Paul D. Burns (Toronto)
Tel: (1-416) 863-1221
Fax: (1-416) 863-6275
As a result of increasing political tension between the United States and Cuba, U.S. anti-Cuba trade laws have expanded in nature and scope to become unabashedly extra-territorial in effect. After they were last supplemented in March 1996 through the well-publicized Helms-Burton Bill, U.S. anti-Cuba trade laws have put multi-national corporations in the difficult position of not being able to act without possibly violating one of the U.S. trade laws and the laws of foreign countries in which they are operating. In particular, U.S. owned Canadian companies, whether or not they have assets in the U.S., may find it difficult to operate without contravening either Canadian or U.S. law. This paper will provide a brief overview of the U.S. laws which relate to trade with Cuba and the Canadian response to those U.S. laws and will comment on the appropriateness of the Canadian response.
Gradual Expansion of the U.S. Trade Laws Restricting Trade with Cuba In the past, Cuba's proximity to the United States combined with its close ties with the former Soviet Union resulted in it being perceived as a threat to the security of the U.S. Accordingly, U.S. political and economic policy towards Cuba, which was influenced by the confiscation of U.S. property by the Castro regime and cold war politics, imposed harsh economic sanctions against Cuba. In 1963, the U.S. issued the Cuban Assets Control Regulations (the "U.S. Regulations") under the U.S. Trading with the Enemy Act and thereby imposed an embargo against Cuba. Generally, under the U.S. Regulations all U.S. citizens and corporations and all of their branches and foreign subsidiaries became subject to:
* a prohibition on the importation into the U.S. of goods and services originating in Cuba;
* a prohibition on the export and re-export of U.S. origin goods and technology to Cuba (including foreign-produced products incorporating U.S. origin components and technology); * a prohibition on any dealings in property with Cuba (therefore, a Canadian subsidiary or branch of a U.S. corporation is prohibited from exporting to Cuba products that are entirely of Canadian origin);
* a prohibition on the buying from or selling to Cuban nationals or "specially designated nationals" ("SDNs"), wherever situated. SDNs include persons or companies who, by virtue of their dealings with Cuba or Cuban nationals, were deemed to be SDNs by the Secretary of the Treasury of the U.S.; and
* a freeze on Cuban property located in the U.S. or in the hands of U.S. persons, and on financial dealings with Cuba.
To soften the U.S. Regulations' harsh extraterritorial effect on U.S. owned foreign subsidiaries, the U.S. Regulations provided for the issuance of certain special licences to afford relief to these subsidiaries. Provided certain conditions were met, licences were issued which permitted transactions involving the export to Cuba of goods produced outside the U.S. by foreign subsidiaries of U.S. companies, as well as the importation of goods from Cuba by foreign subsidiaries into foreign territories. However, on 23 October 1992, section 1706(a)(1) of the Cuban Democracy Act of 1992, was passed. This section prohibits licences from being issued under the U.S. Regulations. As a consequence, a Canadian subsidiary of a U.S. corporation could no longer export goods to Cuba without violating U.S. law even if the goods were produced in Canada entirely from Canadian raw materials and technology.
In February of 1996, the strained political relations between the United States and Cuba were further exacerbated by the downing by the Cuban Air Force of two U.S. civilian aircraft operated by Brothers to the Rescue, a pro-democracy group operating out of Miami, Florida. This incident expedited the signing into law, in March 1996, of the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act, commonly known as the "Helms-Burton Bill." LIBERTAD imposes additional sanctions to those imposed by the U.S. Regulations. Certain of the more important elements of LIBERTAD are as follows:
* U.S. nationals and U.S. government agencies are prohibited from knowingly extending a loan or other financing to any person for the purpose of financing transactions involving any property confiscated by the Cuban Government;
* the existing Cuba sanctions are codified under U.S. law until such time that a democratic transition is underway in Cuba. The removal of these sanctions will require Congressional approval rather than the passing of an executive order, as was the case before LIBERTAD was in force;
* in addition to the prohibition of direct sugar imports from Cuba, U.S. import sugar quota will not be allocated to any country that is a net importer of sugar from Cuba, unless the country can show that it does not import sugar produced in Cuba for re-export to the United States. This supplements the general rule which prohibits the importation into the U.S. of any product made or derived in whole or in part of any article grown, produced or manufactured in Cuba; * the President must make periodic reports to Congress which relate to the activities of U.S. and non-U.S. nationals and foreign countries with respect to investment in, trade with and aid to Cuba;
* certain U.S. persons may file a civil action in U.S. federal district court against the non-U.S. party deemed to be "trafficking" in "confiscated property" of the U.S. national. The right to bring a civil action will not arise until 1 November 1996, provided the President does not suspend the application of this provision for the reason that such a delay is "necessary for the national interest and will expedite a transition to democracy in Cuba" (Title III); and
* non-U.S. persons acting as officers, directors and controlling shareholders of corporations (as well as certain family members of these individuals) held to be "trafficking" in "confiscated" "property" will be denied entry into the U.S. (Title IV). LIBERTAD can have significant implications for certain Canadian companies. For example, Canadian companies who are found by a U.S. federal district court to be "trafficking" in "confiscated property" may be subject to significant damage awards. While the enforceability of such awards against assets located outside of the United States is questionable, assets of Canadian corporations located in the U.S. are clearly at risk. Furthermore, the possible denial of entry into the U.S. of officers, directors and controlling shareholders of corporations (as well as certain family members of these individuals) will cause significant problems for these individuals and the corporations for whom they work.
The Canadian Response
Foreign Extraterritorial Measures (United States) Order, 1992 In response to the extraterritorial application of U.S. anti-Cuba trade law, on 9 October 1992 Canada issued the Foreign Extraterritorial Measures (United States) Order, 1992 (the "Order") under the Foreign Extraterritorial Measures Act (Canada) (the "Act"). The Order makes it an offence for Canadian corporations to comply with the U.S. legislation. A "Canadian corporation" is defined as a corporation that is registered or incorporated under the laws of Canada or of a province and that carries on business in whole or in part in Canada. The Order as originally passed required every Canadian corporation and every officer of such a corporation who received any communications relating to "an extraterritorial measure of the United States" from a person who was in a position to direct or influence the policies of the corporation, to give notice of such communication to the Attorney General of Canada. The Order further prohibited a Canadian corporation from complying with any such extraterritorial measure of the United States or any communications relating thereto.
The Canadian Department of Justice, in conjunction with the Royal Canadian Mounted Police, did investigate a number of companies for potential violations of the Order, but given the wording of the Order, the Department of Justice determined that convictions would be difficult to obtain. Furthermore, in 1995, the LIBERTAD Bill was brought before the U.S. Congress, the passing of which would have the effect of further tightening the embargo against Cuba. As a consequence, the Order was revised on 15 January 1996 (the "Revised Order"). The Revised Order requires every "Canadian corporation" and every director and officer of a Canadian corporation, who receives any communication relating to an "extraterritorial measure of the United States" in respect of any "trade or commerce between Canada and Cuba" from a person who is in a position to direct or influence the policies of the Canadian corporation to notify the Attorney General of Canada of such communication. An "extraterritorial measure of the United States" means the Cuban Assets Control Regulations, Code of Federal Regulations, Title 31, Part 515, as amended from time to time, and any new law, statute, regulation, by-law, ordinance, judgment, ruling, directive, guideline or other enactment, instrument, decision or communication having a purpose similar to that of the Cuban Assets Control Regulations to the extent that same operates or is likely to operate so as to prevent or reduce trade or commerce between Canada and Cuba. "Trade or commerce between Canada and Cuba" is defined to include trade or commerce with respect to both goods and services between Canada, or Canadian nationals, corporations, or other legal entities and government institutions, and Cuba, or Cuban nationals, corporations or other legal entities and government institutions, including Canadian nationals or corporations that are designated as or deemed to be treated as Cuban nationals or corporations pursuant to an extraterritorial measure of the U.S., that is, such entities referred to as "designated nationals" or "specially-designated nationals."
The Revised Order further prohibits a Canadian corporation, including its directors, officers, managers or employees in a position of authority, from complying with any such extraterritorial measure of the U.S. or any communications relating thereto. It should be noted that the Revised Order applies in respect of any act or omission in respect of any trade or commerce between Canada and Cuba, constituting compliance with an extraterritorial measure of the U.S. or a communication relating thereto, whether or not compliance with that measure or communication is the only purpose of the act or omission. Therefore, even where compliance with an extraterritorial measure or communication is a subordinate reason for acting or omitting to act in a way which affects trade between Canadians and Cubans or SDNs, a Canadian corporation will be liable under the Revised Order. This rule will greatly facilitate the prosecution of Canadian corporations under the Revised Order.
The Revised Order is aimed at Canadian subsidiaries of U.S. corporations, as well as U.S. corporations which are registered to do business in Canada, such as U.S. corporations with branch operations in Canada. The provisions of the Revised Order mean, for example, that if a Canadian subsidiary receives any communications from its U.S. parent with respect to the U.S. legislation restricting trade with Cuba, the Canadian subsidiary is required to notify the Attorney General of Canada of such communications. If the Canadian subsidiary does not notify the Attorney General, the Canadian subsidiary would be in contravention of the Revised Order. In addition, if the Canadian subsidiary refused to trade with Cuba in order to comply with the U.S. legislation or because it had received such communications from its parent, it would be in violation of the Revised Order.
Section 7 of the Act provides for the prosecution of offenses by way of indictment or summary conviction. A person found guilty of an indictable offence is liable to a maximum fine of $10,000 or to a term of imprisonment for up to 5 years, or to both fine and imprisonment. The maximum penalties for a summary conviction offence are $5,000 or 2 years imprisonment, or both.
Export and Import Permits Act
The Revised Order notwithstanding, generally it is not a violation of Canadian law to refrain from selling goods to Cuba if they are "U.S. origin goods." The reason is that the "U.S. origin goods" are listed on the Canadian Export Control List ("ECL") established pursuant to the Export and Import Permits Act (the "Permits Act"). A good listed on the ECL may not be exported from Canada without the exporter first obtaining an export permit from the Export Controls Division of the Canadian Department of Foreign Affairs and International Trade ("Foreign Affairs").
Item 5400 of the ECL provides as follows:
All goods that originate in the United States, unless they are included elsewhere in this List, whether in bond or cleared by Canadian customs, other than goods that have been further processed or manufactured outside the United States so as to result in a substantial change in value, form or use of the goods or in the production of new goods. [All destinations other than the United States] Consequently, "U.S. origin goods" may not be exported from Canada without the exporter first obtaining an export permit from Foreign Affairs. Since U.S. authorities are no longer authorizing the export of any goods from the U.S. to Cuba, generally Foreign Affairs in turn will not issue an export permit authorizing the export of U.S. origin goods from Canada to Cuba. Therefore, the Revised Order affects exports to Cuba of goods produced in Canada and not the re-export of U.S. origin goods to Cuba. This is consistent with Article 309 of the North American Free Trade Agreement (Import and Export Restrictions) which provides:
3. In the event that a Party adopts or maintains a prohibition or restriction on the importation from or exportation to a non-Party of a good, nothing in this Agreement shall be construed to prevent the Party from:
(a) limiting or prohibiting the importation from the territory of another Party of such a good of that non-Party; or
(b) requiring as a condition of export of such good of the Party to the territory of another Party, that the good not be re-exported to the non-party, directly or indirectly, without being consumed in the territory of the other Party.
It should be noted, however, that it appears that in certain limited circumstances Foreign Affairs may issue an export permit for the shipment of "U.S. origin goods" to Cuba. Specifically, an export permit may be issued if the export of "U.S. origin goods" to Cuba is in support of previously sold Canadian goods, a shipment of Canadian goods, or a Canadian project in Cuba, provided there is no other source of the "U.S. origin goods". Before an export permit will be issued, the exporter must provide evidence to Foreign Affairs that the U.S. is the only country which produces the good in question.
Foreign Affairs has not issued a written policy statement on when an export permit will be issued with respect to U.S. origin goods, presumably, to allow it flexibility in dealing with each application on a case-by-case basis.
Item 5400 of the ECL covers U.S. origin goods not included elsewhere on the ECL, which have not been further processed or manufactured outside of the U.S. so as to result in a substantial change in value, form or use of the goods or in the production of new goods. Usually, Foreign Affairs will consider a good to be of U.S. origin for export control purposes if it has at least 50 percent U.S. content. In calculating the U.S. content, material, labour and overhead costs, but not profits, are included. The definition of U.S. origin goods under Canadian law is narrower than that under U.S. law with the result that a good may be treated as U.S. origin by the U.S. authorities but not of U.S. origin by the Canadian authorities. While the ECL alleviates most of the inconsistency between U.S. and Canadian trade laws relating to the shipment of U.S. origin goods to Cuba, it does not relieve the inconsistency created by the fact that U.S. law prohibits a not-for-export sale to an SDN, a corporation which may be incorporated under the laws of Canada or a province, and resident and carrying on business within Canada.
Multilateral Agreement Remedies and the Diplomatic Response Canada has responded to LIBERTAD on a number of different fronts. Specifically, Canada has, at the highest levels, expressed strong concerns to the U.S. regarding the provisions of LIBERTAD allowing civil claims and the provisions restricting temporary entry of persons into the United States. Prime Minister Chretien has raised Canada's objections to LIBERTAD with President Clinton. The Minister for International Trade, Art Eggleton, registered concerns with the U.S. Trade Representative at that time, Mickey Kantor, and Canada's Ambassador to the U.S., has sent a diplomatic note expressing Canada's concerns. Canadian trade officials continue to discuss this issue with their U.S. counterparts.
On 12 March 1996 Trade Minister Eggleton requested consultations with the U.S. under Chapter 20 of the North American Free Trade Agreement (NAFTA) thereby initiating the NAFTA dispute settlement procedures. México subsequently requested that it be included in the consultation process. Canada has announced that it is preparing for incorporation into the Organization for Economic Co-operation and Development ("OECD") proposed Multilateral Agreement on Investment provisions designed to protect investments against extraterritorial measures such as those contained in LIBERTAD.
Canada has also raised with the World Trade Organization ("WTO") that LIBERTAD is a violation of the U.S.'s commitments as a member of the WTO. A WTO challenge is certainly another route which the Canadian Government could pursue. The Canadian government is also considering possible retaliatory measures that may be implemented if Canadian companies with U.S. assets are subject to lawsuits commenced as a result of LIBERTAD. While the exact nature of the retaliatory measures is not known at this time, one proposed measure is a tax on U.S. subsidiaries in Canada. This tax would compensate Canadian companies that suffer losses in lawsuits brought pursuant to Title III of LIBERTAD. The Effect and Appropriateness of the Canadian Response Clearly Canada has a legitimate concern with the extraterritorial effect of the U.S. Regulations and LIBERTAD. Canada's assertion of a U.S. violation of NAFTA and its initiation of the dispute settlement mechanism within NAFTA, are appropriate responses to the U.S.'s actions in the circumstances. The dispute settlement mechanisms within NAFTA and the WTO are designed to resolve international disputes between the respective parties to the Agreements. Furthermore, the protests Canada has made to the United States through diplomatic channels and the actions taken by Canada with respect to the OECD Multilateral Agreement on Investment are also appropriate responses. In addition, any action by Canada before the WTO would also be an appropriate response. However, it appears that the promulgation of the Revised Order ultimately may not be in the best interests of Canada.
It is obvious that a large percentage of Canadian businesses are owned or controlled by U.S. persons. Therefore, the Revised Order affects a large number of Canadian businesses. As a result of the inconsistency between the U.S. anti-Cuban trade laws and the Canadian response thereto, many Canadian businesses are caught in the difficult position of not being able to act without violating either U.S. law or Canadian law. As most of these entities wish to be good corporate citizens, that is, wish to comply with all Canadian and U.S. laws to the extent they are applicable to them, considerable time has been spent and expense incurred by these firms to ensure compliance with all applicable laws; these resources could be directed towards more productive pursuits. Certain firms have reorganized and restructured their Canadian operations so as to ensure compliance with the Revised Order. These reorganizations have occurred at significant expense and in certain cases with some loss of efficiency. U.S. officers and directors have resigned their positions with Canadian corporations in an attempt to disassociate themselves from Canadian corporations should charges be laid in either country. In certain cases, as a result of these resignations, the most desirable management structure has been lost. Furthermore, many officers and directors feel a great sense of discomfort in acting as officers and directors, given the significant penalties that can be imposed on a successful prosecution under either the Canadian or U.S. laws.
Canadian companies who are facing difficulties as a result of the inconsistency between the Canadian and U.S. laws should make their plight known to their elected officials, that is, that the Canadian government has put them in an extremely difficult position, and that solutions to the extraterritorial application of U.S. law should be sought through diplomatic channels and through the mechanisms for dealing with international disputes available under NAFTA and the WTO. While it is commendable for the Canadian government to take a stand, it should not do so at the expense of Canadian businesses, even if they are U.S. owned or controlled. In considering what retaliatory actions Canada may impose as a result of LIBERTAD, the Canadian government must be extremely careful to ensure the effect of such actions does not result in a net loss to Canada.
The National Law Center is a non-profit 501(c)(3) Research and Educational Corporation