This article is Part 3 of a four-part series on Canadian sanctions compliance. Part 1 — Overview covered the core legislative framework. Part 2 — Real Estate examined sanctions risk in real estate transactions. Part 3 focuses on the cross-border compliance conflict that arises when Canadian and U.S. Cuba sanctions obligations collide. Part 4 (July 21) will address Canada’s export control rules and recent amendments to the Export Control List.

Introduction

What if complying with one country’s sanctions laws could expose your business to liability in another?

Canadian businesses have become increasingly familiar with sanctions compliance as Canada continues to expand its sanctions regime under the Special Economic Measures Act (“SEMA”). Whether negotiating contracts, onboarding counterparties, processing payments, or evaluating supply chains, businesses are expected to understand the sanctions risks associated with their operations and conduct appropriate due diligence. SEMA serves as Canada’s primary autonomous sanctions tool, allowing Canada to impose sanctions against foreign states, entities, and individuals through measures such as dealings prohibitions, asset freezes, financial restrictions, and trade controls.

In most cases, sanctions compliance follows a relatively straightforward analysis: determine whether a transaction involves a sanctioned country, designated person, or prohibited activity, and assess whether Canadian law permits the transaction to proceed. The Cuba context, however, presents a unique challenge.

Unlike traditional sanctions issues, where the primary focus is compliance with Canadian restrictions, Cuba-related matters can place Canadian businesses between competing legal regimes. The United States maintains extensive sanctions against Cuba through the Cuban Assets Control Regulations (“CACR”) and the Helms-Burton Act, while Canada has adopted measures designed to limit the extraterritorial application of certain U.S. Cuba sanctions to Canadian businesses. The primary Canadian statute governing this conflict is the Foreign Extraterritorial Measures Act (“FEMA”), which prohibits Canadian businesses and their directors from complying with certain foreign measures, including U.S. Cuba sanctions, that purport to regulate conduct in Canada. FEMA creates positive legal obligations that can directly conflict with the demands of U.S. sanctions law. Therefore, organizations with cross-border operations can find themselves navigating conflicting compliance expectations arising from the same commercial activity.

The FEMA exposure in practice: A Canadian subsidiary of a U.S. parent may receive instructions from its parent to avoid Cuba-related business in compliance with U.S. sanctions. Following those instructions may itself violate FEMA. Conversely, refusing them may create tension with U.S. regulators or the parent company’s own compliance obligations. This is not a hypothetical; it is the operational reality for many Canadian businesses with U.S. ownership. Directors of the Canadian entity can face personal liability under FEMA for corporate decisions made in this context.

The result is a classic cross-border compliance “catch-22.” A business may face pressure to align its operations with U.S. sanctions requirements while simultaneously managing Canadian legal obligations and regulatory expectations. Importantly, FEMA’s prohibitions are not advisory. Non-compliance can result in significant penalties, and directors may face personal liability for corporate violations. For organizations with U.S. ownership, multinational operations, cross-border banking relationships, or international supply chains, understanding this conflict has become an increasingly important component of sanctions risk management.

How does Cuba fit within Canada’s sanctions framework?

Canada’s sanctions regime forms part of a broader foreign policy framework designed to promote international peace and security, combat corruption, and support international norms, including respect for human rights. Canadian sanctions are imposed through legislation such as SEMA and can apply to Canadians both inside and outside Canada, as well as persons operating within Canada. Sanctions may restrict dealings with designated persons, prohibit financial services, limit trade activity, and impose sector-specific restrictions.

The Cuba framework differs from most SEMA-related compliance issues because it is not primarily about whether Canada has imposed sanctions on Cuba. Canada has not imposed comprehensive sanctions against Cuba under SEMA. Rather, it highlights the challenges businesses may encounter when different jurisdictions regulate the same activity in different ways. While the United States maintains comprehensive Cuba sanctions, Canada has taken the opposite position: FEMA actively prohibits Canadian businesses from complying with U.S. measures that purport to restrict trade or commercial activity with Cuba in Canada.

For businesses already navigating the complexities of SEMA compliance, the Cuba framework serves as an important reminder that sanctions risk is not always limited to designated persons or prohibited transactions. In some circumstances, the challenge lies in understanding how multiple legal regimes apply simultaneously. The Cuba context is the clearest example in Canadian law of a situation where following one country’s sanctions requirements would itself constitute a violation of Canadian law.

Understanding your exposure

The first step in managing sanctions risk is understanding the organization’s operational and corporate footprint.

Particular attention may be required where a business has significant U.S. connections, including:

  • a U.S. parent company or controlling shareholder;
  • U.S. citizens involved in management or operational decision-making;
  • reliance on U.S.-origin technology, software, or services; or
  • transactions that depend on U.S. financial institutions or payment systems.

These connections may increase the likelihood that a transaction attracts inspection from both Canadian authorities and U.S. sanctions regulators. Consequently, sanctions due diligence should extend beyond screening counterparties and include an assessment of ownership structures, governance arrangements, financing relationships, and transaction flows.

As Global Affairs Canada has emphasized, effective sanctions compliance requires businesses to understand not only who they are dealing with, but also the broader legal and operational context in which a transaction occurs.

When routine communications become compliance issues

Many organizations focus sanctions compliance efforts on contracts, counterparties, and payment screening. However, in the Cuba context, routine communications can also create legal and compliance considerations.

For example, a Canadian business may receive instructions from a U.S. parent company regarding Cuba-related operations, encounter restrictions imposed by a U.S. financial institution, or receive requests from counterparties concerning Cuba-related activities. These situations can quickly evolve from operational issues into legal and compliance matters. Under FEMA, even receiving and acting on a written directive from a U.S. parent to avoid Cuba-related transactions may constitute a violation. The moment such an instruction arrives, it should be escalated to legal counsel, not actioned by the operations team.

As a result, businesses should ensure that sanctions-related communications are identified, escalated, and reviewed through appropriate governance and compliance channels. Effective internal reporting procedures and clear lines of responsibility can help organizations assess risk before decisions are made or actions are taken.

For multinational organizations, sanctions compliance is no longer limited to transaction screening. It increasingly requires coordination between legal, compliance, finance, procurement, and senior management teams.

What does this mean for your business?

As Canada’s sanctions regime continues to evolve under SEMA, businesses should recognize that sanctions risk does not always arise from clearly prohibited transactions. In some cases, the greater challenge is navigating competing legal and regulatory expectations imposed by different jurisdictions.

The Cuba framework remains one of the clearest examples of this challenge. For businesses with U.S. ownership, cross-border financing arrangements, multinational operations, or potential Cuba-related activities, understanding how Canadian sanctions compliance intersects with U.S. sanctions requirements should form part of a broader risk management strategy.

The key takeaway is that sanctions compliance is no longer simply a matter of screening names against a sanctions list. Businesses must increasingly evaluate ownership structures, transaction routes, governance processes, and cross-border legal obligations to understand where risk may arise.

For organizations operating internationally, now is an opportune time to review sanctions compliance programs, cross-border governance procedures, and risk management frameworks to ensure they remain fit for purpose in an increasingly complex regulatory environment.

Key takeaways for businesses with cross-border operations

Five things to address before your next Cuba-related transaction or compliance review:

  • Know that FEMA creates positive obligations, not just defences. FEMA does not merely protect Canadian businesses from U.S. extraterritorial measures. It imposes affirmative Canadian legal obligations. Following a U.S. parent’s Cuba-related instructions without legal review may constitute a FEMA violation.
  • Map your U.S. connections before a transaction arises. U.S. ownership, U.S. citizens in management, U.S.-origin technology, and U.S. banking relationships all increase the likelihood of conflicting obligations. Identify these connections now, not when a Cuba-related issue surfaces.
  • Escalate — do not action — Cuba-related instructions from U.S. parents. Written directives from a U.S. parent regarding Cuba operations should go immediately to legal counsel. Acting on them without review creates FEMA exposure for both the corporation and its directors personally.
  • Review your compliance program for cross-border gaps. A compliance program built around SEMA screening alone will not catch FEMA exposure. Cross-border governance procedures, escalation protocols, and training for management and directors are all necessary components.
  • Directors face personal liability. FEMA’s enforcement provisions extend to individual directors and officers. This is not a risk that can be managed at the operational level alone; board-level awareness of the Canada-U.S. Cuba compliance conflict is essential.

If you have questions about how FEMA, SEMA, or U.S. Cuba sanctions may affect your business, please contact a lawyer from our Global Trade and Customs group.