Canada and Iran Sanctions

Should we sanction more? And if so, to what effect?

Here’s a special edition of Insight Intelligence based on some of the questions that I’m being asked by media and other experts about Canadian sanctions against Iranian officials. TL;DR: Canada’s Special Economic Measures Act is like a scalpel compared to the listing of terrorist entities (another sanction tool), and is a much more effective tool in this case. But there are serious limitations to the application of SEMA sanctions in Canada, as well as to their enforcement. Read on for more:

I was asked earlier today about Iranian assets in Canada — about whether any of the already sanctioned individuals had assets in Canada, or if any other regime officials have assets in Canada.

I declined the interview at first because I really didn’t know. Then I got to thinking about it. Why don’t I know? Presumably this is the kind of thing I’d know about, right?

Well, now that I’ve reflected on it, I think the issue is one for the government of Canada. Basically, there’s no comprehensive way to know ~who~ has ~what~ assets in Canada before they get sanctioned, unless they’re under investigation or if they’ve been reported to FINTRAC by banks / other reporting entities for suspicions of money laundering or terrorist financing.

Let me explain.

First off, even non-Canadian residents or citizens might be able to open an account in Canada. Rules vary by banks, but it’s possible to open an account at a Canadian bank even if you’re not in Canada or a Canadian citizen or resident. Common ways to get access to the Canadian financial system include coming to Canada to work or study, even for a short period of time.

But just because you open a Canadian account (even with an Iranian passport for example) does not mean that that account gets reported to the government through FINTRAC (or other reporting mechanisms). In Canada, we have a strong right to privacy, particularly when it comes to banking, and this applies to foreigners with Canadian accounts. So that means that the government will only become aware of foreign assets in Canada (including in real estate) in the case of suspicious activity or if they sanction the entities holding the accounts (at which point those assets have to be reported to the RCMP. We saw RCMP reporting on this as part of the Russia sanctions). Canada’s ongoing lack of a beneficial ownership registry also means that foreign ownership of companies is a problem: it makes it hard to identify foreign ownership of Canadian assets.

One way that the government might have insight into assets in Canada is through FINTRAC’s mandatory electronic funds reports. If someone (again, say an Iranian regime official) sent funds to a Canadian account at or above the CA$10,000 reporting threshold, then FINTRAC would receive a report. But very little effort is required to circumvent this — simply structuring transactions below the threshold would likely result in avoiding this reporting (unless you did it poorly and got reported for attempted structuring in a suspicious transaction report…but I digress.) High ranking officials also qualify as politically exposed people, and are subject to some reporting requirements, but this is fairly limited.¹

Safe Canadians, Secure Economy: FINTRAC’s 2020-2021 Annual Report

Basically, this means that, aside from intelligence reporting on foreign assets in Canada (which happens, but is probably not an intelligence priority for the government of Canada)², financial intelligence from FINTRAC, or tips from the public, there are few ways that the government can proactively know what foreigners have assets in Canada.

So where does this leave us with Iranian sanctions? Should the government of Canada sanction more individuals, and are our sanctions effective? (These are questions I’ve been regularly asked.) Let’s take them one by one.

Should the government sanction Iran more? I say sure. What’s going on in Iran is horrendous, and there’s really no reason why the government of Canada can’t use the SEMA sanctions to impose more pressure on Iranian officials.

However, I don’t think that we should list the IRGC as a terrorist entity as some are suggesting. Doing so is a really sweeping action — one that is difficult to undo, would require weeks, if not months of work by government officials, and would subvert the independence of the process. (This has already been contested with the listing of the Proud Boys, Oath Keepers, and others.) The SEMA sanctions are much more of a precision instrument: they can be applied, strengthened, and lightened with relative ease, making them responsive to policy priorities. There’s also the question of whether or not the IRGC ~could~ be sanctioned as an entity, as military forces of a state exercising their official duties are excluded from Canada’s definition of terrorist activity. (Of course, this didn’t stop the listing of the IRGC-QF…)

If you want to learn more about economic and financial warfare, be sure to check out the CASIS Symposium being held here in Ottawa on November 4th!

Are the sanctions effective? This speaks to the broader debate about the effectiveness of sanctions, and really depends on what exactly you mean by effectiveness. In this case, I’d say that effectiveness should be measured as a change in behaviour. I doubt that this would happen quickly in Iran just because of some Canadian (or even international) sanctions. Iran has been under sanctions for many years and has developed work arounds and other ways of doing business in the face of restricted financial mobility. But sanctioning Iranian officials will limit their options, make their lives harder, and generally signal support to the protesters, all things that are probably in Canada’s interests at the moment.

Do Canadian sanctions matter? In many cases, Canada is a bit player in the sanctions game. Even recent Russia sanctions, resulting in hundreds of millions of dollars frozen, are a drop in the bucket. But I suspect that the Canadian financial system’s exposure to Iranian assets could be proportionally impactful. This means that Canada’s sanctions might be able to hit some of these players where it hurts and might be useful in coercive behavioural change.

On a less positive note, Iranian entities (particularly those with close relationships to Hizballah or IRGC-QF) have extensive experience circumventing sanctions and anti-money laundering / counter-terrorist financing initiatives. This means that without dedicated financial investigators hunting down Iranian assets and responding to attempted sanctions evasion, Canada could be in the position of yet again enacting more laws with insufficient enforcement. Given what we know about the state of Canada’s financial crimes enforcement, I have a hard time believing that there’s a crack team of investigators just waiting to take up this challenge. Even if the government responded to this challenge, they’d have to cannibalize other financial crimes teams. It’s a sad state of affairs, particularly for a government that seems keen to use its tools of economic warfare. Too bad we’re firing blanks.

1. I’m not even getting into the other obfuscation techniques that illicit actors use to obscure the source and destination of their funds, like proxies, third parties, family members, etc etc etc.

2. If you want to know more about our very secretive intelligence priority setting activities (and what those intelligence priorities might be), check out my chapter in Stress Tested. I got access to primary documents for that piece, with the cooperation of the Privy Council Office.