office and say that there is $250,000 that the Chinese regime used to influence Canadian elections, I assume they ran that money through financial institutions.

Mr. Alsace: I’m not going to talk about money laundering, but from the sanctions evasion perspective, yes, the banks are cooperating with the RCMP. The RCMP is kicking off an evasion project, a public-private partnership that we are involved with. We are looking at that closely.

Ms. Mason: From an AMO perspective — ability, motivation, and opportunity — there is always intelligence coming this way from FINTRAC — the Financial Transactions and Reports Analysis Centre of Canada — if they are looking to us to identify specific indicators which we would then apply as we review unusual or suspicious activity within our organizations in transactions of customers.

Senator Loffreda: I want to follow up on Senator Housakos’ question, which is a good question. In my days, Mr. Alsace, in the financial industry, the first rule that you had to abide by religiously was “Know Your Client,” or KYC. I want you to elaborate a little and not have Canadians concerned about what the banks are doing. How important is the “Know Your Client” rule? How important is it in identifying your parties and the parties to sanction? With technology, if there was one area where you need improvement in knowing your client — because it’s not that easy to open up a bank account. It’s not that easy to deal with a bank, especially in Canada. We all know that. Could you elaborate on that and alleviate the concern we and Canadians have on that issue?

Mr. Alsace: Let me answer the first part about KYC. Absolutely, that’s important. That’s the core of being able to combat financial crime.

Senator Loffreda: The first thing was that, regardless of what the credit rating was, if you don’t know your client, you’re not dealing with them. Is that still the golden rule in the finance industry? We are a nation of trade. Over 80% of our GDP is import and export.

Mr. Alsace: We are, absolutely, but there is increasing pressure, I will say, not so much to know who your client is but who your client is dealing with. In this age, we are now under a lot of pressure to be able to advance instant payments. We’re competing with fintechs that aren’t under the same regulatory regime as banks, and our clients are interacting with them. That’s where the risk is.

There is no obligation to actually identify legal names of parties. That’s the whole foundation of crypto-currency: anonymity. That presents a challenge for financial institutions. That’s where the risk is.

One of the things we need to do in Canada is to attack the beneficial ownership issue, not from a federal perspective but provincially. The provinces have to be aligned on this, and that’s where we still have opaqueness in Canada.

Senator Loffreda: Thank you.

The Chair: I’d like to thank our two witnesses, Ms. Mason and Mr. Alsace, for their very valuable contributions today.

Colleagues, for our second panel, we are pleased to welcome two experts via video conference. We have Craig Martin, Professor and Co-Director of the International and Comparative Law Center at Washburn University School of Law, in Kansas; and Michael Nesbitt, Associate Professor, Faculty of Law at the University of Calgary.

Welcome to the committee. Thank you both for joining us.

Professor Martin, the floor is yours for an opening statement.

Craig Martin, Professor and Co-Director, International and Comparative Law Center, Washburn University School of Law, as an individual: Thank you, Mr. Chair and honourable senators, for the invitation to appear before you today. I applaud the work you are doing in conducting this important review of Canadian economic sanctions law and policy.

By way of overview, in contrast to some of the earlier witnesses, my focus today will be on the broader international law issues implicated by the Sergei Magnitsky Law and SEMA. Indeed, I understand that I was invited to testify because of my policy report Economic Sanctions Under International Law: A Guide for Canadian Policy, which was published last year by the Rideau Institute and the University of Ottawa Human Rights Research and Education Centre.

I understand the report hasn’t been circulated to members of the committee yet, but I commend it to your review as I can’t quite do justice to the nuance and complexity of the analysis in my comments here today. In short, however, there is a tendency in the Canadian sanctions discourse to simply accept that autonomous sanctions, that is, sanctions not authorized by UN Security Council Resolution —

The Chair: Professor Martin, I am sorry to interrupt you. We’re having a translation issue at the moment.

We’ll go to Professor Nesbitt. We’ll fix the technical issue and come back to you, Professor Martin. My apologies.

Mr. Martin: Not at all.

Michael Nesbitt, Associate Professor, Faculty of Law, University of Calgary, as an individual: Thank you, Senator Boehm. I wanted to thank everyone — honourable members of the standing committee and those who worked behind the scenes — who made this review of the SEMA and the Sergei Magnitsky Law happen. It is a sincere honour to sit before you today.

I have had the great privilege to listen to previous sessions, including the one we just had with eminent panellists. Without fail, I’d like to support the commentary that you’ve heard to date.

I am an academic in the field of criminal and national security law primarily and thus the bulk of my commentary today will focus on the relevant sanctions regimes from a legal and particularly a criminal law enforcement perspective. Having said that, in the past decade I have also had the privilege of working as a diplomat for Global Affairs Canada, who I will call GAC from here on out, including on international law and sanctions law, as well as being the team lead on Syria and Iran sanctions policy.

With that, let me tell you briefly the story of autonomous sanctions enforcement in Canada. In Canada, good and responsible large private actors — the ones you just spoke with from big financial institutions — are primarily, indeed almost exclusively, responsible for our autonomous sanctions enforcement. On the government side, enforcement and punishment is almost entirely absent. How do we know that? We have never charged an individual under the Magnitsky Law with a sanctions violation. In 30 years now, since the SEMA was introduced, by my count we have charged one individual and one company for violations. Keep in mind that during this time we have had tens of thousands of sanctions on the books under the SEMA and the Magnitsky Law, hundreds of millions or more in frozen assets and criticism from U.S. agencies about a lack of enforcement, as well as from respected international organizations speaking to Canada’s failures to stem the tide of money laundering and sanctions-busting activity.

I’ll add that, as someone who follows this closely, every once in a while — what seems like every six months to a year — we see a Canadian arrested in the U.S. for sanctions evasions, the details of which often appear to indicate that Canada too might have enforced under our laws. Right now, it seems the U.S. is doing more enforcement of sanctions-busting activities happening in our jurisdiction than we are. This failure to enforce is a rule-of-law failure. It sends a message to would-be sanctions busters that we are open for business at little expense, and sends a message to allies like the U.S. that we are not a serious partner on the file.

As a starting point, I have three recommendations to begin to remedy enforcement. First, we need a comprehensive review of the legislative regime pertaining to autonomous sanctions, with domestic law enforcement as a focus. As but one example of a possible legal change, to my mind there is no legal reason, domestic or international, right now that would prevent us from changing the SEMA and Magnitsky Law to provide for the power to list known transshippers and the like, even if those transshippers are incorporated outside of the targeted country. If we do not have the courage to go after known transshippers for targeted countries, as the U.S. did several weeks ago, that is and must be a political decision, but one that is made consciously.

Second, we need a civil law sanctions enforcement regime with significantly higher fines. Under a strictly criminal regime, as exists, we will run into what we call in national security law the intelligence-to-evidence dilemma if we have not done so already — and I suspect we have. The easiest solution is to give the option of regulatory or civil law enforcement of autonomous sanctions, with significantly higher penalties for breaches. Criminal enforcement against companies, as we’ve seen in our one enforcement action in 30 years against a company, is already dealt with through fines, and small fines at that. A civil regime would allow for greater fines that will have more of a deterrent effect and provide benefits associated with avoiding some of the troublesome aspects of our criminal disclosure regime and the elevated standard of proof in criminal trials.

Third, we need to think differently about how the autonomous sanctions file is managed. Right now, our reviews of autonomous sanctions seem limited by assuming that GAC should continue to be the sole lead on the file and the money should, in general, follow. It is time to question that assumption. CBSA needs money and the opportunity to renovate its work on sanctions — I know there is some coming, perhaps — and more autonomy to lead the way on this. The same is true of the RCMP. But beyond them, CSIS, CSE and the Treasury Board are also implicated. Similarly, one organization not mentioned to date is the Public Prosecution Service of Canada, or PPSC, who will ultimately prosecute these offences, yet there is no internal expertise in this area. We have seen no monetary or human resources commitments with respect to these latter organizations, or much of any talk of money for PPSC and others.

In terms of where to focus, we should also look abroad for solutions, including to the U.K. and U.S. There is no GAC equivalent in those countries that has the responsibilities for the sanctions file that GAC does. In the U.S., for example, the Office of Foreign Assets Control, under the U.S. Treasury Department, is the holder of financial intelligence and helps with the listings, putting together what is essentially the legal case and the finances, investigates shell companies and facilitates the actions and so on. Enforcement is prepared from the moment a listing is first considered and that cannot be done by a state department or Global Affairs.

In the U.K., GCHQ will help with open-source investigations at least, if for no other reason than to hide traces of websites visited from government sources looking up potential sanctions targets. GAC does not have the skills necessary to do all of this investigative, legal and enforcement preparation work, much of which has to happen before a listing ever takes place. Moreover, if the goal is coordination, GAC, likewise, might not be the best lead. Investigations could take months or years and GAC has turnover built into its diplomatic function in a way other relevant Canadian agencies do not. Put simply, you are going to go aboard every three years or so and leave the file.

Finally, the legal issues surrounding the enforceability of sanctions are, at the end of the day, on the enforcement side, largely domestic. As a result, I would suggest we take this time to consider whether other agencies should at least have a co-coordination role and how this can be done. Thank you.

The Chair: Thank you, Professor Nesbitt. We’ll go back to Professor Martin. My apologies once again. It’s what we call force majeure. Sometimes things don’t work the way they should.

Mr. Martin: Thank you, Mr. Chair. There is a tendency in the Canadian sanctions discourse to simply accept that autonomous sanctions — that is, sanctions not authorized by the UN Security Council — are lawful. There is an assumption that if all of our allies are imposing similar sanctions regimes they must be legitimate and lawful, and indeed virtuous, as the best way to enforce human rights and other international law obligations.

But this somewhat complacent view neglects serious questions being raised in international institutions, in international law scholarship and in the statements and practice by states in other regions of the international community regarding the legality of certain kinds of autonomous sanctions and in particular whether certain sanctions often imposed in the name of human rights do not themselves violate human rights norms and obligations, potentially constitute unlawful intervention in the sovereign affairs of target states and ultimately undermine the international rule of law.

What is more, these arguments are most strongly made by states in the global south precisely where Canada has traditionally tried to champion the rule of law and human rights compliance. There is thus potential tension between the human rights objectives of Canadian sanctions law and policy — the effectiveness of which is often very much in question and has been raised in questions in this committee — and the possibility that such law and policy causes real harm, undermines Canada’s broader foreign policy objectives, makes it vulnerable to charges of hypocrisy and is inconsistent with its own constitutional values. Canadian policy-makers need to be more sensitive to these international law implications, develop and implement its economic sanctions law policy more fully informed by the relevant principles and norms of international law and provide a fuller and more detailed public explanation of how such law and policy are, in fact, compliant with international law.

Let me explain a few of these points in the time I have remaining. To begin with the human rights and humanitarian considerations, there are two possible concerns. The first is that statewide sanctions under SEMA, when taken in coordination with allies, create comprehensive sanctions regimes — such as those imposed on Iran prior to 2016, or on Venezuela and more recently on Russia — which are increasingly understood to cause food and health insecurity in target populations leading to real harm and suffering. Humanitarian exceptions built into such regimes for medical supplies and food are typically ineffective because there is over-compliance in fear of violating the regime. There is a growing recognition that such regimes that cause food and health insecurity may violate human rights obligations.

The second way in which Canadian sanctions law raises human rights concerns relates to the targeting of individuals under both the Magnitsky Law and SEMA. The committee has already heard extensive testimony on the absence of disclosure, transparency and guidance relating to the designation of individuals for sanction. The failure to explain what criteria are used to designate people or what evidence was relied upon in specific cases, and the absence of a transparent procedure with clear evidence and other standards for challenging or appealing such designations, all raise issues of procedural fairness and fundamental justice, values that are not only part of international human rights law but, of course, Canadian administrative and constitutional law.

As the committee has heard, many other jurisdictions, particularly in the European Union, provide a much more robust protection regime in these cases. A separate area of concern is that some autonomous sanctions, particularly comprehensive sanctions regimes, may be viewed as being coercive and thus rise to the level of constituting unlawful intervention in the sovereign affairs of the target state. American sanctions against Venezuela, in which Canada participated and which were widely viewed as being aimed at forcing regime change, would be an obvious example. Again, this is a complex area of debate in international law, but many states in the global south have taken the position in the United Nations and elsewhere that such sanctions are a violation of the principle of non-convention.

I have some other thoughts on issues of countermeasures and whether Canada could or should employ secondary sanctions, but I will save those for the question and answer session.

In closing, this has only been the barest thumbnail sketch of some of the international law issues implicated by Canadian sanctions law and policy, and I don’t want to overstate the case. Many of these questions regarding the lawfulness of sanctions are unsettled and contested. The unsettled nature of these issues calls for caution and the primary point I would like to leave you with is that the Canadian government has not done enough to publicly address these questions to explain how its sanctions law and policy comply with international law. I would suggest that there are indeed ways in which Canadian law and policy may not be consistent with international law or certain Canadian values, and that even doubts regarding Canadian non-compliance can operate to undermine Canadian efforts to strengthen human rights and the international rule of law.

I thank you and I look forward to your questions.

The Chair: Thank you very much, Professor Martin. Thank you both for excellent opening statements. We’ll go immediately to questions. Senators, as you know, we’re looking at four minutes, so please keep your preambles short and let’s see if we can get the maximum out of this question period.

Senator Simons: My questions are for Professor Nesbitt. It is nice to meet you someplace other than Twitter. You worked inside GAC as a team lead on the Syrian and Iranian sanction policy, and you make a very strong case that GAC as sole lead doesn’t have the investigative capacity to do this work. What I wonder is: Does CBSA or the RCMP have the investigative capacity to do this work? The RCMP has long struggled with white collar and financial criminal investigations.

From your perspective, having been inside GAC, what kind of resources do we need to make these sanctions regimes meaningful? Because the fact that we failed to convict anyone seems a pretty dire commentary on the effectiveness of the procedures.

Mr. Nesbitt: Thank you, Senator Simons. It is also a pleasure to see you here and not on Twitter. It is a great question. I will do my best to answer. It has been a while. I would use OFAC in the U.S. perhaps as an example of an operation that has been effective.

I don’t know what to say about the RCMP, because when you’re getting to the RCMP you’re talking about enforcement after the listing has taken place, and a big part of our problem is that process of ensuring enforcement can later happen — we’re getting all the tentacles associated with an individual that we want to list — has to happen before the listing takes place. In the U.S., you have a number of agencies who are sitting around the OFAC table. The State Department is absolutely there because they are the ones — just like GAC — which will have the intelligence on the individuals abroad that you wish to name in the first place. But someone has to have that financial intelligence to look at corporations — numbered corporations — in which the individual listed might be on the board and we could list them to put together the open-source investigation to ensure that a listing is justified if it’s ever challenged in court, which would include CSIS and CSE possibly. They would also provide that to the RCMP.

I don’t have a good answer for you, but in the U.S. the answer is essentially something like the Department of Finance or Treasury Board with a designated department which specializes in this so you don’t have someone leaving for a diplomatic mission in two years and a total loss of knowledge on the file. It is their file and what they do year in and year out, so you keep the same people there. Does that help?

Senator Simons: It helps, but it seems to me that we almost need a completely new agency that would have the talents of criminal prosecutors, people who can do the forensic accounting. It doesn’t seem to me like a diplomatic mission and it is not conventional law enforcement either.

Mr. Nesbitt: I think that’s right. What the U.S. does is it brings people around the table. You have a coordinating body that says, “It sounds like we need the RCMP,” and there will be someone seconded, much like we do with our integrated national security enforcement teams, where we put them all in one room when we’re investigating a national security offence. To prepare the listing, you bring them all into one room. Because you’re not going to find all of this expertise in one building. You’re certainly not going to find it in Foreign Affairs, which is my concern with much of this happening just in one building and particularly in one that doesn’t have financial expertise, as much as they do have the foreign intelligence expertise.

Senator Simons: Thank you very much.

Senator Loffreda: Thank you to our panellists for being here with us this evening. My question is for Professor Nesbitt. You did mention that the big financial institutions are exclusively responsible for identifying parties to be sanctioned and that government sanctioning is totally absent. Should we expand that responsibility?

You did say that you listened to our previous panel discussions when I did mention the “Know Your Client” rule, which was the golden rule — you had to know your client — but it does get complicated, as you heard. You have to know your client and who they’re dealing with, and you do trust — trust is the currency of every relationship — that your client knows their clients. But it’s becoming more and more difficult to do that.

Should we expand the responsibility to the business community? Would that be too large of a burden for the business community to take on, and maybe government? And I say government because if we do expand that responsibility to government to a certain degree and extent, maybe we would see a lot more sanctioning.

Mr. Nesbitt: Yes. I mean, my take is that you’re right on this. It has got to be the responsibility of both. RBC was right to respond and say we’re the ones with the financial information about our clients and all that. The stuff about that is absolutely bang on. On the other hand, we have to be listing the right people in the first place and have to have the intelligence to support that listing — as Professor Martin alluded to — when we go ahead with, in this case, a criminal trial so we can justify that the person was listed in the first place. That means we have to have this back-end knowledge and intelligence and there is definitely going to be some knowledge and intelligence that our security forces, for example, will have that it’s possible big banks might not that could be shared from the U.S. Again, we’re going to get back to whether you can use that in court. Well, it’s going to be hard in a criminal trial, but it might be easier in a civil trial. That’s why I make that recommendation as well. I think government should have this because a lot of this work should be happening before the listing ever takes place.

Senator Loffreda: Professor Martin, would you like to add something to that?

Mr. Martin: Well, I agree with Professor Nesbitt’s last point. I think really it’s crucially important that this information not only be in the hands of government when it’s designating these people. As you heard from testimony a couple of weeks ago, which I had the opportunity to review earlier this week, I think it’s essential that the government provide some of the criteria that they’re using for designating these people — the kinds of intelligence and information that they’re using in designating these people — so that the public and those outside of Canada have some confidence in the basis upon which these people are being designated, and far less how that information is then going to be used in the course of legal proceedings, whether it be criminal or civil. So I would agree with Professor Nesbitt on that.

Senator Loffreda: There is sanctioning and a lack of sanctioning by the government, which is totally absent, as you mentioned, but the large word I would like to have you elaborate on is prevention and anti-money laundering, or AML. I would like to think that in Canada, given our policies, regulations, restrictions and intelligence that we are efficient in preventing AML. Maybe we can come back on a second round and you can offer a quick remark, if you would allow it, chair.

The Chair: There is no longer any time now for a quick remark, but absolutely on the second round.

Senator Loffreda: Keep that one on your front burner.

The Chair: It is something to think about as we move ahead.

Senator Woo: I have questions for both of our witnesses but let me start with Professor Martin. I would like you to comment on what might be called the leading edge of sanctions to date in this country. In some ways, we are trying to be at the leading edge and pushing the envelope. One is, of course, the recent bills to not only freeze and seize, but also to repurpose assets, not only under SEMA and the Magnitsky Law, but also under FACFOA, which is really about legal agreements between countries. I would like you to talk about the problems of international law that you might see, Professor Martin, in this attempt to repurpose assets.

The other area of the cutting edge in Canadian debates and sanctions is secondary sanctions, which I think Professor Nesbitt is essentially advocating for or has alluded to. We are subject to secondary sanctions sometimes and try to block them. I would like you to comment on the legality in international law. How problematic are these two ideas in Canadian sanctions thinking?

Mr. Martin: Thank you, Senator Woo. I’ll start with the second question first because I think it is a crucially important one. In my report, I address this because there has been scholarship and policy advice, I think, within the Canadian discourse suggesting that Canada should engage in more secondary sanctions. By secondary sanctions, just so everybody is clear, we’re talking about sanctioning both third states — states other than the target state — and also entities and individuals within those third states as a way of deterring or preventing them from transacting with other individuals or the target state itself.

As you allude to, Canada is very familiar with the concept of secondary sanctions because it has been the victim or Canadian entities have been the victim of secondary sanctions in the form of the Helms-Burton Act, most famously, which sanctioned any entities or individuals who purported to engage in transactions with Cuba.

Secondary sanctions are heavily criticized in international law and are argued to be unlawful under international law precisely because they violate international law principles on jurisdiction, specifically principles that limit and constrain governments or states from engaging in the extraterritorial application or enforcement of domestic law — that is, prescribing laws to people outside of the territory of the state. Canada, so far, has not engaged in secondary sanctions. Indeed, Canada, like a lot of European countries, have enacted laws to counteract the secondary sanctions of the United States. The United States is the most aggressive participant in secondary sanctions in the world, and countries have passed laws to counteract and to immunize their own individuals and entities from the operation of the secondary sanctions of the United States.

In my view, it is a mistake for the Canadian government to contemplate becoming more aggressive or even to begin. As I said, Canada has not so far engaged in secondary sanctions. I think it should not. That would be my recommendation.

I think I might be out of time so I can perhaps come back to the freezing of assets question in the second round.

The Chair: You anticipate very well, Professor Martin, indeed; we can try to come back to that in a second round.

I might add that I think that’s a very good point to focus on in our further deliberations as well, this repurposing question.

Senator M. Deacon: Thank you both for being here. These are really thorough presentations and questions. Professor Martin, you noted that the international courts have ruled that it is a violation of human rights not to provide people subjected to targeted sanctions with reasons and a process for challenging their sanctions. We’ve heard during our review that the government has yet to develop a mechanism that allows individuals and companies that are listed under sanctions to challenge them or allow them to understand the basis for their listing. I’m wondering if you could maybe dream, even, or if you could share with us what an appropriate appeals mechanism would look like in practice.

Mr. Martin: Thank you, senator. To begin with the premise of your question, international courts, and in particular the European Court of Justice, as it was then called, in the famous Kadi case, held that the implementation of the United Nations Security Council-authorized sanctions themselves, which would normally be considered to be above any other law under articles 25 and 103 of the UN Charter were, in fact, violations of European human rights obligations by virtue of not having provided notice and opportunity to be heard, to make arguments and to learn of the basis for designation. I do think that it is an enormous problem for Canada that it does not have a mechanism in place for both providing information and notice, but also giving people an opportunity to make submissions, to challenge and to learn of the evidence that is being used against them in designating them for sanctions.

To your question of if I were to dream of what sort of mechanism I would suggest, in the best of all worlds, there should be judicial review and that individuals who are designated for sanctions who want to challenge that should be able to first bring a challenge to the government, but they should have an opportunity on the basis of a rejection of that application to bring an application for judicial review in the courts. I think that there has to be some mechanism. Even the United Nations, after the Kadi case, the Security Council put in place an ombudsman mechanism for ensuring that people who were designated pursuant to UN sanctions and UN Security Council designated lists would have an opportunity and a mechanism for challenging their designation. So Canada, it strikes me, is truly an outlier in not having any mechanism of any sort in place.

Senator M. Deacon: Thank you.

Senator Housakos: My questions can be answered by both professors if they wish to. I would like to know from their point of view, when it comes to using the Magnitsky Law as a tool in Canada, how effective has the Canadian government been the last few years in applying Magnitsky sanctions in comparison to our allies, in particular our Five Eyes allies and those who have legislation like the Magnitsky Law at their disposal?

In my second question, I’ll ask for your comment and your view. Earlier I heard bank executives talk about how they see no problem, there is no more oligarch money in Canada and money laundering is not a big issue. If you listen to them, they have all the tools they need. But when I talk to people in the private sector and people in real estate promotion, the real estate development business and shipping business, they seem to believe we have a serious problem with money laundering in this country and they believe it is coming from various entities. Obviously, there is a lot of attention on the oligarchs, but it is coming from a lot of organizations and regimes around the world who are involved in dubious activities. Can I have your comment on both of those points of view?

Mr. Nesbitt: I don’t have too much to add other than that I agree with you. The big banks are catching what they are able to catch. If someone wants to send money in lower amounts from Toronto to someone else at home who is associated with Hezbollah, that’s not getting captured, and we know that because that’s a crime and we’ve never seen a prosecution of it. We know it’s happening. It’s not just sanctions; we have an overlap of offences there. We have a terrorist-financing offence and a sanctions offence, and neither of them are getting captured and neither ever have in the last 20 years.

Mr. Martin: The one thing I would add is that it is important to distinguish and to keep some clarity in the distinction between general money laundering and problems of corruption more generally and the specific purpose of the economic sanctions regime.

Again, this gets to some questions that I think were asked in previous sessions about how effective sanctions are, and their purposes and objectives. It might be that, in some ways, the sanctions regime is failing to capture some of the activities that the sanctions regime was designed to capture, but it may also be that some of the activity the senator is referring to, which is general money laundering, as nefarious as that might be and as much as we might want to capture that under different regimes, it might not necessarily be a failure of the economic sanctions regime that such activity is going on.

Senator Housakos: My other question is this: How well has the Canadian government used the Magnitsky Law in comparison to other governments that have that tool at their disposal?

Mr. Nesbitt: We have used it poorly in comparison to the U.S., and I can’t speak for other jurisdictions. Again, we have no prosecutions whatsoever.

Mr. Martin: I would defer to Professor Nesbitt, who has more particular expertise on the enforcement of the Magnitsky Law.

Again, however, I would go back to this question: What do we mean by “how effectively has it been used?” That needs a frame of reference. Certainly, the United States has been more aggressive in enforcing its sanctions regimes, so in that sense, it has been more effective in clamping down on the individuals who have been designated under their sanctions regime than Canada. If that’s the sense in which we mean “effective,” then yes, I think other jurisdictions have been more effective.

Senator Busson: My questions are motivated by the comments of Professor Nesbitt, so I am posing my question to you, professor.

You mentioned a number of times that we in Canada have been criticized by our international partners for a failure to enforce. Another comment you made was that there is no expertise within the public prosecutions area to deal with charges.

My question started out being about who is in charge of charge approval in this regime, but I think I already know the answer to that. So the spinoff from that question is this: Is there, in your opinion — you mentioned the United States — an enforcement model internationally that you would recommend to start looking at as the design for an effective enforcement regime in Canada? There is the old saying “If you build it, they will come,” but if things are properly funded, is there any possibility that, if this was properly managed and proper enforcement and prosecutions took place, it would be a self-funding effort?

Mr. Nesbitt: It’s a great question. I don’t know whether it would be a self-funding effort in that regard.

More generally, most sanctions — perhaps getting back to the previous question with respect to deterrence — will be effective because money is cut off by the big banks. So the enforcement will not play a huge role in that. It signals that we are taking it seriously to both the bad actors and allies. We have laws on the book; we should enforce them.

Importantly, it does play that little bit of a deterrence function. It will be in the news. Individuals will see that these are being enforced and that they exist. A lot of small- and medium-sized businesses that might want to send who knows what kinds of goods to a country where we have sanctions might not even know about it. I think it would play that role.

Whether it would be self-funding, I don’t know. We have a lot of places where we can look for examples of, frankly, better processes in terms of coming up with these lists than Canada. Again, the EU, the U.K. — the U.K. probably more so that than the EU, to my mind — and the U.S. would be other places to look.

In terms of the model itself, I have a bit of a disagreement with labelling; secondary sanctions is what I have recommended. Secondary sanctions mean, for example, that the U.S. says to a Canadian company that it can no longer deal with a Cuban company, or else good luck dealing with an American company. What I am saying is to list the people who can already be captured under Canadian sanctions.

One of the enforcement mechanisms about which you are asking for a model is that if you know someone is involved in the transshipment process from Canada and they also have operations in Canada, we could currently capture them. The problem is that we will not capture them because they are not listed, and CBSA will not know that at the border. The difference in listing that third-party country, which would already be captured under our current sanctions, would be that we are formally listing them, but the benefit of that is it sends a signal to the CBSA — those who are looking at the packing slips as things go abroad — that this would be captured. It would also do the same for small- and medium-sized businesses.

[Translation]

Senator Gerba: My question is for both witnesses, and I thank them for being here.

Some witnesses recommended that the sanctions be reviewed periodically to ensure their effectiveness and above all their rationale. What are your thoughts on that? What is the current process for removing sanctions and who decides to do that?

[English]

Mr. Martin: I absolutely agree. I heard the testimony; most recently, I think Professor Lilly was making arguments that there should be sunset clauses and periodic review. That is absolutely an essential component. As she pointed out, part of the reason you are having these hearings is precisely because there is such a sunset clause that is forcing this review. I think it’s an essential component.

As Professor Charron also mentioned in her testimony, it is the case that, even for UN sanctions, Canada has failed to remove its sanctions for several years after the UN sanctions had been terminated. So these are what then amount to be autonomous sanctions remaining in place after the raison d’etre of those sanctions have been eliminated. That speaks to the fact that Canada is not engaging in sufficiently timely review of its sanctions.

I would leave it to Professor Nesbitt, since he was in Global Affairs, to explain precisely what the mechanism is currently in place for that process.

Mr. Nesbitt: In terms of Foreign Affairs, I don’t know what the process is right now. We have had a number of changes to the processes in the last 10 years, so I can’t speak to how they are being reviewed. We know there are presumed deceased individuals on sanctions lists, so you’d question whether they’re being reviewed, certainly, with that knowledge, but whether they are or how they are, I don’t know.

In terms of periodic review, we have it for all our other criminal-listing regimes, like the Criminal Code-listing regime. It’s there because it’s thought to help uphold the regime, constitutionally and legally. If that’s thought to be the case, then it should exist for this regime as well. But if we intend to enforce one day, one can imagine a legal challenge there, and one can imagine throwing the government’s words at the government by saying, “We had to have it for the five-year penalty for the terrorism offence and listing, but we didn’t have to have it over here for this listing.” I wish the prosecutor luck in explaining that one.

There absolutely has to be a periodic review because we have literally said there has to be proper review so that we have the right people on these lists.

Senator Greene: I’m wondering if you think there is perhaps more value in looking at areas we can combine into a brand new agency to deal with all of these questions and issues — sort of a one-stop do-it-all. Or should we be expanding the model of existing agencies such as FINTRAC in order to be involved in these areas? Could refurbishing what we have be a possibility or should it be the creation of something new? Where would you stand?

Mr. Nesbitt: I don’t know. This is exactly the kind of stuff I would like to see studied. It will be a question of what’s effective within government according to the experts in government that are doing this today. I wouldn’t want to say too much. I would want to defer to the ton of internal government expertise on this that could get the job done. However, someone will have to question whether GAC is the right place to be coming back with the answer, which seems to keep more money and power within GAC, frankly.

In terms of other new agencies, in the last six months, we’ve announced the possibility of a money laundering and terrorist finance agency — I’m not clear what it is. Maybe it’s an agency or maybe it’s within an existing agency, but we have had an announcement of it. Certainly, sanctions would fit nicely within that, whether it’s a standalone or within an existing department. It might be that rather than talking about a whole new agency, we’re just talking about a designated group that spends all of its time coordinating this kind of stuff and ensuring that PPSC has enough money to send one prosecutor there to give the advice and the RCMP has someone designated to liaise and do that sort of work.

I’m sorry, that’s not a great answer for you, but I think there are a number of effective options, all of which would be better than what we have.

Mr. Martin: I wouldn’t have much to add. Bureaucratic design is outside my expertise. As Professor Nesbitt indicated, there are clearly other stakeholders — the Department of Justice clearly comes to mind — who might add value by being involved in the process. Whether that is true as a comment or just people around the table as with the process Professor Nesbitt described in the United States, I think that’s a design issue. I do think that a lot of the other previous witnesses have indicated that a lack of resources, both human and financial, is really what is at issue in some of the shortcomings that have been identified.

Senator Simons: Just as the previous panel was ending, we got into a brief conversation about the role of crypto-currencies in the movement of money around the world. I wanted to ask each of these professors, from their areas of expertise, what challenges the rise of crypto-currencies have added to the enforcement of these kinds of regimes or, I guess, in Professor Martin’s case, to the understanding of whether these regimes are still even a functional model for us.

Mr. Nesbitt: I’m not an expert in crypto-currency, so I will avoid answering that. I will say, consistent with some of the testimony you’ve heard before, that the U.S., for example, came out with a series of very detailed explanations as to how crypto-currencies would be dealt with under the sanctions regimes and provide training to private sector actors, including financial institutions, as to how crypto-currencies were covered by existing and new U.S. sanctions. Again, we have not done anything similar. Unfortunately, that also means a lot of us aren’t in a position to make any comments because we have a dearth of information.

Senator Simons: That doesn’t sound good.

Mr. Martin: I also have not done a lot of work on crypto-currency. However, I would point out that one of the reasons the United States has such a powerful leverage in the world of sanctions is because virtually all financial transactions have to, at some point, go through American financial institutions. So when we’re thinking about things like secondary sanctions and the conversation I had in response to Senator Woo earlier, Americans could argue that it’s not actually a secondary sanction if, in fact, the sanction is being applied to an American financial institution at some point in the chain of transactions. Since every transaction is eventually going to have to go through a U.S. institution if it’s denominated in U.S. dollars, then this gives the United States enormous power in the sanctions world.

Crypto-currency does have the potential of short-circuiting that in the sense that it doesn’t then necessarily — potentially — have to go through, for example, an American financial institution if you’re simply dealing in crypto-currency on the blockchain. It does raise questions, but I don’t have the expertise to drill down into that and say what that means for sanctions regimes generally, but it does raise interesting questions.

Senator Simons: Donald Trump declared his attempt to run for the Republican nomination. So much of the international architecture of this is predicated on the idea that America is going to follow a rules-based international order. Should we come to the day again — even if it’s not a Donald Trump — that there is another American president whose interests are antithetical to Canadian interests and Canadian values, how difficult is it for Canada to run an independent sanctions regime that is not dependent upon that American architecture?

The Chair: Senator, we have run out of time. Can we take that as a statement? We won’t have a third round, but maybe we can pick up on that.

Senator Loffreda: I want to go back to the question I asked in the first round where we discussed the shortcomings, the lack of sanctioning by the government and prevention. Can you elaborate on any recommendations to improve these areas of weaknesses that you have identified? You did discuss a transfer overseas not being identified and the responsibility being exclusively on the financial institutions. But how can we capture some of these transactions given today’s technology? Where would you say recommendations should be made? Would it be on the technology side, the resources, the intelligence, the guidance or in our legislation? What can be added to capture these transactions? I would like to alleviate the concern on the AML that you have expressed.

Mr. Nesbitt: You are looking at two main areas. One is the shipment of goods: dual-use goods, goods that could be used as weapons, goods that we have sanctioned with a foreign country. That’s where I get to the transshippers. We know what’s happening. We can all name the ports. We know what ports Canadian goods end up in. The shipping label switches over, they go across the Strait of Hormuz, and in they go. So the easiest solution is that you start labelling some of those transshippers and you get a little better at the shipment of goods.

Again, the U.S. did this with a number of countries that were essentially Iranian, but operating out of a number of other countries like Turkey, about two or three weeks ago. It wasn’t secondary as I understand it, in this case anyway. It was just looking at countries that are facilitating sanctions-busting from American territory.

The more prescient question was the one about finances. The answer, I think, at least in small part, is to just let our smart government bureaucrats do the hard work to come up with the intelligence.

Now, one of the problems that you will have, particularly if this remains a purely criminal regime, will be disclosure of intelligence that is secret or top secret which we don’t want to disclose in court. You’re going to be talking about not just a lot of hard work in the background in terms of making connections between individuals and offshore numbered companies, et cetera, but you’re also going to have to do a lot of that in the open-source intelligence realm.

Again, a lot of that is working with the banks, sharing more information with them and it’s spending more time at the listing regime up front so that we ensure we have the companies and affiliates mentioned from the beginning.

The Chair: Professor Martin, do you have anything to add on this point?

Mr. Martin: I don’t have much to add to Professor Nesbitt’s point.

Senator Woo: Professor Nesbitt, your testimony is focused very much on improving the effectiveness of the current sanctions regime. The primary question, it seems to me, is whether sanctions are working. This is something we have been discussing in previous hearings.

Fortunately for us, you are not only a scholar of sanctions but you are a practitioner. You ran part of the operation. I want to ask you, in terms of the two principal criteria for the success of sanctions — which are deterrence and behaviour change — what has been the track record of our sanctions on DPRK, Venezuela and Syria?

Mr. Nesbitt: I would love to have an answer for you. As Professor Martin has alluded to, I wish we had these sorts of studies to look at: Are they effective? What’s the effect on human rights? Are they doing what we’re intending them to do?

Senator Woo: On deterrence and on behaviour change, you cannot make a judgment on that?

Mr. Nesbitt: I can tell you two things. I think you’ve gotten that answer a few times in the past, and I won’t answer any more than what they’ve said, other than to say there are two things we have to keep in mind.

One, independent of deterrence, in terms of what Canada adds in value, we are trying to be good allies with others, like the EU, the U.S. and the U.K. The other thing we have to consider in terms of deterrence is the goal is not to completely prevent this sort of behaviour. It’s to make it harder and more expensive. We can say fairly clearly that we’re making things harder and more expensive because, at the very least, if the banks are right that the money is flowing out of Canada and into somewhere else, that costs money and time, and it is difficult.

At minimum, you can say there is there a deterrence level there. Beyond that, we don’t have an answer because they’ve not been studied.

Mr. Martin: This question of whether sanctions are effective is a fundamentally important question that this committee is asking. I’ve listened to other witnesses, and there hasn’t really been anyone who has been able to say, “Yes, absolutely.” There is a wealth of scholarship in other areas, other disciplines, that suggests that broad, comprehensive sanctions are not effective in changing behaviour.

I don’t have the expertise to answer the question specifically on whether it has been successful, but I would like to offer a way of thinking about the question. It strikes me, if we think about human rights and constitutional law jurisprudence, a method of analysis which is reflected famously in the Oakes test in Canadian Charter jurisprudence is that if rights are being violated — and we know that comprehensive sanctions are causing humanitarian suffering in some cases — then the first question you ask is: Is the objective important? I think everyone would agree that the stated objective of sanctions is incredibly important.

The next question you ask is whether the means are rationally connected to the ends and whether they’re the least restrictive alternative. If the government cannot establish that these sanctions regimes are effective, then it’s a hard case to make that they are rationally connected, far less being the least restrictive alternative.

The third question, of course, in this kind of approach to human rights and constitutional analysis is to ask whether the benefit to be obtained through realizing this objective is proportionate to or outweighs the harm being caused. Again, if the government cannot establish that these sanctions are effective, then it’s hard to make the case that the marginal benefit to be obtained — particularly if it’s some marginal benefit that is more expensive and more difficult for certain things to be done by nefarious people — outweighs the very real, empirically established harm that is being caused by comprehensive sanctions in countries like Venezuela and Iran.

That’s one way to think about the effectiveness question.

[Translation]

Senator Gerba: Professor Martin, you indicated earlier that sanctions can sometimes have consequences, particularly for food insecurity, and for the populations of developing countries. Is there a way to impose sanctions without hurting those civilian populations? Can the sanctions be formulated in such a way so as to allow for the protection of vulnerable populations?

[English]

Mr. Martin: Thank you, senator. This too is a fundamentally important question. We learned from the experience in the 1990s with the very comprehensive sanctions regimes against Iraq that caused fairly widespread humanitarian suffering and harm and deaths in Iraq that those sorts of blunt comprehensive sanctions regimes were causing real harm. One of the answers was the development of so-called smart sanctions, targeted sanctions, as a way of trying to minimize that, as well as developing humanitarian exemptions and exceptions within comprehensive sanctions, like trading and financial embargoes on states.

For example, a comprehensive sanctions regime on Venezuela would allow for the delivery of food and medical supplies and so forth, so as not to affect the public health.

The problem with those humanitarian exemptions and exceptions is that the companies that are engaging in trade with those target states are typically going to over-comply, and the exemptions are not going to operate effectively.

For example, we know, because there is already empirical evidence, that U.S. sanctions on Iran during the pandemic likely caused undue illness and death precisely because medical supplies were not getting through, notwithstanding the fact that the United States claimed that there were humanitarian exemptions put in place precisely to prevent that kind of harm from happening — but it did happen.

And so the short answer to your question is we don’t know how to design sanctions in a way that they’re not going to have these sorts of collateral harms, particularly when you get beyond targeted sanctions and have any sort of comprehensive sanctions regime — which we do with respect to Venezuela, Myanmar, Iran and a number of other countries.

Targeted sanctions, of course, have the other problem, where you have the due process issues: You’re not causing harm to the general population, but you’re now potentially having due process and individual rights issues with respect to the people who have been targeted.

I’m not sure if that entirely answers the question.

The Chair: Thank you very much. We are out of time. On behalf of the committee, I thank Professor Nesbitt and Professor Martin for joining us today. Thank you for your very helpful answers and comments.

Before we adjourn, colleagues, I remind you that we will reconvene tomorrow morning at 11:30 in this room to once again discussion the situation in Ukraine. Tomorrow’s meeting will be a one-hour meeting with Canada’s Ambassador to Ukraine Larisa Galadza.

(The committee adjourned.)