The Cuban Catch-22: U.S. Subsidiaries in Canada Must (Not) Deal with Cuba

Date: May 02, 2005

Overview

Many American companies are well aware that they are prohibited from trading with Cuba. However, what many American companies may not realize is that their subsidiaries in Canada are not permitted to comply with this prohibition on trade, creating a potential Hobson’s choice of violating either U.S. or Canadian law.

The U.S. prohibition covers operations inside and beyond U.S. borders. The Cuban Assets Control Regulations (“CACR”), which detail most of the U.S. restrictions on trade with Cuba, are “extraterritorial” in their effect – meaning that they apply not only to U.S. individuals and entities, but also in some cases to foreign individuals and entities operating outside the U.S. The latter group includes foreign subsidiaries of U.S. corporations. A violation of the CACR can mean civil and criminal penalties, including up to 10 years in prison and fines of $1,000,000 for corporations and $250,000 for individuals.

The case of James Sabzali shows the U.S. will enforce the Cuban embargo against Canadians, despite the fact that Canada mandates non-compliance with the embargo.

Sabzali, a Canadian, worked for a U.S. company that sold water purification products. In the year 2000, Sabzali was charged on numerous counts of violating the U.S. trade embargo against Cuba, notwithstanding that many of the offending sales were made while he lived and worked in Canada. Sabzali faced life in prison and more than $19 million in fines. After being convicted in 2002, having the conviction overturned, and then pleading guilty to a lesser charge, Sabzali’s three and a half year nightmare is over.

The case is a forceful reminder of the tough stance the U.S. has taken and is continuing to take on trade with Cuba. In the words of Treasury Secretary John Snow, “We’re cracking down. We mean business. We’re cutting off American dollars headed to Fidel Castro, period.”

Canada, however, like other countries, considers extraterritorial measures like the CACR a violation of its sovereignty, regardless of the penalties that the U.S. may impose. As a countermeasure, Canada’s Parliament enacted legislation to “block” extraterritorial measures of the U.S.

The Foreign Extraterritorial Measures Act (United States) Order (“FEMA Order”) requires Canadian corporations, or their directors and officers, to give notice to Canada’s Attorney General of any directive that they receive related to U.S. laws applying to subsidiaries in Canada trading with Cuba.

The FEMA Order also prohibits Canadian corporations, and their directors, officers, managers, and employees in positions of authority, from complying with such directives. A violation of either of these requirements can result in corporate criminal liability of up to $1,500,000 and individual criminal liability of $150,000 or five years in prison.

On their face, the CACR and the FEMA Order are difficult to reconcile. The CACR may require that Canadian subsidiaries of U.S. corporations violate Canadian law, while the FEMA Order may require that Canadian subsidiaries both report and ignore directives related to compliance with the U.S. embargo on Cuba.

The potential cost of non-compliance under either regime is significant. Until one or both countries’ laws are amended, U.S. companies must carefully consider how they communicate to their Canadian subsidiaries about trade with Cuba. For their part, Canadian subsidiaries and their officers and directors must consider the risks they face under U.S. law should they do business with Cuba, and under Canadian law should they not.

Global U.S. companies should also be aware that U.S. lawmakers are increasingly considering extraterritorial application of U.S. sanctions in other parts of the world, particularly with respect to countries in the Middle East. If adopted, such measures would doubtless raise sovereignty objections from Canada, Europe and elsewhere, and could result in a far more difficult Catch-22 involving many of America’s major trading partners.

Disclosure

This article was featured in the Cincinnati Business Courier. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes.