Canada: Doing Business In Cuba: Understanding Canada's Blocking Legislation

www.mondaq.com/ By Roy Millen and Laura Cundari  

Canadian corporations with U.S. ownership or affiliates must navigate inconsistent requirements related to doing business in Cuba. Canada's Foreign Extraterritorial Measures Act (FEMA) and orders issued under FEMA are quite different from legislation enacted by the U.S. This bulletin summarizes the various provisions so that potential problems can be identified and addressed prior to a breach arising.

FEMA AND THE 1992 BLOCKING ORDER

FEMA is referred to as a "blocking statute": it is aimed at limiting the effect of foreign exterritorial measures. It is primarily an enabling statute, as it authorizes the Attorney General of Canada to make orders blocking extraterritorial measures from being taken. An individual or corporation that breaches either FEMA or an order made under FEMA can be subject to sanctions.

To date, FEMA has only been used to block U.S. extraterritorial measures related to Cuba. In 1992, in response to expanded U.S. trade sanctions with extraterritorial effect, Canada enacted an order under FEMA referred to as the "1992 Blocking Order". The 1992 Blocking Order explicitly applies to the U.S. Cuban Assets Control Regulations or any other similar legislation that purports to affect trade between Canada and Cuba. With respect to doing business in Cuba, there are two significant requirements under the 1992 Blocking Order: a reporting requirement and a compliance requirement.

Reporting Requirement

Under section 3 of the 1992 Blocking Order, Canadian corporations and their directors and officers must give notice to the Attorney General of any "directive, instruction, intimation of policy or other communication relating to an 'extraterritorial measure' of the United States in respect of any trade or commerce between Canada and Cuba that the Canadian corporation, director or officer has received from a 'person who is in a position to direct or influence' the policies of the Canadian corporation in Canada". It is unclear how broadly this provision is intended to apply. Read literally, it could mean that any innocent reference to an extraterritorial measure would trigger the notification requirement. It is also notable that the person providing the communication need not necessarily be a non-national. For example, a Canadian communication from a Canadian director could potentially trigger the notification requirement.

Compliance Requirement

The compliance requirement prohibits Canadian corporations and their directors, officers, managers and employees in positions of authority from complying with an extraterritorial measure of the U.S. or with any "directive, instruction, intimation of policy or other communication" relating to such measure received from a "person who is in a position to direct or influence the policies of the Canadian corporation in Canada". Canadian entities with U.S. parent corporations must ensure that the U.S. parent corporation is not in a position to influence the Canadian subsidiary in respect of extraterritorial measures. Carefully drafted agreements, such as shareholders' agreements, may be used for this purpose.

THE HELMS-BURTON ACT AND AMENDMENTS TO FEMA

In 1996, the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act, otherwise known as the Helms-Burton Act, was enacted by the U.S. after the Cuban government shot down two U.S. civilian planes. Title III of the Act provides a private right of action to U.S. nationals who have a claim to property expropriated during the Castro revolution in Cuba. This right of action allows U.S. nationals to recover damages in U.S. courts against foreign companies and foreign citizens for "trafficking" such confiscated property. Trafficking is broadly defined such that it may include conducting business with those trafficking confiscated property.

FEMA was amended in 1997 to specifically deal with Title III of the Helms-Burton Act. Pursuant to the amendments, FEMA blocks the enforcement of judgments under Title III in Canada, restricts the production of records in Title III actions and gives Canadians a right of action to sue in a Canadian court to recover the amount of damages awarded against them. Title III of the Helms-Burton Act is currently suspended. Suspension is reviewed every six months by the president of the United States.

Corporate families that include both Canadian and U.S. entities may have difficulty reconciling the divergent Canadian and U.S. legislation. U.S. corporations must be careful not to offend U.S. legislation, but must also be careful not to give direction to Canadian affiliates that results in a breach of FEMA. Because FEMA has never been enforced in court, there is a lack of interpretive case law which might provide some guidance in addressing the difficulties inherent in complying with contradictory regimes. A cautious approach is recommended given the potential liability for corporations and their directors. In some circumstances, transactions and corporate governance can be structured to comply with both sets of regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.