Economic threats to national security may not grab headlines as much as other dangers with the potential to affect Canada, but that doesn’t mean they’re not dangerous to the safety and prosperity of Canadians. Earlier this year the federal government struck a task force to study and address new and emerging threats and asked stakeholders to give feedback.
The Competition Law and Foreign Investment Review Section of the Canadian Bar Association provided detailed recommendations. Below is a summary of some of the most salient ones.
Pre-closing notifications and approvals
The Section believes a focused regime of notifications and approvals “could effectively alert the Government to investments of potential concern prior to implementation and give foreign investors and Canadian businesses increased predictability and regulatory certainty.” In order to achieve this goal, such a regime must be focused on higher risk investments, be based on clear thresholds and be free of burdensome or time-consuming compliance obligations.
On the possibility of requiring pre-closing notifications in certain technology areas, the CBA Section says regardless of the approach taken, “filing requirements must be clear and unambiguous to materially limit the number of investments subject to pre-closing filing requirements.” Providing a list of sensitive business or technology areas is useful guidance for foreign investors, but the government should ensure the descriptions are not too nebulous or broad. One suggestion is to use North American Industry Classification System codes, or other similarly unambiguous metrics.
Exemption for low-risk countries
As the Section notes, more than two-thirds of foreign investment is from the U.S., U.K and Australia. “We believe that investments from these countries are highly unlikely to raise national security concerns. As such, we strongly favour exempting investors from the U.S., U.K. and Australia from any mandatory pre-closing notification regime. (New Zealand could also be included for equal treatment of Five Eyes jurisdictions.)”
This would reduce burdens on foreign investors from these countries without materially impairing the government’s ability to enforce the Investment Canada Act, or ICA.
Mitigation
Most investments contain some risk and some reward for the Canadian economy, the Section says. “Mitigation is, and should be viewed, as a possible remedy to elements of an investment that present a concern of injury to Canada’s security interests.”
Good faith investors will likely accept reasonable mitigation measures, especially if compliance is not disproportionately burdensome and if investors have advance knowledge of what measures they are liable to face. “Regulatory uncertainty can have a spillover chilling effect and deter non-problematic investors,” the Section writes, encouraging the government to catalogue mitigation measures in the ICA Annual Report as an informal guide to investors and lawyers.
The Section offers a list of technological and physical mitigation measures it considers desirable such as network segregation, reasonable geographic restrictions or video surveillance but adds that “structural mitigation such as non-approval or divestiture of lines of business should not be ordered unless absolutely necessary.”
Enforcement
The Section believes enforcement is “an important part of an effective national security regime” and that the Investment Review Division should have the resources necessary to enforce compliance where necessary.
In addition, it believes Canada should adopt an enforcement approach similar to that of other Five Eyes jurisdictions, including increased statutory fines for failure to make a required application or notification if certain conditions are met. On the other hand, the CBA Section does not “believe investors ought to be fined for national security ‘contraventions.’”
Considering that the vast majority of investments raise no national security or net benefit concerns, the Section believes investors should only be fined when they fail to comply with Ministerial demands to submit a required notification or application. “We do not believe these investors should risk punishment for an inadvertent failure to notify.”
Transparency in the national security review process
Investors can be frustrated trying to address the government’s security concerns if they are not given sufficient information about those concerns. While the CBA Section understands the need to protect national security, and recognizing recent improvements in the degree of disclosure, it believes there is room for additional disclosure without jeopardizing national security.
The security review process could also be improved by a Special Advocate, a security-cleared individual acting as a fairness monitor to “remind all parties of the proper considerations of a security review, namely those related to genuine threats to the security of Canada and its allies. This individual would observe official deliberations on a transaction and certify that the process was objective, fair and based on genuine security considerations.”