risky business: doing business in near-failed and failed states
Recent events in Libya, Egypt and Tunisia and further turmoil in the Middle East and North Africa may spill over into other regions of the world. This is heightening the scrutiny on Canadian businesses doing business in countries of concern (failed states, failing states and other countries for which Fund for Peace issues, alerts and warnings in their index) 1 . Businesses and their financial backers are rightly concerned about their investments in countries of concern and their ability to access assets and funds in these states. Internally, businesses practices are impacted: sales staff may not be able to market to regions because exports are prohibited, letters of credits may be frozen or thrown into default; legal, compliance, human resources and investor and public relations personnel are inundated by requests for clarity.
export controls and economic sanctions Canada currently imposes trade controls and economic sanctions to varying degrees on the following countries:
- Democratic Republic of Congo
- Ivory Coast
- North Korea
- Sierra Leon
Canada's export controls and economic sanctions regime can be expanded and constricted quickly to respond to U.N. Security Council resolutions and Canada's foreign policy concerns. For example, Canada has severely restricted its approvals of export permits to failed states (e.g., Libya) and, recently is exercising its discretion to deny permits for export to near-failed states and other countries of concern without notice (for example, exports to Yemen).
Canada's trade restrictions and economic sanctions on a country of concern or its people may include:
- Prohibitions on exports of controlled goods, arms and related goods;
- Prohibitions on exports of technical, financial or other assistance to persons;
- Restrictions on dealings with persons (e.g., leaders, families of leaders, government officials, government departments and institutions, central banks, etc.);
- Restrictions on dealings with property owned or controlled by persons;
- Prohibitions on facilitating dealings, financial dealings and providing financial assistance or related services to persons;
- Asset freezes (including bank accounts) that prohibit dealings with specified individuals or persons (wherever the assets are located);
- Travel bans;
- Prohibitions on new investment by Canadian persons;
- Prohibitions on Canadian registered ships and aircraft from docking or landing in the country of concern;
- Prohibitions of ships and aircraft from the country of concern from docking or landing in Canada.
Where failed and failing regimes are involved, financial transactions will be scrutinized by international banks and governments to prevent fraud, pilfering and other illegal acts. Canada responds to international concerns regarding money laundering in The Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Canadian companies involved in financial transactions in failed and failing states will need to understand the applicable rules and the risks involved in certain practices.
In addition, Canada has introduced new legislation, the Freezing of Assets of Corrupt Regimes Act, which, when passed, will permit at the request of a foreign state, the taking of restrictive measures in respect of the property of officials and former officials of foreign states and persons associated with them. Canadian financial institutions and businesses may be ordered by the Government of Canada to freeze assets and stop payments.
Canada combats bribery of foreign officials by Canadians through the Corruption of Foreign Public Officials Act (Canada) by making such actions a criminal offence under Canadian domestic law. The Government of Canada may review financial transactions of Canadian companies in countries of concern, including transactions with senior political and government officials and their families, and government and public institutions in such countries. Increased scrutiny may uncover past and/or current suspicious payments and result in enforcement action. Companies dealing in any foreign country (not merely states of concern) must have adequate polices and practices in order to be compliant with this important legislation. Unintended consequences resulting from lack of attention to this requirement include very substantial fines and imprisonment.
political risk insurance and foreign investment protection
Revolutions, civil war and political instability often lead to damage to property or revocation of legal rights granted by earlier governments. Export Development Canada and various private insurers offer Canadian businesses coverage against many forms of political risk that arise in countries of concern, including risks of sabotage, political violence, expropriation, breach of host government contracts and currency controls. Companies that have suffered losses that may be covered by political risk insurance policies should notify their insurers promptly in order to preserve their rights.
Canadian businesses with substantial investments in countries of concern should also ensure that they are covered by the protections of bilateral investment treaties. Canada has over 23 Foreign Investment Protection and Promotion Agreements that allow Canadian investors to seek compensation from host states that have expropriated their investments, discriminated against them or engaged in other forms of unfair treatment. Even where a Canadian treaty is not available, corporate structures can often be implemented to take advantage of a treaty signed between the host state and a third country. Claims against host states under investment treaties can be enforced through trusted international arbitration rules.
contract disputes and force majeure
Political instability internationally, and Canada's political and legislative responses to it, can create obstacles to contract performance for companies doing business in countries of concern or for their suppliers (including financial lenders and investors in Canadian businesses). While some force majeure clauses may eventually excuse non-performance in these situations, they are usually subject to strict requirements regarding notice and timing. It may also be difficult to prove the exact cause of the non-performance and to relate it back to the specific relief identified in the force majeure clause. Failure to promptly invoke such clauses may be a waiver of legal rights.
Further, contractual provisions in standard form contracts may need to be updated to cover current risks given the radical new political environment. Existing contracts should also be reviewed to determine if contractual requirements have been breached (such as maintenance of insurance, notification of specified events, compliance with export or other similar laws, etc.).
If contract disputes cannot be resolved, international arbitration clauses ensure that claims can be brought or defended in a neutral forum. This may be the only recourse where local courts or other dispute mechanisms in the country of concern are in turmoil.
how McMillan can help
the McMillan LLP team:
- assists with internal audits of compliance programs;
- assists clients to design and develop, implement, manage and enforce global regulatory compliance, corporate social responsibility (CSR) and security programs and codes of conduct;
- provides guidance to export compliance personnel, senior management and project teams on required policies and procedures;
- acts as a liaison with government officials abroad and in Canada;
- drafts advisory opinions and voluntary disclosure documents;
- acts on international commercial and investment arbitrations;
- advises businesses and financial institutions on sales and marketing initiatives, channel-partner and distribution relationship structures and contractual provisions to minimize political and legal risk; and
- advises companies with respect to insurance and other risk transfer mechanisms.
McMillan LLP's Defense Industry and International Trade Groups have extensive technical and practical experience in addressing these thorny issues.
|Elisabeth Preston |
Defense Industry, International Trade and Global Regulatory Compliance
International Arbitration and Foreign Investment Protection
Insurance Risk Management
Global Regulatory Compliance
For more information on this topic, please contact:
a cautionary note
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2011©
1Failed States Index