| AUTHOR: | JOHN W. BOSCARIOL |
| TITLE: | AN ANATOMY OF A CUBAN PYJAMA CRISIS: RECONSIDERING BLOCKING LEGISLATION IN RESPONSE TO EXTRATERRITORIAL TRADE MEASURES OF THE UNITED STATES |
| SOURCE: | Law and Policy in International Business 30 no3 439-99 Spr 1999 |
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ABSTRACT
Say you're 11, and your mother sent
you to buy chewing gum, vowing punishment if you balk. Your father, though,
vowed to punish you if he ever caught you buying gum. What to do? That's roughly
the position Wal-Mart found itself in recently in Canada, but it wasnt' gum--it
was pyjamas. The pyjamas, you see, were made in Cuba. Can't sell'em, dictates
the Helms-Burton Act. So Wal-Mart, when it discovered the offending garments,
started pulling them off the shelves. Wait a second, said Canada's
Government--you can't do that either. It's against Canadian law to obey that
American law. Various nations, Canada included, are challenging Helms-Burton,
saying it is America's attempt to strong-arm the world. Washington, with a
straight face, responds that it may have to label this a 'national security'
issue. Invasion of the killer pyjamas.(FN1)
I. INTRODUCTION
The
Cuban pyjamas incident described above epitomizes the difficult conflicts in
which Canadian businesses and individuals may find thernselves embroiled when
trading, or merely exploring opportunities to trade, with Cuba.(FN2) Although
Cuban pyjamas have since found their way back to Wal-Mart's shelves in Canada,
the conflicting obligations imposed by the U.S. trade embargo of Cuba and the
Canadian blocking legislation continue to plague Canadian exporters and
investors doing business in the international marketplace, especially those who
are aware of their obligations under Canadian
law.(FN3)
When a nation perceives its sovereignty
offended by an extraterritorial measure of another nation, a number of responses
may be employed in an effort to challenge or demonstrate its disgust with the
impugned measure. These responses may include various forms of diplomacy,
negotiation, or recourse to either the International Court of Justice or to a
dispute resolution mechanism under a trade agreement to which both countries are
party. A nation's response may also include the enactment of what is commonly
referred to as 'blocking' legislation, which typically includes a prohibition
against domestic individuals and corporations complying with such
extraterritorial measures.
The Foreign
Extraterritorial Measures Act(FN4) (FEMA) and the orders issued under it
constitute Canada's blocking legislation. Described by some commentators as "a
remarkable piece of legislation"(FN5) and "Canada's most vigorous legal reaction
to excessive jurisdictional claims,"(FN6) FEMA and its orders have been at the
forefront of Canada's response to perceived extraterritorial measures that
affect international trade. So far these extraterritorial encroachments have
arisen out of the foreign policy of the United
States.
In circumstances involving the infringement
of Canadian sovereignty, FEMA provides authority to the Attorney General to
prohibit the furnishing of documents before foreign tribunals,(FN7) declare
certain foreign judgments unenforceable in Canada,(FN8) and permit Canadians to
recover damages from persons who have obtained certain judgments from them
abroad.(FN9) Most significantly, FEMA also authorizes the Attorney General, with
the concurrence of the Minister of Foreign Affairs, to (1) require persons to
notify it of communications concerning certain extraterritorial measures
received from parties in a position to direct or influence the policies of the
person in Canada;(FN10) and (2) prohibit persons in Canada from complying with
certain extraterritorial measures, or directives or intimations of policy
concerning such measures received from parties in a position to direct or
influence the policies of the person in
Canada.(FN11)
The focus of this Article is the
Canadian response to these potentially offensive extraterritorial measures. In
particular, this Article will examine the Canadian government's chosen method of
subjecting Canadian individuals and corporations to criminal investigation and
punishment under FEMA when they have failed to make the required notifications
to the Attorney General or when their actions can be construed as compliance
with the extraterritorial measure.
Two relatively
recent events have broadened and intensified the dilemma of Canadians facing the
choice of either complying with FEMA or with what has been designated as a
foreign extraterritorial measure. The first is the enactment of the Cuban
Liberty and Democratic Solidarity (LIBERTAD) Act of 1996,(FN12) otherwise known
as the Helms-Burton Act, which attempts to extend the U.S. Cuban trade embargo
to individuals and entities that have no connection to the United States. The
second is the enactment of recent amendments to FEMA, effective January 1,
1997,(FN13) that substantially increase the penalties levied against those
violating notification and non-compliance orders issued under
FEMA.
Part I of this Article intends to serve as a
general introduction to the topic of U.S. extraterritorial measures and the
Canadian response. Part II will provide a brief overview of the current U.S.
trade embargo of Cuba, including the extraterritorial application of transaction
and export controls to entities outside of the United States. Part III will
examine in detail the Canadian response to the imposition of these
extraterritorial measures. In particular, it will examine the issuance of FEMA
orders with respect to trade with Cuba and the problems they pose to Canadian
businesses trading with Cuba or contemplating trade with Cuba. The recent
enactment in the United States of legislation, including the Helms-Burton Act,
that purports to extend its reach to parties with no connection with the United
States, will be reviewed in Part IV. Part V will analyze Canada's response to
the U.S. legislation and the potential application of Canada's 1996 FEMA order
to the legislation. Part VI will discuss the possible defense in U.S. courts of
foreign sovereign compulsion, which may serve as a justification for the
enactment of Canadian blocking legislation. Finally, Part VII will explore
alternatives to the criminalization of Canadians perceived to be complying with
U.S. extraterritorial measures. These alternatives include binding dispute
resolution mechanisms under trade agreements that have come into force since the
enactment of FEMA and the negotiation of agreements among nations delineating
the use of extraterritorial trade measures.
In short,
subjecting Canadian individuals and companies to criminal prosecution for
perceived compliance with the Cuban trade embargo is over-broad, ineffective and
places an unreasonable burden of addressing U.S. extraterritorial measures on
Canadians doing business abroad. While Canada continues to impose obligations of
non-compliance on its companies and citizens, it has yet to take full advantage
of the remedies available to it under the agreements of the World Trade
Organization or the North American Free Trade Agreement.
II. THE U.S. EXTRATERRITORIAL MEASURES
A. PAST EXTRATERRITORIAL CONFLICTS BETWEEN CANADA AND THE
UNITED STATES
The recent tensions between
the governments of Canada and the United States regarding trade with Cuba are
not the only instances of disagreement between the two nations over
extraterritorial trade measures.(FN14) In 1957, the United States attempted to
prohibit the sale of 1,000 Canadian-made vehicles to China by the Canadian
subsidiary of the Ford Motor Company. The Canadian government took issue with
the U.S. interference and took the position that the only law applicable to such
matters should be Canadian law. After a meeting in Ottawa between U.S. President
Eisenhower and Canadian Prime Minister Diefenbaker, a joint communiqué was
issued recognizing the differences between Canadian and U.S. positions on trade
with China and committing the two countries to look for "appropriate procedures"
to address those differences. As a result, an ad hoc system developed for
similar disputes in future years where Canadian companies obtained certain
exemptions from U.S. controls when the Canadian government intervened on their
behalf and the preponderant impact of those measures was on the Canadian
economy.(FN15)
Conflicts between Canada and the
United States have also arisen with respect to the extraterritorial application
of antitrust measures. In 1977, following an investigation conducted by the U.S.
Department of Justice into alleged price fixing among certain domestic and
foreign producers and suppliers of uranium, Canada moved to prohibit the removal
from Canada of certain relevant evidence by enacting the Uranium Information
Securities Regulations.(FN16) The regulations were successfully invoked to block
extraterritorial discovery in Canada in some ensuing U.S. litigation. For
example, in In re Westinghouse Electric Corp., the Tenth Circuit held that fear
of contravening this Canadian legislation was a valid excuse for non-production
by a U.S. corporation of documents located in
Canada.(FN17)
In addition to the conflicts, however,
there have been significant areas of agreement in regard to extraterritorial
antitrust measures. Canada and other countries have enjoyed some success in
obtaining commitments from the United States to monitor and address these
extraterritorial actions.(FN18) Even though Canada and the United States have
had their conflicts over extraterritoriality in respect to anti-trust measures
and trade with many third countries, both nations have been largely successful
in achieving some resolution of these disputes. On the other hand, since the
imposition by the United States of its embargo on Cuba over thirty-five years
ago, trade with Cuba remains a significant sore spot in Canada-U.S. trade
relations. Today, these conflicts of extraterritoriality continue to plague not
only Canada's trade relations with the United States, but also Canadian
individuals and companies trading with or investing in Cuba. Measures taken by
both the U.S. and Canada are responsible for the continuing problems.
B. THE U.S. EMBARGO OF
CUBA
In 1959, the American conflict with
Cuba began with the emergence of Fidel Castro and the subsequent development of
the relationship between Cuba and the Soviet Union. In 1960, U.S. President
Eisenhower imposed a partial embargo on trade with Cuba.(FN19) Relations between
the two countries deteriorated even further when, in 1962, U.S. President
Kennedy proclaimed a full embargo on all trade with Cuba(FN20) under the
authority of the Trading with the Enemy Act of 1917.(FN21) The U.S. trade
embargo, at least until the recent enactment of the Helms-Burton Act, primarily
consisted of foreign assets control regulations and export control
regulations.
1. THE CUBAN ASSETS CONTROL
REGULATIONS
Issued pursuant to the Trading
with the Enemy Act, the Cuban Assets Control Regulations(FN22) (CACR) have been
the primary source of U.S. measures prohibiting trade with Cuba. Soon after
their enactment, the CACR became the focus of conflict between Canada and the
United States largely because of their application to Canadian subsidiaries of
U.S. companies. In one notable example in 1974, intervention of the Canadian
government was necessary when the United States attempted to prevent the sale of
Canadian-made locomotives by the MLW-Worthington Company to Cuba. The U.S.
government had denied an application from MLW-Worthington's U.S. parent for a
license. Following forceful representations from the Canadian government and the
resignation of two U.S. directors from Worthington's board, the locomotive sale
was eventually consummated.(FN23)
The Cuban embargo
promulgated through the CACR covers all aspects of trade with Cuba, including:
(1) prohibitions against the export of products, technology, and services from
the United States to Cuba; (2) prohibitions against the import of goods or
services of Cuban origin; (3) a total freeze on Cuban assets in the United
States or in the possession or control of U.S. persons; and (4) a ban on travel
by U.S. nationals to Cuba.(FN24) Despite a recent announcement by the Clinton
Administration of some minor relaxation in the embargo, the U.S. restrictions on
trading with Cuba remain as strong as ever.(FN25)
The
CACR is administered by the U.S. Treasury Department's Office of Foreign Asset
Controls(FN26) (OFAC), which has stated that its objective in implementing the
sanctions on Cuba "is to isolate Cuba economically and deprive it of U.S.
dollars."(FN27) Current criminal penalties for violating the restrictions
contained in the CACR include up to ten years imprisonment for and
U.S.$1,000,000 in corporate and U.S.$250,000 in individual fines. Civil
penalties may also be imposed of up to U.S.$55,000 per
violation.(FN28)
From Canada's perspective, the most
offensive aspect of the CACR is its application to entities owned or controlled
by U.S. persons, "wherever organized or doing business."(FN29) Until 1975, a
general license was available to permit trade by non-banking entities, provided
that a U.S. national did not participate in the transaction.(FN30) In 1975, the
general license was eliminated and foreign businesses owned or controlled by
U.S. companies were required to apply for specific licenses in order to trade
with Cuba.(FN31) These licenses, however, would only be granted if the foreign
firm operated independently of its U.S. parent with respect to its
decision-making, risk-taking, negotiation and financing.(FN32) In 1990, the U.S.
Congress proposed significant changes in the application of the CACR to foreign
affiliates with the introduction of the Mack Amendment, which imposed an
outright prohibition on the issuance of licenses to foreign affiliates of U.S.
firms.(FN33) The Cuban Democracy Act of 1992 (1992 CDA), incorporating this
amendment, effectively accomplished this(FN34) and led to a firestorm of
criticism from U.S. trading partners around the world who claimed that this
extension of extraterritorial jurisdiction by the United States over entities
outside of its border violated basic fundamental principles of international
law.
The extension of the Cuban trade embargo to
businesses outside the United States that are owned or controlled by U.S.
nationals is likely a violation of international law.(FN35) The extraterritorial
impact of the 1992 CDA was immediate and significant. U.S. Congressman Robert
Torricelli, one of the leading supporters of the 1992 CDA, estimated that U.S.
trade with Cuba through foreign subsidiaries fell from U.S.$718 million in 1991
to only U.S.$1.6 million in 1992 as a direct result of the implementation of
this measure.(FN36) In Canada, the CACR affected an estimated Can.$30 million in
annual trade between Canada and Cuba in 1992.(FN37) In the European Union,
foreign U.S. subsidiaries were estimated to account for U.S.$500 million of the
$600 million in annual trade between the EU and Cuba at that time.(FN38)
2. U.S. EXPORT CONTROLS ON TRADE WITH
CUBA
The CACR should not be confused with
a separate export control and licensing regime administered by the U.S.
Department of Commerce's Bureau of Export Administration (BXA). The Export
Administration Regulations(FN39) (EAR) apply to the export and re-export from
third countries of U.S.-origin goods. The EAR require a license application to
be made for the export or re-export of goods to Cuba where the U.S. content is
10% or more of the total value of the good being
exported.(FN40)
With the exception of medicines and
medical supplies, the BXA will generally deny licenses for the exportation of
U.S.-origin goods to Cuba.(FN41) with respect to the re-exportation of products
from third countries to Cuba, the BXA will generally consider license
applications favorably on a case-by-case basis where (1) the amount of
U.S.-origin material forms an insubstantial proportion of a non-strategic
foreignmade product, (2) the third country from which the product is exported
requires or favors trade with Cuba, (3) the U.S.-origin content does not exceed
twenty percent, and (4) the party exporting the product from the third country
to Cuba is not a U.S.-owned or controlled entity.(FN42) Canada's export
licensing authority, the Export Controls Division (ECD) of the Canadian
Department of Foreign Affairs and International Trade, respects, to a limited
extent, U.S. jurisdiction over the re-export of U.S.-origin products to certain
countries such as Cuba by requiring Canadian exporters of U.S.-origin items to
apply for an export permit.(FN43) Where U.S.-origin goods have been further
processed or manufactured outside of the United States, resulting in a
substantial change in value, form, or use or resulting in the production of new
goods, Canadian law does not require that exporters of such goods apply for an
export permit. Canadian authorities apply the following general "rule-of-thumb"
to determine whether there has been a "substantial change in value, form or use"
or the "production of new goods": where the value of U.S. materials or
components is less than half of the total value of the product being exported
from Canada, there usually has been sufficient transformation such that an
application for a Canadian permit to export to Cuba will not be
necessary.(FN44)
Accordingly, the BXA requires a
Canadian company exporting products to Cuba with a U.S. content of, for example,
thirty percent to apply for an export license. In those circumstances, however,
the Canadian company is not required to apply to the ECD for a permit to export
the product to Cuba. As discussed below, the application to the BXA for a
license to export goods to Cuba would appear to indicate "complicance" with the
U.S. trade embargo of Cuba and therefore may violate the current order issued
under FEMA.
C. U.S. EMBARGOES OF OTHER
COUNTRIES
Cuba is not the only country
currently subject to extraterritorial U.S. restrictions on trade. As further
discussed in this Article in Part IV.B, the Iran-Libya Sanctions Act of 1996
imposes a number of sanctions on non-U.S. companies investing in the oil
industry in Iran or Libya, or engaging in trading activity that enhances Libya's
military capabilities.(FN45) The United States also maintains a comprehensive
trade embargo of North Korea.(FN46) Similar in scope to the CACR, these trade
restrictions, maintained and enforced by OFAC, apply to "all branches,
subsidiaries and controlled affiliates of U.S. organizations around the
world."(FN47)
III. THE FOREIGN EXTRATERRITORIAL MEASURES
ACT
In the face of increasing U.S.
extraterritorial measures in the antitrust area, and following the lead of
certain European nations, such as the United Kingdom(FN48) and France, Canada
enacted blocking legislation in 1984 in the form of FEMA. The following
summarizes some of the more significant FEMA provisions.(FN49) Although the
motivation for the enactment of FEMA was in large part based on the
extraterritorial application of U.S. antitrust law, over the last thirty-five
years the intensification of the U.S. economic embargo of Cuba and the
extraterritorial effects of those measures have brought FEMA to the forefront of
Canadian foreign policy.
A. AUTHORIZATION FOR THE ATTORNEY
GENERAL
FEMA is largely an enabling
statute that sets out the conditions under which the Attorney General of Canada
may make certain orders, including those prohibiting the production or
disclosure of records before foreign tribunals,(FN50) or make declarations that
the judgments of foreign tribunals shall not be recognized or enforceable in
Canada.(FN51) Generally these conditions arise when a foreign state or foreign
tribunal takes measures affecting international trade or commerce in a manner
that has impaired significant Canadian interests in relation to international
trade. These conditions may also arise where such measures have infringed
Canadian sovereignty.
For example, where a foreign
tribunal has exercised jurisdiction in a manner that adversely affects
significant Canadian interests in relation to international trade, FEMA
authorizes the Attorney General to prohibit or restrict (1) the production
before the foreign tribunal of any records under the control of a Canadian
citizen or resident, (2) the taking of action that would likely result in the
production of such records, and (3) the giving by a person of information
relating to such records to a foreign tribunal.(FN52) FEMA also enables the
Attorney General to apply to a Superior Court for a warrant authorizing the
seizure of records and the delivery of them to the Court for
safekeeping.(FN53)
For the purposes of Canada's
response to extraterritorial measures of the United States in respect to the
Cuban trade embargo, the two most significant provisions of FEMA concern
notification and non-compliance. Where a foreign state or tribunal takes
measures affecting Canadian interests in international trade or infringing on
Canadian sovereignty, the Attorney General has the authority to issue orders
requiring persons in Canada to notify it of any directives, instructions,
intimations of policy or other communications relating to such measures that are
received from a person in a position to direct or influence the policies of the
person in Canada.(FN54) The Attorney General may also issue orders prohibiting
any person in Canada from complying with such measures or with any such
directives or other communications received from a person in a position to
direct or influence the policies of the person in Canada.(FN55)
B. PENALTIES FOR VIOLATING FEMA
ORDERS
As a result of amendments effective
January 1, 1997, penalties for the contravention of notification or
non-compliance orders issued under FEMA have been substantially increased. Upon
conviction on indictment, corporations may be liable for fines of up to $1.5
million and individuals may be liable for fines of up to Can.$150,000 or to
imprisonment for a term not exceeding five years or
both.(FN56)
Before penalties can be applied to
persons violating a FEMA order, however, the order must be served on the
accused.(FN57) For example, the 1996 FEMA Order(FN58) was served by an order
issued by the Federal Court - Trial Division on January 16, 1996 upon an ex
parte application by the Attorney General. The Court's Order approved of service
of the 1996 FEMA Order on a number of companies identified by the Department of
Justice as potentially being affected by the Order. Notably, this list was
obtained from the Latin American Caribbean Trade Division of the Canadian
Department of Foreign Affairs and International Trade, which had collected names
of Canadian individuals and companies trading with Cuba or interested in Cuban
trade opportunities. The list had also been updated based on expressions of
interest received from companies and individuals attending a Canada-Cuba trade
exhibition. The Court also approved of service of the 1996 FEMA Order by way of
publication in the Globe and Mail, La Presse, and Canadexport on the basis that
the costs of serving all persons potentially affected by the 1996 Amendment
Order was so large that personal service was not
reasonable.(FN59)
At the same time that the January
1, 1997 amendments provided for substantially increased penalties for the
contravention of FEMA orders, FEMA was also amended to provide guidance to
courts for determining the sentence for such offences. FEMA now provides that,
when determining the sentence for these offences, a court must consider a number
of factors. These factors include the degree of premeditation in the commission
of the offence, the size, scale and nature of the offender's operations, and
whether any economic benefits have directly or indirectly accrued to the
offender as a result of having committed the offence.(FN60)
C. THE 1992 FEMA
ORDER
Canada's strongest response to the
1992 CDA came in the form of a FEMA order issued six days after the legislation
was passed by the United States Congress. The Foreign Extraterritorial Measures
(United States) Order, 1992 (1992 FEMA Order) required Canadian corporations and
their officers who received any directives, intimations of policy, or other
communications relating to the 1992 CDA from a person in a position to direct or
influence the policies of the corporation in Canada to give notice to the
Attorney General.(FN61) Canadian corporations were also prohibited from
complying with the 1992 CDA in respect of trade or commerce between Canada and
Cuba or with any communications relating thereto that had been received from a
person in a position to direct the policies of the corporation in
Canada.(FN62)
Noting that the offensive U.S.
provisions had the potential of adversely affecting approximately $30 million of
Canadian annual trade with Cuba, the Attorney General stated that not to issue
the order "would have left the infringement of Canadian sovereignty unanswered,
and the adverse effect on Canadian international trade unchecked. This option
was, therefore, unacceptable."(FN63) In discussing the anticipated impact of the
Order, including the fact that Canadian businesses would now face a significant
"Catch-22" dilemma, the Attorney General conceded that some Canadian companies
would encounter difficulty with the United States law, but that it was "seen as
a necessary measure to protect and safeguard Canadian sovereignty."(FN64)
D. THE 1996 FEMA
ORDER
Four years after the issuance of the
1992 FEMA Order, the Attorney General issued significant amendments "to increase
its scope to make it more responsive to infringements of Canadian sovereignty
and to make it more effective in light of experiences gained since it was first
made."(FN65) The Foreign Extraterritorial Measures (United States) Order(FN66)
(1996 FEMA Order) extended the 1992 FEMA Order in a number of significant ways
that are discussed below. Although the 1996 FEMA Order enhanced the coverage of
the notification and non-compliance requirements, it also introduced a number of
interpretation difficulties.
1. THE NOTIFICATION
OBLIGATION
Section 3 of the 1996 FEMA
Order requires every Canadian corporation and its director and officers to
forthwith 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" with respect to any "trade or commerce between
Canada and Cuba" that the Canadian corporation, director or officer had received
from "a person who is in a position to direct or influence the policies of the
Canadian corporation in Canada."(FN67) There are several elements of the
notification requirement that deserve closer examination.
A. WHAT ARE THE RELEVANT U.S. EXTRATERRITORIAL
MEASURES?
The 1996 FEMA Order specifically
defines "extraterritorial measures of the United States" to include the CACR or
any law, guideline or other enactment or communication having a purpose similar
to that of the CACR to the extent that it operates or is likely to operate so as
to prevent or impede trade or commerce between Canada and Cuba.(FN68)
Accordingly, the Attorney General would typically have to be notified of any
communication concerning a provision of the CACR. Such measures are notifiable
only to the extent that they operate so as to prevent, impede or reduce trade or
commerce between Canada and Cuba. Those provisions of the CACR or other U.S.
laws or measures with a similar purpose that do not operate to prevent, impede,
or reduce trade or commerce between Canada and Cuba, do not require notice. In
addition, as explained below, a Canadian corporation is not prohibited from
complying with such measures.
Significantly, the
Department of Foreign Affairs and International Trade has taken the position
that the Export Administration Regulations (EAR), as they pertain to the
re-export of goods from Canada to Cuba, could fall within the definition of
extraterritorial measures of the United States in the 1996 FEMA Order to the
extent that the EAR, like the CACR, operates to prevent or impede trade or
commerce between Canada and Cuba. This applies despite Canada's partial respect
of U.S. jurisdiction over the export from Canada to Cuba of goods that may
contain some U.S.-origin components.(FN69) Accordingly, the Attorney General of
Canada may require notice of communications from entities that may direct or
influence the policies of a Canadian company in Canada and that refer to U.S.
export controls over the re-export to Cuba of goods containing U.S. components
or ingredients. As discussed below, the inclusion of the EAR applying to the
re-exportation of goods from Canada to Cuba, within the scope of
"extraterritorial measures of the United States" can have significant
implications for Canadian companies subject to the non-compliance
obligation.
B. WHAT COMMUNICATIONS ARE
COVERED?
One of the most problematic
issues concerns whether a particular communication will trigger the notification
requirement--whether it is a directive, instruction, intimation of policy or
other communication in respect of an extraterritorial measure. Although it may
be clear when a company receives a directive or instruction, the same cannot
always be said for an "intimation of policy" or "other communication." A literal
reading of section 3 of FEMA would appear to indicate that any innocuous
reference to the extraterritorial measure would trigger the notification
requirement. For example, a list of countries covered by trade embargoes
enforced by OFAC that is transmitted as part of an information package from a
U.S. parent to its Canadian subsidiary would appear to constitute either an
intimation of policy or other communication relating to the CACR. As a result,
the subsidiary would have to notify the Attorney
General.
Even if one were to apply the longstanding
interpretative principle that the term "other communication" is best defined in
the context of the immediately preceding terms, which include directives,
instructions, or intimations of policy, uncertainties remain. For example, there
may be situations where a relatively minor reference to the trade embargo of
Cuba could be interpreted, depending on the underlying circumstances of the
matter, as an intimation of policy from a parent to its subsidiary. To avoid
mandated notification, corporations may restrict themselves to no communications
of any kind relating to Cuba between U.S. parents and their Canadian
subsidiaries. Such restrictions can be awkward where parent corporations have
numerous communications with their subsidiaries and may wish to ensure that
their subsidiaries are at least aware of U.S. trade embargo law in general with
respect to a wide range of countries. If these communications are made, however,
the Canadian subsidiaries must notify the Attorney General of each
communication. Failing to do so results in a risk of criminal prosecution and
penalties of up to Can. $1.5 million and five years in prison.
C. WHO IS IN A POSITION TO DIRECT OR
INFLUENCE?
Communications that trigger the
notification requirement must be received from "persons who are in a position to
direct or influence the policies of the Canadian corporation in Canada."(FN70)
This covers communications from a U.S. parent to its Canadian subsidiary,
assuming that the U.S. parent is indeed in a position to direct or influence the
policies of its subsidiary. The language of section 3 of FEMA, however, is
over-broad. For example, the language indicates that communications from a
Canadian company's chief executive officer, a Canadian shareholder, or even
Canadian creditors could trigger the notification requirement. Depending on the
circumstances, communication from any party--regardless of their
nationality--who may be viewed as being in a position to direct or influence the
policies of a Canadian corporation will trigger the application of section 3.
Although, from a policy perspective, Canadian authorities could not have
intended that communications from the CEO of a Canadian company trigger the
notification requirement, a strict interpretation of the language in section 3
seems to indicate that this is the case. Significantly, this applies not just to
subsidiaries owned or controlled by U.S. parents, but to any Canadian
corporation.
One may argue that these
interpretations, perhaps accurate in strict literal terms, could not be
consistent with the intent of the legislative framers and should be weakened by
the courts. There is, however, significant uncertainty in this regard, because
the courts have yet to review FEMA or any of the orders issued pursuant to it,
as to date there have been no prosecutions under FEMA.
2. THE NON-COMPLIANCE
OBLIGATION
The 1996 FEMA Order prohibits
Canadian corporations, their directors, officers, managers, and employees in
positions of authority from complying with an extraterritorial measure of the
United States or with any directive or other communication relating to such a
measure received from a person in a position to direct or influence the policies
of the Canadian corporation in Canada.(FN71)
It is
significant to note that, while the notification requirement discussed above
applies to the Canadian corporation, its directors and officers, the
non-compliance requirement also applies to managers and employees in positions
of authority. Accordingly, managers and employees in positions of authority may
receive communications concerning extraterritorial measures without having to
notify the Attorney General of them. However, these same parties are under an
obligation, as is the corporation and its directors and officers, not to comply
with such measures or such communications.
In
addition to the notification requirement, there are several other issues that
should be considered in assessing the obligation of a Canadian corporation, its
directors, officers, and managers not to comply with extraterritorial measures
of the United States.
A. CAN THERE BE COMPLIANCE WITH BOTH CANADIAN AND U.S.
LAW?
Due to FEMA and the corresponding
U.S. measures, Canadian companies doing business in Cuba may often find
themselves in the position of having conflicting obligations under Canadian and
U.S. law. Often these companies will have no choice but to violate one or the
other. In some cases, however, transactions may be structured to walk the
tightrope of compliance with both the Canadian and U.S. rules. The definition of
"extraterritorial measure" in the 1996 FEMA Order would appear to permit
compliance with the CACR or similar U.S. laws, provided that compliance with the
particular provisions does not reduce trade or commerce between Canada and Cuba.
This interpretation may be helpful in structuring U.S. investment in Canadian
businesses that may do business in or with Cuba. For example, in certain
circumstances OFAC may permit a U.S. national to invest in a Canadian company
doing business in Cuba provided that the U.S. national is not in a position to
own or control the Canadian investment. Mechanisms structured in a shareholders
agreement or related contracts to ensure that U.S. nationals are never in a
position to control the Canadian entity, yet at the same time do not result in
reducing trade or commerce between Canada and Cuba, appear to be at least one
way in which the requirements of both Canadian and U.S. law may be
satisfied.
Another area where Canadian companies must
tread carefully concerns the extended definition of "trade or commerce between
Canada and Cuba." To be covered by the Order, companies must engage in the
activity that the U.S. measures prevent. The 1996 FEMA Order defines this trade
or commerce to include the free exchange of goods and services between Canadian
nationals, corporations or other legal entities, including federal, provincial
or other local government institutions, and Cuban entities. The term also
includes trade between Canadian companies and Canadian nationals or corporations
that OFAC has designated as Cuban for the purposes of the U.S. trade embargo of
Cuba.(FN72) In the cases where OFAC has designated Canadian nationals or
corporations as Cuban, they are deemed to be "specially designated nationals"
under the CACR.(FN73) For example, OFAC has designated the Cobalt Refinery
Company, Inc. of Fort Saskatchewan, Alberta as a specially designated national
under the CACR;(FN74) accordingly, the CACR prohibits a Canadian entity owned or
controlled by a U.S. national or corporation from trading with this company. In
turn, the 1996 FEMA Order prohibits Canadian companies from complying with that
prohibition.
Compliance with the Export
Administration Regulations with respect to Cuba is an area in which Canadian
authorities accord some respect to U.S. jurisdiction over goods produced in the
United States. This compliance, however, may also present some difficulties.
Canada's Department of Foreign Affairs and International Trade has taken the
position that the EAR, to the extent that it reduces trade between Canada and
Cuba, falls within the definition of extraterritorial measures under the 1996
FEMA Order. Accordingly, a Canadian company applying for a license to the BXA
for exporting goods containing over 10% U.S. content from Canada to Cuba, as
required by the EAR, would appear to violate the non-compliance obligation
contained in the 1996 FEMA Order. Further, a Canadian company that refuses to
export goods from Canada to Cuba because their U.S. content exceeds 20% (the
license application to the BXA would be subject to a general policy of denial)
may also be subject to sanction for violation of the non-compliance requirement.
The same Canadian company that was denied a permit for the export of certain
goods containing U.S. components from Canada to Cuba (assuming the U.S. content
exceeded 50%) would not violate the 1996 FEMA Order by refusing to export. Such
refusal would be based on Canadian and not U.S.
measures.(FN75)
A Canadian company that refuses to
export goods to Cuba because it believes that such goods were not sufficiently
further processed in Canada to result in the production of new goods (for
example, the U.S. content of such goods exceeds the 50% threshold typically
applied by Canadian authorities) could also face a problem under the 1996 FEMA
Order. The fifty percent rule of thumb is applied to determine whether it is
necessary to apply to Canadian authorities for an export permit, and not applied
as an absolute test of whether a permit will be issued or not. Therefore, in
such circumstances the Canadian authorities have taken the view that this
Canadian company must first apply to Canadian authorities for an export permit.
Only if the company applies for and is then denied the permit may it then refuse
to export the goods to Cuba without fear of breaching the non-compliance
requirements in the 1996 FEMA Order.(FN76)
B. WHAT DOES IT MEAN TO
COMPLY?
The most problematic
interpretative issue with respect to the prohibition of compliance contained in
section 5 of FEMA concerns the meaning of "comply." A company could cease
trading with Cuba or choose not to pursue an opportunity to do business with
Cuba because of concerns about stability in the country, credit risks,
insufficient profits, or due to a decision to serve only the Canadian
marketplace. In these circumstances, refusals to trade with Cuba should not
properly be considered compliance with the U.S. embargo on trade with
Cuba.
As a result of section 6 of the 1996 FEMA
Order, however, Canadian companies that refuse to trade with Cuba for legitimate
business reasons may still be viewed as acting in compliance with the U.S.
measure if one of the reasons for the company's act or omission was the
existence of the U.S. measure.(FN77) Accordingly, if only one of the many
reasons a company may have for not pursuing a Cuban business opportunity is the
existence of the U.S. trade embargo, regardless of the relative weight of that
embargo in the decision-making process, that act or omission may be deemed to be
compliance with the impugned U.S. measures. The corporation, its officers,
directors, managers and employees may therefore be subject to criminal
prosecution and penalties of up to Can. $1.5 million and five years in
jail.(FN78)
The meaning of compliance in the context
of the Helms-Burton Act also presents some uncertainties.(FN79) The notification
and non-compliance obligations contained in the 1996 FEMA Order(FN80) are
excessive, awkward and lend themselves to over-broad interpretations.
Unfortunately, because of the absence of any case law or any formal guidance
from Canadian authorities, these obligations continue to be unresolved. Similar
to the 1992 FEMA Order, even though the Attorney General's office conceded that
the 1996 FEMA Order could put Canadian companies and individuals in a difficult
position, in the Attorney General's view, this was necessary to assert Canadian
sovereignty:
The amendments will place some corporations and persons in Canada in a situation where they cannot comply with United States law and other measures. This will, however, be due to the extraterritorial imposition of United States law and other measures on Canadian trade with Cuba in violation of Canadian sovereignty, and in violation of generally accepted principles of international law.
The amendment may also be expected to attract political attention both in the United States and in Canada. The highest level of consideration of these potential impacts lies behind the concurrence given by the Minister of Foreign Affairs to the issuance of the amending Order. It is seen as a necessary measure to protect and safeguard Canadian sovereignty.(FN81)
E. THE ENFORCEMENT OF
FEMA
As noted above, many of the
uncertainties surrounding the application of FEMA and orders issued thereunder
could be ameliorated if the courts have a chance to consider and interpret the
measures. In the nine years since the issuance of the first order under FEMA and
fifteen years since the enactment of FEMA there have not been any prosecutions
or references under this blocking legislation. Furthermore, neither the Canadian
Department of Foreign Affairs and International Trade nor the Canadian Justice
Department has issued any guidelines or rulings to assist in the interpretation
of FEMA Orders.
According to some observers, however,
there have been as many as twenty Canadian companies investigated by the Royal
Canadian Mounted Police (RCMP) for allegedly following instructions by their
U.S. head offices to cease or abstain from trade with Cuba. These investigations
have included some high profile corporations such as Eli-Lilly, Red Lobster,
Heinz and American Express.(FN82)
Pepsi-Cola and
American Express have each been involved in controversies concerning FEMA
Orders. In May 1991, shortly before the 1992 FEMA Order became effective, Regor
International, a Canadian company, ordered 29,000 cases of Pepsi from
Pepsi-Cola's office in Montreal. Pepsi cancelled the order when it learned that
the products' final destination was Cuba, claiming that as a result of
discussions between its Canadian office and its U.S. head office, it had decided
not to fulfil any orders that were destined for Cuba. The Canadian Department of
Foreign Affairs and International Trade's Latin American and Caribbean Bureau
issued a written reprimand to Pepsi that stated:
Canadian Government policy, which we would expect to be supported by companies incorporated in Canada, favors trade in non-strategic goods with Cuba .... [T]he Canadian Government has also consistently opposed the extraterritorial application of U.S. trade policy towards Cuba, either directly by the U.S. Government or through U.S. parent corporations [and] as such the possible interference by the U.S. head office of Pepsi Cola in this matter, resulting in the cancellation of a Canadian export order would be a matter of considerable concern.(FN83) Nonetheless, Pepsi continued to refuse to fulfil the order.(FN84)
In 1996, the Canadian Parliament discussed the
American Express case.(FN85) American Express refused to issue traveler's checks
to a Quebec resident for a trip to Cuba. The head office of American Express in
the United States informed the individual that all its subsidiaries worldwide
were required to abide by U.S. transaction and export controls. The company's
letter to the Quebec resident could not be more explicit: "We regret that you
are unable to use travelers' checks in Cuba. This is due to U.S. government
regulations prohibiting the exportation of goods and services in Cuba. These
regulations apply to companies incorporated within the United States and their
foreign branches and subsidiaries."(FN86) To date, no prosecutorial action has
been taken against American Express in this
matter.(FN87)
A more recent and high profile
investigation by Canadian authorities under FEMA involved the Cuban pyjamas
incident. In February 1997, after an astute shopper at one of Wal-Mart's
Winnipeg stores pointed out to its manager that the pyjamas were labeled "Made
in Cuba," Wal-Mart immediately pulled the pyjamas off the shelves of its 136
stores across Canada. Immediately, upon notice of Wal-Mart's action, Canada's
Department of Foreign Affairs and International Trade referred the matter to the
Justice Department for an investigation and a decision regarding the possible
prosecution of Wal-Mart under the provisions of FEMA. Although many of the press
reports at that time characterized Wal-Mart's actions as being mandated by the
Helms-Burton Act, it would appear that Wal-Mart, as a wholly-owned subsidiary of
a U.S. corporation, was more concerned about the prohibitions against trade with
Cuba or in Cuban goods contained in the CACR. Two weeks after pulling the
pyjamas, Wal-Mart returned them to its shelves following a comprehensive review
and consultation with its lawyers and discussions with Canadian officials.(FN88)
Hours after the decision, Wal-Mart's U.S. parent stated that its Canadian
subsidiary had deliberately defied instructions from headquarters to obey
American law and cease all trade in Cuban goods. Soon thereafter, OFAC announced
that it was reviewing Wal-Mart's action and declared that it would enforce the
Cuban embargo.(FN89)
Although Wal-Mart appeared
concerned about the consistency of its actions with Canadian law, its decision
to return the Cuban pyjamas to its Canadian store shelves may have been
motivated more by public relations than by the 1996 FEMA Order.(FN90) In the
court of public opinion, Wal-Mart had clearly stepped into a public relations
nightmare. The following letter to the editor was representative of the Canadian
reaction:
More at stake than pyjamas:
My voice is just a small one in the vast wilderness; I hope others will hear it and join in. I will not be shopping in Wal-Mart anymore. It is over pyjamas. I feel if Wal-Mart wants to do business in my country, then it must follow our laws. We do not have a trade embargo with Cuba, the United States does. That is its right as a country and I honour its decision. But this is Canada and if you do business here then you go by the rules. Perhaps it is only a small thing, but it can grow to larger issues. The few cents I may save by shopping at Wal-Mart is not worth the price of knowing I must have American laws control me. There is more at stake here than a pair of pyjamas, it's called integrity.(FN91)
IV. EXTENDING THE EXTRATERRITORIAL REACH OF U.S.
MEASURES
In recent years, the United
States has expanded the reach of its trade embargoes. Currently certain embargo
measures, specifically those with respect to Cuba, Iran, and Libya, may apply,
not only to foreign entities that are owned or controlled by U.S. nationals, but
also to businesses that have no connection with the United States. In the same
vein, Canadian entities that are not owned or controlled by U.S. nationals must
now be cognizant of their non-compliance and notification obligations under the
1996 FEMA Order.
A.
HELMS-BURTON
Tensions over the
extraterritorial application of U.S. law were increased in early 1996 when,
shortly after the downing by the Cuban Air Force of two planes flown by Brothers
to the Rescue, a Cuban-American organization, President Clinton signed into law
the Helms-Burton Act.(FN92) The most controversial elements of the legislation
are contained in Title III, "Protection of Property Rights of U.S. Nationals"
and Title IV, "Exclusion of Certain Aliens."(FN93) Given Canadian business'
active pursuit of trade with Cuba, Canada is particularly vulnerable to the
extraterritorial effects of this legislation.(FN94)
1. TITLE III - PRIVATE RIGHT OF
ACTION
Title III of Helms-Burton, which
has been in effect since August 1, 1996,(FN95) provides a private right of
action to U.S. nationals, including those who were not U.S. citizens at the time
of expropriation, who have a claim to property expropriated during the Castro
revolution in Cuba, to bring suit against those considered to be trafficking in
such confiscated property.(FN96) Persons are considered to be trafficking in
confiscated property where they knowingly, intentionally, and without the
authorization of any U.S. national owning a claim to the property, engage in any
of a broad range of specified commercial activities or profit from such
activities.(FN97) Notably, the definition of trafficking is broad enough to
include not only direct dealings in confiscated property, but also the conduct
of business with the owners of such property. For example, indirect activities,
such as purchasing from or selling to traffickers, could be considered to be
either "[engaging] in a commercial activity ... otherwise benefiting from
confiscated property" or "[profiting] from
trafficking."(FN98)
In addition to the broad, vague
definition of trafficking, there is the availability of treble damage awards to
claimants under Title III. Any person found to have been trafficking in
confiscated property after November 1, 1996 will be subject to treble damages if
the claim has been certified by the U.S. Foreign Claims Settlement
Commission.(FN99) Regarding non-certified claims, traffickers will be liable for
treble damages if they continue to traffic in confiscated property after
receiving written notice of a Title III action against them, at least thirty
days before its initiation.(FN100)
2. TITLE IV - BAR ON ENTRY INTO THE UNITED
STATES
Title IV of the Helms-Burton Act,
which came into force on March 12, 1996, excludes from entry into the United
States any foreign national and his or her spouse and minor children who has
converted confiscated property for personal gain or who traffics in confiscated
property in Cuba.(FN101) Although the definition of trafficking for the purposes
of Title IV differs somewhat from the definition applied for the purposes of
Title III, trafficking, again, is defined in broad, vague
terms.(FN102)
The U.S. State Department's first
notification under Title IV was directed to Sherritt, Inc. of Canada, the
largest private investor in Cuba. Sherrit is also a company well known for its
intentions to continue expanding its business activities in Cuba despite the
existence of the U.S. trade embargo. As of August 24, 1996, the principals of
Sherritt, their spouses, and minor children have been barred from entry into the
United States.(FN103) Since 1996, the U.S. State Department has also banned
executives and their family members from Grupo Domos, a Mexican
telecommunications firm, and BM Group, an Israeli fruit products
company.(FN104)
3. THE AFTERMATH OF
HELMS-BURTON
The use of broad and
ambiguous language throughout the Helms-Burton Act was not accidental. The goal
of the U.S. Congress was to create a investment and trading chill that would
strongly discourage any foreign entities from entering into or maintaining
commercial relationships with Cuba, at least to the extent that the activities
would constitute trafficking in confiscated property.(FN105) Despite the current
suspension of the right of action under Title III, the Helms-Burton Act appears
to be achieving its objective. Companies that have reportedly reduced or
terminated their participation in Cuban business include Paradors Nacionale of
Spain, Cemex of Mexico, Redpath of Canada, ING of the Netherlands, and Grupo
Domos of Mexico.(FN106) Furthermore, the U.S. State Department has indicated
that, since the enactment of the Helms-Burton Act, nineteen firms from over ten
countries have changed their plans for investment in Cuba or have terminated
their investments there.(FN107)
Like the CACR, the
Helms-Burton Act is an offensive extraterritorial extension of United States
jurisdiction over commercial activity. The Act violates basic international
legal principles of extraterritoriality, U.S. obligations under international
trade agreements, and U.S. domestic and constitutional law.(FN108) In terms of
its extraterritorial reach, the Helms-Burton Act may be even more offensive than
the CACR to the extent that it seeks to sanction individuals and companies who
have no connection whatsoever with the United States. The consistency of the
CACR and the Helms-Burton Act with U.S. obligations under the agreements of the
World Trade Organization and the North American Free Trade Agreement will be
briefly reviewed in Part VII.A-B.
B. THE IRAN-LIBYA
ACT
Shortly after Helms-Burton came into
force, U.S. President Clinton signed into law the Iran and Libya Sanctions Act
of 1996 (Iran-Libya Act).(FN109)
Under the Iran-Libya
Act, a person, regardless of nationality, will be subject to sanction if he or
she makes a minimum investment of $40 million(FN110) or a combination of
investments of at least $10 million, that in the aggregate equal or exceed $40
million during any twelve-month period that directly contributes to the
enhancement of Iran's or Libya's development of petroleum resources.(FN111) In
addition, a person who exports, transfers or otherwise provides to Libya any
goods, services, technology or other goods prohibited under certain UN Security
Council resolutions will be subject to sanctions if the provision of such goods
(1) significantly and materially contributes to Libya's ability to acquire
certain weapons or enhance its military capabilities, (2) contributes to its
ability to develop its petroleum resources, or (3) contributes to its ability to
maintain its aviation capabilities.(FN112)
The
sanctions include the following: restrictions on imports into the United States;
denial of participation in U.S. government procurement programs; denial of
export licenses for goods exported to sanctioned persons; denial of U.S.
Export-Import Bank assistance, prohibition of loans from U.S. financial
institutions for amounts over $10 million; and, where the sanctioned person is a
financial institution, the denial of designation as a primary dealer in U.S.
government debt and the prohibition on service as a repository for U.S.
government funds.(FN113)
To date, the enforcement of
the Iran-Libya Act by the U.S. State Department has had mixed results, and there
have only been two investigations of significance. The first investigation
involved a joint venture between Total of France, Gazprom of Russia and Petronas
of Malaysia in the (U.S.) $2 billion development of Iran's South Pars gas field.
In May 1998, the U.S. Secretary of State, Madeline Albright, made a
determination that the joint venture constituted sanctionable activity under the
Iran-Libya Act; however, Albright waived imposition of sanctions against the
three firms involved on the basis of the national interest waiver contained in
the legislation.(FN114) The waiver may have been issued in connection with a
recent agreement between the United States and the European Union aimed at
ending their disputes over the Iran-Libya Act and the Helms-Burton
Act.(FN115)
In May 1997, the second investigation
undertaken by the U.S. Department of State under the Iran-Libya Act was
initiated when a consortium, including Bow Valley Energy of Calgary, Canada, and
Bakrie of Indonesia, tendered on the development of Iran's Balal offshore oil
field in the Persian Gulf.(FN116) The deal, which was worth an estimated $150
million, was signed in August of 1997 and drew immediate condemnation from U.S.
officials. Senator D'Amato of New York, one of the drafters of the Iran-Libya
Act, joined in the condemnation, claiming that Bow Valley had "chosen to support
international terrorism" and urged the U.S. State Department to apply all
available sanctions under the legislation against Bow Valley and its
partners.(FN117)
Although merely a fraction of the
size of the South Pars deal, no waiver from the U.S. State Department in respect
to Bow Valley's joint venture oil development appears to be forthcoming. U.S.
officials have claimed some success in delaying the project. Apparently, through
the efforts of U.S. officials, Bakrie has terminated its participation in the
deal, forcing Bow Valley to seek out new partners and new sources of
financing.(FN118)
As evidenced from the above
examples, the Iran-Libya Act, similar to Helms-Burton, achieves a new level of
extraterritoriality by sanctioning persons who have little, if any, connection
with the United States. Moreover, the Title IV investigation and ultimate
imposition of sanctions against Sherritt under the Helms-Burton Act demonstrates
that the enforcement of the extraterritorial legislation appears to have had a
direct impact on the conduct of Canadian business in the international
marketplace.
V. THE CANADIAN
RESPONSE
Canada has responded to the
extraterritorial measures contained in both the Helms-Burton Act and the
Iran-Libya Act, although its responses to both acts have not been uniform.
Canada's response to the enactment of the Iran-Libya Act has been primarily
diplomatic in nature; Canada has expressed "strong objections" and noted that it
"will continue to defend its interests against the extraterritorial application
of such legislation."(FN119) However, there has been no initiation of
consultations under either NAFTA or the WTO. In addition, FEMA has not been
amended nor have any FEMA orders been issued to address the Iran-Libya
Act.
In contrast, Canada has responded to the
enactment of the Helms-Burton Act on several levels. First, it made unsuccessful
diplomatic overtures to Washington in efforts to exempt Canadian businesses from
the extraterritorial effects of the legislation. This was followed by an
initiation of the consultation procedures under NAFTA. The matter was also
raised at the meetings of the Investment Committee at the Organization for
Economic Co-operation and Development as well as at meetings of the Organization
of American States. Canada also joined, as a third party, the action brought by
the European Union against the Helms-Burton Act at the World Trade
Organization.(FN120) For the purposes of this analysis, however, the most
significant Canadian response to date has come in the form of the FEMA
amendments.
A. THE FEMA
AMENDMENTS
Effective January 1, 1997,
there were five major substantive amendments to FEMA, ostensibly made to
demonstrate Canada's resolve in standing up to the extraterritorial measures
employed by the United States as well as to offer some protections to Canadian
companies that might be subject to any of the Helms-Burton Act remedies. These
amendments were limited to addressing Title III actions against Canadians. They
can be considered mostly symbolic and their effectiveness largely depends upon
the existence of U.S. Title III plaintiffs who have a presence or significant
assets in Canada.
1. BLOCKING TITLE III
JUDGMENTS
Under the amendments, any
attempts by successful U.S. complainants to enforce their U.S. judgements and
awards obtained under Title III of Helms-Burton Act in Canadian Courts will be
blocked. Where a U.S. court has rendered judgement against a Canadian company
under Title III and, in the opinion of the Canadian Attorney General, the
recognition or enforcement of the judgement will adversely affect significant
interests in Canada, the Attorney General may order that the judgement not be
recognized or enforceable in any manner in Canada.(FN121) In addition, the
Attorney General may reduce the amount by way of order of any Title III monetary
award for purposes of recognition and enforcement in Canada.(FN122)
2. RESTRICTIONS ON PRODUCTION OF
RECORDS
FEMA was amended to include Title
III judgements in the authority given to the Attorney General to restrict or
prohibit the production of records. Accordingly, the Attorney General may
prohibit the production of records in Canada or under the possession or control
of Canadians that may be required in Title III actions in the United States.
Canadians may also be prohibited from testifying or giving any information in
relation to such records to a U.S. court hearing a Title III action under the
Helms-Burton Act.(FN123)
3. THE "CLAWBACK"
The
FEMA amendments also provide for a clawback, enabling Canadian companies who
have had damages awarded against them in the United States in a Title III
proceeding to claim an equivalent amount of damages from the U.S. Title III
plaintiff. Canadian companies may bring suit for and recover any amount obtained
from them by the successful U.S. plaintiff and all expenses incurred by the
Canadian companies in the course of defending the proceedings in which the
judgement was awarded. This includes all court costs and attorney's
fees.(FN124)
4. RECOVERY OF
COSTS
The amendments also enable Canadian
Title III defendants to recover their costs before a Title III judgement has
been given. Where proceedings have been initiated under Title III but no final
judgement has been rendered, the Canadian defendant may, with the consent of the
Attorney General, sue the U.S. claimant who instituted the action and recover
from them all defense expenses incurred by the Canadian company and all expenses
involved in instituting the proceedings under FEMA.(FN125)
5. INCREASED
PENALTIES
Although the blocking, clawback
and cost-recovery provisions afford Canadian companies some protection from the
effects of the extraterritorial U.S. legislation, they are only effective if the
particular U.S. Title III plaintiff has significant assets in Canada. In
contrast, a final amendment to FEMA increased the penalties against Canadian
companies for violating FEMA orders.(FN126)
Strictly
speaking, this amendment did not respond to the Helms-Burton Act. The increase
in penalties was intended to attract the attention of those companies that had
chosen to follow the CACR (which imposes penalties of up to U.S. $1 million)
rather than the orders issued under FEMA. As noted by a Canadian Department of
Justice official during testimony before a House of Commons Committee examining
the FEMA amendments:
I think it was quite clear to us in conversations we had with lawyers representing different companies, who are always acting on an anonymous basis, not revealing who their clients were but letting us know that when the company had to choose between a $10,000 fine in Canada and a U.S. $1 million fine in the United States, the decision was rather simple.
We matched the American fines here pretty well. The American $1 million fine is equal to quite a bit more than Cdn.$1 million, so we set the fine at Cdn.$1.5 million. This allows us to up the American fine just a little bit to enhance compliance. These are maximum fines, of course, and we are at liberty to impose a lesser fine. But these are fines that will stick in people's minds when they know what they are exposed to by breaching an order issued by the Attorney General.(FN127)
Notably, these criminal measures may be applied to
Canadian corporations (and their officers, directors and employees) even if they
are not owned or controlled by U.S. persons. Assuming the 1996 FEMA Order
applies to the Helms-Burton Act, it is no longer merely the Canadian
subsidiaries of U.S. corporations that now face the dilemma of whether to follow
the U.S. Cuban trade controls or Canadian law--now Canadian businesses that are
in no way connected to the United States have been put in the position of having
to decide whether to risk being subject to significant U.S. lawsuits and
possible exclusion from entry into the United States or be subject to criminal
sanctions under Canadian law.
B. DOES THE 1996 FEMA ORDER COVER
HELMS-BURTON?
The 1996 FEMA Order was
issued January 16, 1996, at which time the Helms-Burton Act was making its way
through the U.S. Congress. Accordingly, there is no doubt that Canadian
officials responsible for issuing the 1996 FEMA Order knew that the Helms-Burton
Act was pending. However, there has been no clear statement from either the
Department of Foreign Affairs and International Trade or the Department of
Justice as to whether they intend to issue a new order under FEMA that would
address compliance by Canadian companies with the Helms-Burton Act, or whether
they are of the view the Helms-Burton Act is already within the scope of the
1996 FEMA Order.
As noted above, the 1996 FEMA Order
prohibits Canadian persons and corporations from complying with any
extraterritorial measure of the United States. "Extraterritorial measure" is
defined very broadly to include the CACR and
any law, statute, regulation, by-law, ordinance, order, judgment, ruling, resolution, denial of authorization, directive, guideline or other enactment, instrument, decision or communication having a purpose similar to that of the [CACR], whether enacted, passed, made, done, voted, established, issued, rendered, given, taken or executed by any legislative, executive, administrative, regulatory, judicial or quasi-judicial authority or body of the United States, the District of Columbia or any of the member states or territories or possessions of the United States, or any municipality or other local authority in the United States or its territories or possessions, to the extent that they operate or are likely to operate so as to prevent, impede or reduce trade or commerce between Canada and Cuba.(FN128)
The issue is whether the Helms-Burton Act qualifies
as a law having a purpose similar to that of the CACR to the extent that it
operates to prevent, impede or reduce trade between Canada and Cuba. On one
hand, Titles III and IV of the Helms-Burton Act apply to all persons but limit
sanctions to "trafficking" in confiscated property and do not constitute a ban
on all business or transactions with Cuban entities. In contrast, the purpose of
the CACR is to regulate all transactions with Cuba carried on by U.S. nationals
and U.S. owned or controlled subsidiaries, whether located inside or outside of
the United States. Arguably, in this respect the Helms-Burton Act, which intends
to sanction persons trafficking in confiscated property in Cuba, does not have a
purpose similar to that of the CACR.
The definition
of extraterritorial measures of the United States, in addition to setting out a
purpose test, also has an "effects" component that must be considered.
Specifically, the purposes of the potential extraterritorial measures of the
United States are to be assessed "to the extent that they operate or are likely
to operate so as to prevent, impede or reduce trade or commerce between Canada
and Cuba." It would not be unreasonable to conclude that the CACR and the
Helms-Burton Act are similar in purpose and effect at least to the extent that
they both are legislative regimes that operate to prevent, impede or reduce
trade. Given the lack of any guidelines, rulings or directives, or any comment
appearing in the Regulatory Impact Analysis Statement, which consider what is
meant by "having a purpose similar," or even whether the Helms-Burton Act is
covered, it would appear that Canadian authorities have purposely left
unresolved the issue of whether the 1996 FEMA Order applies to the Helms-Burton
Act. Perhaps this should not be a surprise, as the Canadian government would
likely hesitate to prosecute Canadian companies, in particular those that are
not U.S. owned or controlled, that have been put in a position of conflicting
obligations in these circumstances.
Even if the
Helms-Burton Act falls within extraterritorial measures of the United States in
the 1996 FEMA Order, Canadian authorities may encounter some practical
difficulties in attempting to demonstrate that a Canadian corporation has
violated section 5 of the Order by complying with either Titles III or IV. With
respect to Title III at least, Canadian corporations are arguably not required
to comply with any U.S. measures. Title III merely affords U.S. nationals a
right to sue those trafficking in confiscated property in Cuba. Accordingly,
avoiding or extricating a company from Cuban trade opportunities in order to
avoid a Title III action in the United States may not constitute compliance with
U.S. extraterritorial legislation. On the other hand, dictionary definitions of
compliance, as well as Canadian case law considering that term, have accorded it
a very wide meaning, including "to yield, to accommodate or to adapt oneself to,
to act in accordance with, to accept."(FN129) Under such broad definitions of
compliance, arguably a company that organizes its affairs to avoid Titles III or
IV is indeed complying with the Helms-Burton Act.
The
consequences of applying the 1996 FEMA Order to the Helms-Burton Act are
significant. For example, a small Canadian company, with no connection to U.S.
nationals, that refuses to supply products or services to hotels and resorts in
Cuba for fear that it may be subject to Title III actions against traffickers or
a Title IV prohibition on entry into the United States may be considered to be
complying with a U.S. extraterritorial measure. As a result, it could find
itself subject to criminal prosecution, monetary penalties and imprisonment.
Until the enactment of the Helms-Burton Act, only Canadian corporations owned or
controlled by U.S. entities faced these issues, all of which were subject to
U.S. prohibitions or restrictions on trade with Cuba. Currently, the passage of
the Helms-Burton Act and the refusal by Canadian authorities to explicitly
exclude the Helms-Burton Act from the application of the 1996 FEMA Order have
created an untenable situation. Canadian businesses entirely unrelated to U.S.
entities may now be subject to criminal prosecution for acting, or failing to
act, in such a manner that they may be considered to have "complied" with the
Helms-Burton Act.
C. CONTRASTING THE CANADIAN AND EUROPEAN
RESPONSES
The European Union (EU) response
to the extraterritorial measures included in the Helms-Burton Act and the
Iran-Libya Act focuses on recourse to dispute settlement mechanisms available
under international trade agreements, in particular the World Trade
Organization. This recourse to dispute settlement mechanisms is in conjunction
with the negotiation of an arrangement with the United States limiting the
application of these extraterritorial measures to European companies and
individuals.(FN130) However, the EU also enacted EU-wide blocking regulations
similar, in principle, to FEMA and orders issued thereunder in
Canada.(FN131)
Similar to the January 1997 amendments
to Canada's blocking legislation, the EU retaliatory legislation provides a
"clawback" enabling EU companies to recover damages, including legal costs,
resulting from the application of the Helms-Burton Act. Such damages may be
recovered from "the natural or legal person or any other entity causing damages
or from any person acting on its behalf."(FN132) In addition, courts' judgments
and administrative decisions--originating outside of the EU and giving effect to
certain specified laws, including the Helms-Burton Act--will not be recognized
or enforced in any manner in the EU.(FN133) The EU legislation also contains a
requirement that, where a person's economic or financial interests are affected
directly or indirectly by the specified laws, including the Helms-Burton Act,
notification must be made to the European Commission within thirty days of
obtaining information to that effect.(FN134) The legislation prohibits
compliance, whether it is active or by deliberate omission, with any requirement
or prohibition based on or resulting from the specified
laws.(FN135)
There are some very significant
differences between the EU and Canadian blocking legislation. First, the EU
legislation explicitly applies to the Helms-Burton Act, the 1992 CDA and the
Iran-Libya Act.(FN136) Second, unlike the 1996 FEMA Order that applies to
corporations, their directors, officers and certain employees, the EU blocking
legislation applies to legal persons incorporated within the EU, individuals
residing in the EU and nationals of EU member states.(FN137) Third, there are
significant differences in the nature of the notification requirement. Where the
Canadian 1996 FEMA Order requires a notification to be made to the Attorney
General concerning any communication from certain parties concerning U.S.
extraterritorial measures, the EU requires notification only where a person's
"economic or financial interests are affected" by a specified law.(FN138) By
directly relating the notification requirement to economic and financial
interests, the EU legislation appears to have a more direct relationship with
the U.S. extraterritorial measures and their negative effects on EU companies
and individuals.
One of the more interesting aspects
of the EU blocking legislation is an exception to the non-compliance obligation
that is conspicuously absent from Canada's FEMA and the 1996 FEMA Order. Under
the EU legislation, individuals and companies may seek authorization to "comply
fully or partially" with the specified laws "to the extent that non-compliance
would seriously damage their interests or those of the Community."(FN139) Unlike
the Canadian legislation, the EU blocking statute contemplates a type of
pressure valve that addresses the hardship that EU companies and individuals may
face when subject to conflicting obligations under EU and U.S.
law.
Although the EU blocking legislation came into
force in November 1996 with much fanfare from EU member countries eager to take
a strong stand against the extraterritorial measures of the United States, the
centerpiece of the European response is the EU's challenge at the World Trade
Organization and the subsequent negotiation of an agreement aimed at protecting
EU individuals and companies from the extraterritorial reach of these measures.
This aspect of the European response is discussed further in Part VII of this
Article.(FN140)
VI. THE DEFENSE OF "FOREIGN SOVEREIGN
COMPULSION"
One potential justification
for the policy of forced non-compliance, contemplated in Section 5 of the 1996
FEMA Order and the authority granted to the Attorney General to prohibit
production of documents or other information, is the availability in the United
States of the defense of "foreign sovereign compulsion." This defense enables
individuals or entities that are considered to be acting under compulsion by
foreign governments to avoid punishment for their conduct. In the context of the
1996 FEMA Order, firms that are required by Canadian law to trade with or invest
in Cuba in violation of the U.S. embargo measures ought not to be prosecuted for
violating the CACR or be subject to sanction under the Helms-Burton
Act.(FN141)
A. FOREIGN SOVEREIGN
COMPULSION
The foreign sovereign
compulsion defense was first recognized by the U.S. District Court of Delaware
in Interamerican Refining Corp. v. Texaco Maracaibo, Inc.,(FN142) a private
antitrust action in which the court granted summary judgement in favor of the
defendant on the grounds that its anti-competitive activity had been compelled
by a foreign government. The defendant, Texaco Maracaibo, had been sued for
treble damages under U.S. antitrust legislation on the basis that it had engaged
in a concerted boycott refusing to sell Venezuelan crude oil to the plaintiff.
The court accepted the evidence that the defendant's basis for refusal was that
sales to the plaintiff had been prohibited by the government of Venezuela. The
Court concurred with the defendant's position that the Venezuelan government's
prohibition of dealings with the plaintiff was an affirmative defense to the
claim. The court stated that:
When a nation compels a trade practice, firms there have no choice but to obey. Acts of business become effectively acts of the sovereign. The Sherman Act does not confer jurisdiction on United States courts over acts of foreign sovereigns .... Were compulsion not a defense, American firms abroad faced with a government order would have to choose one country or the other in which to do business. The Sherman Act does not go so far.(FN143)
The defense of foreign sovereign compulsion is
described in the American Law Institute's Restatement (Third) of the Foreign
Relations Law of the United States as follows:
(1) In
general, a state may not require a person
(a) to do
an act in another state that is prohibited by the law of that state or by the
law of the state of which he is a national; or
(b) to
refrain from doing an act in another state that is required by the law of that
state or by the law of the state of which he is a
national.
(2) In general, a state may require a
person of foreign nationality
(a) to do an act in
that state even if it is prohibited by the law of the state of which he is a
national; or
(b) to refrain from doing an act in that
state even if it is required by the law of the state of which he is a
national.(FN144)
Therefore, on the basis of this
doctrine, a Canadian company subject to sanctions in the United States could
rely upon the existence of the prohibition against compliance contained in the
1996 FEMA Order as a defense. As described further below, however, recent case
law in the United States suggests that the availability of such a defense is at
best certain.
B. "BALANCING OF
INTERESTS"
In rulings subsequent to the
Interamerican decision, U.S. courts appear to have shied away from a liberal
application of the foreign sovereign compulsion defense. They favor instead a
balancing of interests analysis conducted under the rubric of the doctrine of
international comity.(FN145) Under this doctrine, "a court faced with the
prospect of a United States law punishing what another country requires,
encourages, or permits should analyze the contacts and interests of the two
countries and by neutral criteria select the law that it is more reasonable to
apply-the law of the state whose 'interest is clearly
greater.'"(FN146)
As noted by some U.S. commentators,
this balancing test has introduced a significant measure of uncertainty to the
defense of foreign sovereign compulsion.(FN147) Three cases in particular are
cause for concern for companies wishing to rely on this defense. In Remington
Products, Inc. v. North American Philips Corp.,(FN148) the District Court of
Connecticut adopted the finding of a Special Master who had considered whether a
Dutch blocking statute precluded the imposition of sanctions against a defendant
who had refused to provide discovery in a civil antitrust matter. The Master
concluded that the mere existence of a foreign statute prohibiting disclosure
did not preclude the imposition of sanctions against the defendant. Rather, the
decision to impose sanctions depended on a balancing of interests. In the
Master's view, the Dutch interest underlying the blocking provision was not the
confidentiality of business documents but rather frustration with U.S. antitrust
laws. The Master did not consider this to be a legitimate national interest,
because the Dutch government had never criminally prosecuted a Dutch national
for violating the blocking legislation. The Special Master, therefore, doubted
whether the defendant would be subject to criminal penalties for complying with
the U.S. discovery order.(FN149) This is particularly notable due to the
similarities in Canada's lack of prosecutions under
FEMA.
A similar attitude towards blocking legislation
can be found in the judgement of the court in In Re Uranium Anti-Trust
Litigation.(FN150) The court compelled the production of documents located in
Canada relating to a U.S. antitrust matter, despite the existence of Canadian
blocking legislation that explicitly prohibited such disclosure. In that case,
the court ignored the blocking legislation that, in its view, had "the express
purpose of frustrating the jurisdiction of the United States courts over the
activities of the alleged international uranium
cartel."(FN151)
Another case considering the foreign
sovereign compulsion defense is In Re Japanese Electronic Products Antitrust
Litigation (Matsushita).(FN152) This case involved an antitrust action brought
against certain Japanese corporations and their subsidiaries. Prosecutors
alleged that they had conspired to eliminate American competitors from the U.S.
television market by selling products to U.S. consumers at dumped prices. The
Japanese manufacturers relied on the defense of foreign sovereign compulsion,
arguing that their actions had been mandated by the Japanese Ministry of
International Trade and Industry. Even though the Japanese Ministry had written
to the Court indicating that it was an authorized agency of the Japanese
government and, pursuant to its policy, the defendants were required to sell the
televisions at specified prices, the defense was denied. Commentators point to
this case as an example of how the defense, as it currently exists in U.S. law,
is "too open to manipulation by judges."(FN153)
C. AN UNCERTAIN
DEFENSE
In addition to the uncertain
nature of the foreign sovereign compulsion defense in current U.S. law, a number
of factors may present significant difficulties to Canadian companies seeking to
rely on the existence of the 1996 FEMA Order as a defense to prosecution and
penalties under the CACR or sanctions under the Helms-Burton Act. First and
foremost, the lack of any attempt to prosecute Canadian companies under FEMA
could be an indication to a U.S. court that there is no enforcement of Canadian
law. Therefore, a U.S. court may find an absence of any real compulsion exerted
on a Canadian defendant. In order that the compulsion defense be available, a
U.S. court must be satisfied that there exists a risk of severe sanction where
the act or omission required by U.S. law is
followed.(FN154)
The availability of the foreign
sovereign compulsion defense in the context of Titles III and IV of the
Helms-Burton Act is even more uncertain. First, Canadian authorities have
refused to clarify whether the prohibition on compliance contained in the 1996
FEMA Order even applies to the Helms-Burton Act. The lack of enforcement, in
addition to the uncertainty of whether Canadian companies are required to comply
with the Helms-Burton Act, may be sufficient basis for a U.S. court to rule that
the foreign sovereign compulsion defense would not be available to a Canadian
company subject to sanctions under the Helms-Burton Act. Indeed, given the
uncertainty surrounding the issue as to whether the 1996 FEMA Order would
require a Canadian company to make or maintain investments in confiscated
property in Cuba, it would be unlikely that the foreign sovereign compulsion
defense would be available in a Title III
action.(FN155)
Adding further uncertainty to the
matter is the fact that Title III of the Helms-Burton Act, by its own terms, is
not subject to the act of state doctrine: "No court of the United States shall
decline, based upon the act of state doctrine, to make a determination on the
merits in an action brought under paragraph (1) [liability for
trafficking]."(FN156) The principle underlying the defense of foreign sovereign
compulsion is that when a company or individual is forced by a foreign state to
follow a particular trade practice, those acts effectively become acts of the
state and as such cannot be the subject of U.S. court jurisdiction. Viewed in
this context, this exemption may prevent U.S. courts from applying the foreign
sovereign compulsion defense.(FN157)
The uncertainty
of the foreign compulsion defense is acknowledged by the Canadian authorities in
the Regulatory Impact Analysis Statement accompanying the 1996 FEMA Order, which
provides: "Should a person be prosecuted in the United States for a violation of
a United States measure, the existence of this Order can be considered by
American courts. Its precise impact, however, will be for those courts to
determine." Furthermore, in response to a comment from a member of the House of
Commons Foreign Affairs Committee to the effect that Canadian companies facing
conflicting laws in the United States and Canada had a choice "between being hit
with a bat or a brick," a witness from the Canadian Department of Justice made
the following observations as to the availability of the foreign sovereign
compulsion defense:
In a nutshell, that's right. I think there are some nuances you can put on that, though. First of all, the authorities on both sides of the border would have to have enough evidence to prosecute. That is one caveat. But it is possible that in the American proceedings they could use the Canadian legislation as some sort of shield and the defense in the prosecution in the United States. This isn't a guaranteed shield. There is some room in the case law for making that sort of argument. For instance, we can't give Canadians the assurance that they would get off scott-free in the United States. That's not the way it works. But there is a possibility of an argument based on that to lessen their exposure.(FN158)
There may be "some room in case law" or the
"possibility of an argument." This is by no means, however, a sufficient basis
for Canada's policy of forced non-compliance as set out in the provisions of
FEMA and the 1996 FEMA Order. Alternative means of protecting and promoting
Canadian sovereignty, either through recourse to remedies available under
international trade agreements or negotiating agreements delineating the bounds
of extraterritorial activity are options that ought to be seriously considered
in light of the ineffectiveness of FEMA to date.
VII. ALTERNATIVES AVAILABLE TO THE CANADIAN
GOVERNMENT
In addition to the unsuccessful
and largely ad hoc diplomacy employed by Canada in response to extraterritorial
measures enacted by the United States in the past, there are alternatives to
subjecting Canadian companies to both U.S. and Canadian criminal investigation
and prosecution. This section examines recourse to remedies under the agreements
of the World Trade Organization (WTO) and the North American Free Trade
Agreement.
A. THE AGREEMENTS OF THE WORLD TRADE
ORGANIZATION
At the time of the enactment
of FEMA in 1985, the world body regulating international trade was the General
Agreement on Tariffs and Trade (GATT).(FN159) When disagreements arose between
contracting parties to the GATT, dispute resolution panels were available as a
means of resolving the issues. The panels, however, only brought a limited
measure of success to trade law disputes. One of the reasons was the requirement
of unanimous agreement of all GATT members, including agreement of the party
complained against, before establishing a panel to consider a dispute and before
adopting a panel's final report. As a result, GATT panel decisions contained a
significant political element. A country unsatisfied with the findings or
determinations contained in a panel report would, on the basis of its single
vote, be able to block its adoption.(FN160)
Recent
changes adopted during the Uruguay Round of GATT negotiations include the
creation of the WTO. Dispute resolution under the auspices of the World Trade
Organization has become more timely and more effective than it was under the old
GATT regime. Unless there is a consensus of members to block, a panel will now
be established automatically upon the request of any member with a
grievance.(FN161) Furthermore, WTO panel reports will be adopted unless there is
a consensus of members not to adopt the report or unless there is an appeal to
the Appellate Body.(FN162)
WTO Members who fail to
bring measures into compliance with the recommendations and rulings contained in
a panel or Appellate Body decision may be subject to the suspension of
concessions or other obligations by the complaining WTO Member.(FN163) To some
extent, therefore, the obligations under the agreements of the WTO may be
considered "binding," as failure to abide by such obligations may result in
sanctions in the form of the suspension of benefits accorded by the complaining
Member to the offending Member.
The United States has
already had the extraterritorial aspects of its embargo on trade with Cuba
challenged at the WTO. In 1996, the European Union successfully requested the
establishment of a dispute settlement panel to consider the Helms-Burton
Act.(FN164) The EU challenge of the extraterritorial aspects of the Cuban trade
embargo deserves closer examination. It provides an excellent example of how
international trade agreement remedies, in conjunction with negotiated
arrangements for limiting the use of extraterritorial measures, may resolve many
of the issues that measures of forced non-compliance have failed to address.
1. THE EU CHALLENGE OF THE CUBAN TRADE EMBARGO AT THE
WTO
On October 4, 1996, the European Union
formally initiated its challenge of the Helms-Burton Act by filing a request for
the establishment of a panel to consider the consistency of the U.S. measures
with the General Agreement on Tariffs and Trade 1994 (GATT 1994), and the
General Agreement on Trade in Services (GATS).(FN165) The EU challenge was not
limited to Titles III and IV of the Helms-Burton Act. It also included (1) the
CACR; (2) measures prohibiting the allocation of sugar quotas to countries that
fail to certify that they do not import Cuban sugar; (3) measures prohibiting
vessels, either carrying Cuban goods or carrying goods or passengers to or from
Cuba, from entry into U.S. ports; (4) measures prohibiting vessels that have
entered a Cuban port from loading or unloading freight in U.S. ports within six
months of having departed from Cuba; and (5) the prohibition against the
extension of financing by U.S. persons to anyone for the purpose of a
transaction involving confiscated property under Title I of the Helms-Burton
Act.(FN166) From the EU perspective, these measures, along with Titles III and
IV of the Helms-Burton Act, violated U.S. obligations under GATT 1994 and
GATS.(FN167)
The EU relied on GATT 1994 prohibitions
against the use of import and export restrictions to challenge the CACR to the
extent that it restricted trade between the EU and Cuba and between the EU and
the United States.(FN168) Prohibitions against discrimination in the application
of import and export restrictions were cited by the EU to impugn the sugar quota
restrictions applicable to net importers of sugar that fail to certify that they
do not import Cuban sugar.(FN169) Guarantees of freedom of transit for vessels
and prohibitions against discrimination with respect to a vessel's flag, place
of origin, departure, entry, exit or destination, or any circumstances related
to the ownership of goods on board a vessel, were relied upon in challenging the
U.S. port measures.(FN170)
In challenging Titles I,
III, and IV of the Helms-Burton Act, the EU relied on certain obligations set
out in the GATS that extend to the services and service suppliers of WTO
Members. These obligations include most-favored-nation treatment;(FN171)
transparency requirements; (FN172)the reasonable, objective and impartial
administration of measures affecting trade in services;(FN173) market
access;(FN174) and national treatment.(FN175) The Helms-Burton Act Title IV
prohibition on entry into the United States was also challenged on the basis of
the GATS Annex on the Movement of Natural Person Supplying Services Under the
Agreement, which contains certain obligations with respect to the entry of
individuals into Member countries.
The EU also
claimed that the U.S. trade embargo measures are contrary to the non-violation
nullification and impairment provisions of both GATT 1994 and GATS. The EU
argued that, even if the measures taken by the United States do not violate any
of the provisions of the WTO agreements, those measures nonetheless nullify or
impair benefits that the EU and other WTO Members could have reasonably expected
to have accrued under the specific WTO commitments of the United States and
Cuba.(FN176)
2. RELIANCE ON THE NATIONAL SECURITY
EXCEPTION
The United States responded to
the EU challenge of the extraterritorial aspects of its Cuban trade embargo by
justifying the measures under what is commonly known as the national security
exception. Available in both GATT 1994 and GATS, the exception provides that
nothing in the agreements prevent any WTO Member from "taking any action which
it considers necessary for the protection of its essential security interests
... taken in time of war or other emergency in international relations."(FN177)
Relying on the national security exception, the U.S. Administration claimed that
the Helms-Burton Act, along with other measures of the Cuban trade embargo,
"reflected important U.S. national security and foreign policy concerns ...
[t]he WTO was not created to decide foreign policy and national security
issues."(FN178)
Despite the self-judging nature of
the exception (a WTO Member may itself decide what measures are "necessary for
the protection of its essential security interests"), there are arguably at
least two objective requirements for successfully invoking the national security
exception that the United States would have to satisfy. First, based on the
drafting history and past use of the exception, it appears that the United
States should have to at least demonstrate that its embargo of Cuba is
proportional to the threat to U.S. security interests posed by Cuba. Second, the
U.S. should have to demonstrate that these measures have been "taken in time of
war or other emergency in international relations," even though some of the
measures have been in place for over 35 years.(FN179) In this case, threats by
the United States to refuse to participate in the WTO challenge, the possibility
of a WTO panel permitting the United States to rely upon the national security
exception, and the general uncertainty surrounding the application of the
national security exception, led both the United States and the EU to the
bargaining table in an effort to negotiate a settlement to avoid having to
address these issues before a WTO panel.
3. THE UNITED STATES-EUROPEAN UNION
UNDERSTANDING
In April 1997, after a
series of negotiations between the EU and the United States, an agreement was
reached to suspend the EU challenge of the Helms-Burton Act at the WTO, pending
the negotiation of penalties for the acquisition and dealing in confiscated
property and for the use of extraterritorial measures. This was achieved under
the auspices of the Multilateral Agreement on Investment (MAI) negotiations in
progress at the Organization for Economic Cooperation and Development (OECD).
This agreement became known as the "April 1997 Understanding."(FN180) In return
for the EU's commitment not to challenge either the Helms-Burton Act or the
Iran-Libya Act, the U.S. agreed to continue its waiver of Title III. On May 18,
1998, after further negotiation, and despite a lack of progress among OECD
members in negotiating the MAI, the United States and the European Union
concluded an Understanding with Respect to Disciplines for the Strengthening of
Investment Protection (Investment Protection
Understanding).(FN181)
The Investment Protection
Understanding is scheduled to take effect once the U.S. Executive Branch
succeeds in having Congress amend the Helms-Burton Act, so that it authorize
issuance by the U.S. executive branch of a waiver, without a specific time
limit, exempting EU individuals and companies from the application of the visa
restrictions contained in Title IV.(FN182) Once the waiver has been granted to
the EU, the United States and the EU will implement penalties for dealing in
illegally expropriated properties as set out in the Investment Protection
Understanding. Those penalties include the denial of government support and
government commercial assistance for transactions involving property that has
been expropriated in violation of international law.(FN183) The United States
executive branch has also agreed to obtain a Title III waiver for the EU without
a specific time limit.(FN184) Although the Investment Protection Understanding
contains no mention of the Iran-Libya Act, or the EU's WTO challenge, the EU has
stated that it will not challenge either the Helms-Burton Act or the Iran-Libya
Act provided that, (1) the waiver of Title III remains in effect, (2) the waiver
authority for Title IV is exercised for EU individuals and companies, (3) no
action is taken against EU companies or individuals under the Iran-Libya Act,
and (4) by the expiration of Clinton's second term, a Title III waiver without
specific time limit has been granted.(FN185)
Although
Canada reserved its third party rights in the EU challenge of the Helms-Burton
Act, Canada did not participate in the negotiation of either the April 1997
Understanding or the Investment Protection Understanding.(FN186) Even though
this latest agreement between the U.S. and the EU allows for the possibility of
other countries joining the agreement,(FN187) there are no guarantees that
Canada will benefit from this understanding. Given that the Clinton
Administration has taken the view that the waiver of Title III may be effected
on a country-by-country basis,(FN188) and the Investment Protection
Understanding currently contemplates only an EU-specific Title IV waiver,
Canadian individuals and companies may find themselves the subject of Title III
law suits and Title IV entry restrictions while their European counterparts
benefit from specific waivers.
Although the
Investment Protection Understanding will likely receive a difficult reception in
the U.S. Congress,(FN189) and the success or failure of the agreement may not be
evident for some time to come, it appears initially that the EU has provided its
nationals with some protections from some of the extraterritorial elements of
the Helms-Burton Act and the Iran-Libya Act. If implemented, the Understanding
promises a full exemption from the extraterritorial effects of the Helms-Burton
Act for EU companies and individuals. In any event, the EU continues to ready
its challenge of the U.S. Cuban trade embargo at the WTO. Most recently, the EU
has stated that it would be under "enormous pressure" from its member states to
reinitiate its challenge in the event that an EU company were sanctioned under
Title IV of the Helms-Burton Act.(FN190)
B. THE NORTH AMERICAN FREE TRADE
AGREEMENT
In 1985, when FEMA was enacted,
Canada had yet to conclude a free trade agreement with the United States. Four
years later, however, the Canada-U.S. Free Trade Agreement took effect. Five
years later, the North American Free Trade Agreement (NAFTA) came into
force.(FN191) Similar to its WTO counterpart, NAFTA includes a binding dispute
resolution mechanism. When a panel has determined that a measure is inconsistent
with NAFTA and a Party refuses to amend its laws accordingly, the complaining
Party may suspend benefits of equivalent effect.(FN192) This mechanism is
similar to the process relied upon by the EU in its WTO challenge of the U.S.
embargo of Cuba.(FN193) NAFTA also contains provisions likely to be more
effective than those of the WTO agreements in addressing the extraterritorial
aspects of the U.S. trade embargo on Cuba--in particular, obligations with
respect to the treatment of investments(FN194) and guarantees of temporary entry
for business persons.(FN195)
1. CHAPTER 11 INVESTMENT
PROTECTIONS
Chapter 11 of NAFTA provides a
range of investment protections. These protections include national treatment,
whereby the United States must accord to Canadian investors treatment no less
favorable than it accords to its own investors under like circumstances; and
most favored nation (MFN) treatment, whereby the United States must accord to
Canadian investors treatment no less favorable than it accords to investors of
any other country in like circumstances.(FN196) Accordingly, application of
Titles III and IV of the Helms-Burton Act, which discriminates against Canadian
investors in the United States, may be vulnerable under NAFTA. For example, by
applying a Title III waiver on a country-by-country basis, the United States may
subject Canadians with assets or investments in the United States to costly
Title III lawsuits while other investors, in particular EU investors, may have
insulated their U.S. investments from such lawsuits. Any application of the
Helms-Burton Act, and other measures of the U.S. trade embargo on Cuba, favoring
U.S. investors or foreign investors, but discriminating against Canadian
investors or their investments, could be subject to a NAFTA challenge on the
basis of either the national treatment or MFN
obligations.
NAFTA Parties must also extend to other
Parties' investors and their investments treatment in accordance with
international law, which includes fair and equitable treatment and full
protection and security.(FN197) As noted previously, the extraterritorial
aspects of the Helms-Burton Act, the CACR, and other measures taken by the
United States in its embargo on trade with Cuba, are arguably inconsistent with
customary international law.(FN198) Article 1105 of NAFTA essentially
incorporates customary international law obligations into the binding dispute
mechanism available to NAFTA Parties. Therefore, the inconsistency of the
Helms-Burton Act with basic international law principles may be subject to
challenge before a NAFTA panel.
NAFTA also prohibits
the direct or indirect expropriation of investments, or the implementation of
measures tantamount to expropriation of investments. NAFTA does provide an
exemption for measures that are (1) designed for a public purpose, (2)
undertaken on a non-discriminatory basis, (3) applied in accordance with due
process of law, and (4) indemnified through payment of freely transferable and
fully realizable compensation without delay.(FN199) An argument can be made that
Title III of the Helms-Burton Act, which exposes Canadians with investments in
the United States to otherwise groundless treble damage lawsuits, would be a
measure tantamount to expropriation without compensation, and, therefore, would
be inconsistent with U.S. obligations under NAFTA. Another interesting prospect
for Canadian investors that are the subject of successful Title III lawsuits is
the possibility of suing the U.S. government for enacting measures tantamount to
uncompensated expropriation pursuant to the investor-state dispute mechanism
contained in Chapter 11 of NAFTA.(FN200)
2. CHAPTER 16 GUARANTEES OF
ENTRY
Chapter 16 of NAFTA contains
obligations for Parties to grant temporary entry into their territory to
business persons otherwise qualified for entry under applicable measures
relating to public health and safety and national security.(FN201) A business
person is defined as a citizen of a NAFTA Party who is engaged in trading goods,
the provision of services, or the conduct of investment activities.(FN202)
Because executives of Canadian companies would fall under the definition of
business persons within Chapter 16 and fall within the category of business
visitors,(FN203) the United States arguably has an obligation to provide
temporary entry to such executives. With respect to business visitors, NAFTA
Parties are prohibited from requiring prior approval procedures as a condition
of temporary entry or imposing or maintaining numerical restrictions with
respect to temporary entry.(FN204)
Because Canadian
executives and their families would otherwise be qualified for entry under
applicable measures relating to public health and safety and national security,
Title IV appears inconsistent with U.S. obligations under Chapter 16 of
NAFTA.
3. A CANADIAN NAFTA
CHALLENGE?(FN205)
Canada, along with
Mexico, initiated consultations under Chapter 20 of NAFTA shortly after the
enactment of the Helms-Burton Act in March of 1996. Since July of 1996, Canada
has been in a position to call for the establishment of a panel to consider the
consistency of the Helms-Burton Act with U.S. obligations under NAFTA.(FN206) To
date, Canada has yet to request the establishment of a NAFTA panel.
C. AN AGREEMENT ON
EXTRATERRITORIALITY
Pursuing bilateral or
multilateral negotiations to address certain measures perceived by one country
as an unjustifiable extraterritorial extension of the powers of another is an
alternative that deserves serious consideration. This is especially true in
light of binding trade agreements such as NAFTA and the agreements of the WTO.
In addition, such negotiations are consistent with the EU and U.S. approach
evidenced in the Investment Protection Understanding, which was reached under
threat of a WTO challenge. Without the existence of binding WTO obligations,
such an agreement would not likely have been achieved.(FN207) However, the
Investment Protection Understanding has yet to come into force and appears to be
encountering significant difficulties in the U.S. Congress. Nevertheless, the
pursuit by Canada of a bilateral or multilateral agreement on the
extraterritorial application of trade measures should be considered, especially
in light of past experience in antitrust law, which used to be a battleground
for extraterritorial conflicts.(FN208)
The primary
basis for the enactment of FEMA was the extraterritorial application of U.S.
antitrust measures. In particular, Canada had difficulties with extraterritorial
aspects of the U.S. investigation into alleged price fixing by producers of
uranium.(FN209) Since that time, however Canada has been able to resolve some of
the problems encountered with respect to the extraterritorial application of
U.S. antitrust law. For example, in 1984 a non-binding memorandum of
understanding was negotiated between Canada and the United States addressing
conflict management, cooperation in enforcement, and regular consultations
between competition and antitrust authorities.(FN210) This was superseded in
1995 by the Agreement Between the Government of Canada and the Government of the
United States of America Regarding the Application of their Competition and
Deceptive Marketing Practices Laws (Canada-U.S. Competition Law Agreement). This
agreement established a binding framework for the coordination of investigations
between the Canadian and U.S. governments in the competition law
area.(FN211)
The Canada-U.S. Competition Law
Agreement provides for detailed notification procedures as well as procedures
designed to avoid conflicts. It also provides that comity considerations be
taken into account by the national competition authorities in the avoidance of
enforcement conflicts. For example, each party must notify the other when it
undertakes enforcement activities that may affect the other party's important
interests.(FN212) The agreement provides a list of enforcement activities of one
party that may affect the important interests of another. These activities
include those that (1) are relevant to the other's enforcement activities, (2)
involve substantial anti-competitive activities carried out in whole or in part
in the other's territory, (3) involve mergers or acquisitions in which one or
more of the parties is organized under the law of the other, (4) involve conduct
required, encouraged or approved by the other, (5) involve remedies expressly
requiring or prohibiting or otherwise directed at conduct in the other's
territory, and (6) involve the seeking of information in the other's
territory.(FN213) The Canada-U.S. Competition Law Agreement also enables
authorities in one country to request that the authorities in the other take
enforcement action against anticompetitive conduct that adversely affects the
important interests of the requesting
country.(FN214)
Canada and the U.S. have also
negotiated a treaty providing for mutual legal assistance in enforcement
matters. Concluded in 1985, the United States-Canada Mutual Legal Assistance
Treaty (MLAT),(FN215) requires both governments to provide assistance to each
other in "all matters relating to the investigation, prosecution and suppression
of offences."(FN216) The MLAT applies to all indictable criminal offences in
Canada and all offences with a minimum statutory penalty of one year in the
United States.(FN217)
Today, Canadian and U.S.
differences regarding the application of competition and antitrust laws pale in
comparison to their different approaches to trade with Cuba. However, the small
measures of successes in the antitrust area that began with a memorandum of
understanding and progressed into binding international legal commitments
between Canada and the United States indicate that an agreement delineating or
limiting the use of extraterritorial trade measures is not
impossible.
The pursuit of an international agreement
that would define the boundaries of extraterritorial measures in international
trade would be the most direct solution to what often appears to be essentially
a political problem that remains unresolved by legislative measures such as
blocking statutes. In this regard, on the basis of his analysis of the use of
extraterritorial measures in international trade, Professor J.-G. Castel
observed as follows:
In the absence of self-restraint, blocking legislation has been the preferred method of retaliation. However, self-restraint and retaliation are not the answers to excessive or unwarranted extraterritoriality. International economic cooperation and interdependence are ill-served by blocking legislation. The members of the international community must agree to identify and limit their sovereignty in order to solve conflicts of jurisdiction involving the regulation of the economy. This can best be done through the political process. States should legislatively restrain their prescriptive jurisdiction by limiting the range of application of their statutes and regulations. When this is not the case, domestic and international tribunals should also strive to do so. But the most effective method is for states to enter into international agreements that define their jurisdictional boundaries. Comity, reciprocity and reasonableness ... can only serve as guides to diplomats, legislatures and the courts.(FN218)
VIII. CONCLUSION
The
extraterritorial aspects of U.S. measures concerning trade with Cuba, Iran and
Libya are likely offensive to international law, as well as offensive to U.S.
commitments under international trade agreements, including NAFTA, GATS, and
GATT 1994.
The current imposition of criminal
sanctions on Canadian companies and individuals whose actions may be perceived
as compliance with such extraterritorial measures deserves serious
reconsideration. These sanctions can impose significant compliance costs in
terms of time and effort expended by Canadian companies in resolving their
conflicting duties. Furthermore, the 1996 FEMA Order may be counterproductive as
some Canadian companies may find themselves better off altogether avoiding even
preliminary inquiries into Cuban trade opportunities in light of the possibility
of criminal sanction if they decide not to
proceed.
The enactment of the Helms-Burton Act in
particular has widened the scope of these problems. Now not only must Canadian
corporations that are owned or controlled by U.S. entities resolve the difficult
issues of conflicting obligations under Canadian and U.S. law, but all Canadian
companies, and their officers, directors and employees, to the extent that the
1996 FEMA Order may apply to the Helms-Burton Act, have been drawn into this
"Catch-22."
Even if one concedes that FEMA orders are
absolutely necessary to assert Canadian sovereignty in response to
extraterritorial measures undertaken by the United States, the 1996 FEMA Order
suffers from broad, vague language, uncertainty of application and fundamental
unfairness. By contrast, the EU blocking legislation explicitly applies to the
Helms-Burton Act, it does not yet suffer from a lack of enforcement, provides
for an exclusion permitting EU nationals to partially or fully comply with
certain extraterritorial measures in cases of hardship arising out of
conflicting obligations under EU and U.S. law.
In
contrast to the time at the enactment of FEMA, today there are better responses
to extraterritorial measures available to Canada than threatening Canadian
directors or officers with five years in prison or Canadian companies with fines
up to Can.$1.5 million. Recourse to binding dispute settlement procedures at the
WTO or pursuant to NAFTA, along with the pursuit of bilateral or multilateral
arrangements limiting the extraterritorial effects of these measures, are
alternative options worthy of further consideration. Indeed, recent events
concerning the EU's WTO challenge of the U.S. trade embargo of Cuba and the
subsequent negotiation of the Investment Protection Agreement indicate that, at
least for the time being, EU companies and individuals appear to be better
insulated from the negative effects of U.S. extraterritorial trade measures than
their Canadian counterparts.
ADDED MATERIAL
JOHN
W. BOSCARIOL
Lawyer, McCarthy Tétrault, Toronto,
Canada and member of the firm's Trade Law Group. This paper was originally
written for a paper requirement of the author's LL.M., Osgood Hall Law School,
Toronto, Canada.
FOOTNOTES
1. The Pajamas Are Coming, N.Y.
TIMES, Mar. 9, 1997, at § 3, p. 2.
2. See infra Part III.E for a further
description of the Wal-Mart incident and the subsequent investigation by
Canadian authorities.
3. Undoubtedly, there are a number of businesses that
are unaware of the full ramifications of the Canadian legislation.
4. Foreign
Extraterritorial Measures Act, R.S.C., ch. F-29, §3 (1985), amended by ch. 28,
1996 S.C. (Can.).
5. See William C. Graham, The Foreign Extraterritorial
Measures Act, 11 CAN. BUS. L.J. 410, 410 (1986).
6. Gilles Lauzon,
Extraterritorial Acts Good and Bad, 1 CAN. INT'L LAW. 75, 75 (1995).
7.
Foreign Extraterritorial Measures Act, supra note 4.
8. Id. § 8.
9. Id. §
9.
10. Id. § 5(1)(a).
11. Id. § 5(1)(b).
12. See Cuban Liberty and
Democratic Solidarity (LIBERTAD) Act, 22 U.S.C. §6021 (Supp. III 1998).
13.
Foreign Extraterritorial Measures Act, supra note 4, § 3.
14. For a detailed
review of past extraterritorial disagreements arising between Canada and the
United States and Canada's responses, see generally Graham, supra note 5; J.-G.
CASTEL ET AL., THE CANADIAN LAW AND PRACTICE OF INTERNATIONAL TRADE 293-310
(1991); A.L.C. DE MESTRAL & T. GRUCHALLA-WESIERSKI, EXTRATERRITORIAL
APPLICATION OF EXPORT CONTROL LEGISLATION: CANADA AND THE U.S.A. 129-189 (1990);
J.-G. CASTEL, EXTRATERRITORIALITY IN INTERNATIONAL TRADE: CANADA AND UNITED
STATES OF AMERICA PRACTICES COMPARED (1998).
15. See J.-G. CASTEL ET AL., THE
CANADIAN LAW AND PRACTICE OF INTERNATIONAL TRADE, supra note 14, at 303.
16.
See Uranium Information Security Regulations, C.R.C., Ch. 366, §3 (1978)
(Can.).
17. See 563 F.2d 992, 996 (10th Cir. 1977). For an analysis of this
case see generally Catherine Botticelli, Recent Canadian Blocking Legislation: A
Vehicle to Foster Extra-Territorial Discovery Cooperation Between the United
States and Canada?, 10 FORDHAM INT. L.J. 671, 680 (1987). See also Graham, supra
note 5 (providing analysis of the Westinghouse case). But see In re Uranium
Antitrust Litigation, 480 F. Supp. 1138, 1155-56 (N.D. Ill. 1979) (compelling
the production of documents located in Canada despite the existence of the
Uranium Information Securities Regulations). See also infra Part VI for a
discussion of the Uranium Information Securities Regulation.
18. See
discussion infra Part VII.C.
19. See 74 Stat. 140 (1960) (codified as amended
22 U.S.C. 2370 (1994 & Supp. III 1998).
20. See Proclamation No. 3504, 27
Fed. Reg. 10,401 (1962).
21. Trading with the Enemy Act of 1917, 50 U.S.C.
apps. §§ 1-44 (1994 & Supp. III 1998).
22. Cuban Assets Control
Regulations, 31 C.F.R. § 515 (1999).
23. See DE MESTRAL &
GRUCHALLA-WESIERSKI, supra note 14, at 166.
24. The restrictions in the CACR
pertaining to trade with Cuba apply not only to trade with Cuba or Cuban
companies, but also to certain companies deemed by OFAC to be "specially
designated nationals," companies that, in its view, have acted on behalf of
Cuban authorities in international trade. See Cuban Assets Control REgulations,
31 C.F.R. § 515.305 (1999). For example, the Cobalt Refinery Co., Inc. (a
company connected with Sherritt Inc. and the Cuban government), which is located
in Fort Saskatchewan, Alberta, has been identified by OFAC as a specially
designated national. See OFFICE OF FOREIGN CONTROL, U.S. DEPT. OF THE TREASURY,
SPECIALLY DESIGNATED NATIONALS AND BLOCKED PERSONS (1998) (visited Mar. 25,
1999) <http://www.ustreas.gov/ofacAccordingly,
the CACR prohibitions on trade with Cuba extend to dealings with this
company.
25. On March 20, 1998, U.S. President Clinton announced amendments
to the CACR that allow U.S. persons to send cash of up to U.S. $300 for the
support of a close relative's household in Cuba, direct passenger charter
flights between the United States and Havana, and travel to Cuba for U.S. sales
representatives of pharmaceutical and medical companies in connection with
permitted sales of health care products. See OFFICE OF FOREIGN ASSETS CONTROL,
U.S. DEPT. OF TREASURY, AN OVERVIEW OF THE CUBAN ASSETS CONTROL REGULATIONS,
TITLE 31 PART 515 OF THE U.S. CODE OF FEDERAL REGULATIONS (1998) (visited Mar.
25, 1999) <http://www.ustreas.gov/ofac[hereinafter
OFAC].
26. OFAC also monitors various forms of trade and investment embargoes
currently in place. See 31 C.F.R. § 550 (1999) (sanctioning Libya); 31 C.F.R. §
590 (1999) (sanctioning Angola); 31 C.F.R. § 560 (1999) (sanctioning Iran); 31
C.F.R. § 575 (1999) (sanctioning Iraq); 3