Sanctions Capture Cartels As Terrorist Groups

Although terrorist designations are not new, before the latest cartel designations, companies often had significantly less exposure because the jurisdictions implicated by terrorist activity were either conflict zones, or comprehensively sanctioned jurisdictions where sanctions risks had already made it prohibitively difficult to operate, e.g., Yemen, Iran, Iraq, and Syria. Now, significant terrorist risk exists in Mexico and several other Latin American countries in which Canadian companies have significant operations. Under NAFTA and CUSMA, supply chains have benefited through manufacturing and sourcing in Mexico. However, cartel activity in the country is now leading to increased enforcement risk.

The Government of Canada (GOC) has listed the following seven major drug cartels operating primarily out of Latin America as terrorist groups under the Criminal Code, making it a criminal offence to deal with them:¹

• Cártel del Golfo (Gulf Cartel)
• Cártel de Sinaloa (Sinaloa Cartel)
• La Familia Michoacana (the Family)
• Cárteles Unidos (consisting of various affiliated cartels)
• La Mara Salvatrucha (MS-13)
• Tren de Aragua
• Cártel de Jalisco Nueva Generación (Jalisco New Generation Cartel)

Except for the Cártel del Noreste (formerly Los Zetas) all drug cartels designated by the US are now designated as terrorist groups in Canada. The designations of cartels as terrorist organizations in both Canada and the US allows for asset freezes and bans on transactions with these groups and can cause significant compliance risks. Companies operating in, or whose supply chains pass through, areas of cartel activity may be exposed to additional investigative risk if their operations are vulnerable to cartel activity.

Offences

Part II.1 of the Criminal Code prohibits dealing in property of terrorist groups, including certain entities identified in the Regulations Establishing a List of Entities. The Criminal Code imposes specific reporting requirements and asset-freeze obligations relating to terrorist property. It also sets out several offences relating to money laundering and the financing of terrorism.²

A terrorist listing under the Criminal Code is equivalent to an asset freeze: all persons in Canada and Canadians anywhere in the world are prohibited from dealing, directly or indirectly, in any property owned or controlled by or on behalf of a terrorist group, facilitating, directly or indirectly, transactions or providing financial assistance in respect of this property.³ It is also an offence to directly or indirectly provide property knowing that it will be used by or benefit a terrorist group. There are, however, certain health and humanitarian authorizations which may be granted if a terrorist group controls a geographic area.

Causing, assisting or promoting prohibited activities is likewise prohibited.

Section 83.1 requires anyone in Canada, and Canadians anywhere, to advise CSIS and the RCMP about the existence of property in their control or possession that they know is owned or controlled by or on behalf of a terrorist group as well as any information about transactions related to that property.

Forms of Support to Terrorist Groups

Complex corporate structures, dubious intermediaries and personal connections, may result in legitimate companies making payments to cartels, and cartel-affiliated organizations or individuals. For example:

• Companies establish legitimate relationships with foreign third parties that have been infiltrated by or are effectively controlled by a cartel.
• Companies may be confronted with demands for "donations to communities," or other similar payments, for access to roads or facilities, or to enhance community services. The recipients may be directly or indirectly associated with a cartel, even if they are nominally a local government official.
• Companies may be forced to do business with specific individuals or companies associated with cartels, including purchasing supplies, raw materials, or equipment from individuals.
• Companies´ logistics departments or service providers are infiltrated by cartel operatives.
• In addition to direct dealings with cartels, liability may also arise from indirect dealings with cartels through third-party entities or individuals.
• Obtaining permits and licenses from municipal authorities in areas may also be challenging when local governments may have a direct or indirect link with cartels.

A company must not knowingly deal with a cartel. However, willful blindness can also establish the knowledge requirement, if for example a company consciously avoided knowledge of the cartel's activities or the nature of the dealings or property being provided.

Risk Mitigation

Companies including manufacturers, extraction companies, logistics providers, and agricultural businesses operating in Mexico and Central America must be cautious about potential cartel ties in their supply chains. Companies should reassess the compliance risk that operations in known cartel territories now pose:

• Assess (i) potential cartel-related exposure based on the footprint of business operations, manufacturing sites, procurement and logistics networks, to help better understand how evolving cartel influence may affect operations in impacted jurisdictions; and (ii) the effectiveness of existing screening processes, controls, and reporting mechanisms. Such assessments will help inform which additional risk-mitigation measures should be considered.
• Conduct enhanced due diligence and tailor contractual obligations with third parties where necessary. Consider establishing a contractual right to immediately terminate relationships if a counterparty is suspected of being linked to cartel.
• Consider how to enhance monitoring programs, including with continuous screening, to support the identification of cartel-related risks. Implement escalation procedures for addressing red flags and conduct audits of key supply chains to identify potential exposure to cartel-linked entities.
• Implement mandatory training for employees, especially those in procurement, finance, logistics, and human resources to educate employees on how to identify and mitigate risks associated with potential interactions with cartels.
• Review policies and procedures pertaining to handling requests for charitable donations, and local community offsets.
• Conduct due diligence and background checks on employees of sensitive functions to assess links with cartels.
• Diligence should incorporate red flags for indirect dealings with cartels who may use seemingly legitimate, often registered, tax-paying businesses. This can create risk, for example, in dealings with local distributors, suppliers and vendors.
• Evaluate payment and financial contracts with heightened regulatory expectations around know your customer and vendor requirements. Be prepared to address additional compliance scrutiny by banks and financial institutions which will face heightened oversight regarding transactions linked to cartels.
• Companies engaged in cross-border trade should be prepared to respond to stricter due diligence requirements from customers or suppliers if they operate in regions with high cartel activity.

In light of the nature of the offence, it is important to document both the steps taken to address risks and the practical and security challenges that may limit companies' mitigation to demonstrate the due diligence undertaken in the event of a government investigation.

Takeaways

Although the designations target criminal organizations, they create ripple effects that impact legitimate businesses. Companies must strengthen compliance policies and ensure they are not inadvertently linked to cartels to mitigate potential legal and reputational risks.

1. Enhanced risk of governmental investigation for companies with contractual counterparties who may be alleged to be cartels, engaged in dealings with cartels, or to have dealt with intermediaries linked to cartels.
2. The designation of cartels will expand the number of parties for which transactions would be prohibited by Canadian authorities.
3. Companies that operate in or do business with entities in cartel-controlled areas should perform a risk assessment and ensure that their compliance programs sufficiently address anti-terrorism risks, enhance existing due diligence procedures to address the increased risks, and closely monitor developments surrounding new cartel designations.

Footnotes

1. Public Safety Canada's press release is available here. The backgrounder on each designation is available here.

2. The Criminal Code prohibits willfully collecting or providing, directly or indirectly, property, financial or other related services to listed terrorist entities intending or knowing they will be used in a way that benefits the terrorist entity or supports terrorist activity.

3. Criminal Code, section 83.01.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.