Rare new guidance is available from a recent Alberta decision confirming that Canadian sanctions screening cannot stop at checking whether a counterparty is named on a Canadian sanctions list. Businesses must also assess whether a party is owned or controlled, directly or indirectly, by a person named on a Canadian sanctions list. In conducting such an assessment, Canadian courts will look beyond formal share ownership to practical indicators of control, including voting power, board composition, governance rights, and the ability to direct the entity’s activities.
In RN Cardium Oil Inc v Loyal Energy (Canada) Operating Ltd., 2026 ABKB 239 (“RN Cardium v Loyal”), the Court undertook detailed analyses that provide much needed guidance on how far sanctions due diligence must go when considering counterparty sanctions risk. The Alberta Court of King’s Bench considered ownership, voting power, board composition, and governance to determine that RN Cardium Oil Inc., a Canadian oil & gas production company, was controlled by Rosneftegaz, the latter being a sanctioned entity under Schedule 1 to the Special Economic Measures (Russia) Regulations.
Background and Outcome of Proceeding
The dispute arose from a joint venture involving oil & gas assets in Alberta. Loyal Energy (Canada) Operating Ltd. (“Loyal”) operated the jointly owned assets under an agreement with RN Cardium. RN Cardium held a 30 percent working interest and was entitled to receive its share of net revenues from production, after costs and expenses.
After Canada expanded its sanctions regime against Russia following Russia’s invasion of Ukraine, Loyal stopped paying RN Cardium its quarterly share of net revenues, citing compliance with Canada’s sanctions laws. In response, RN Cardium stated that Loyal misinterpreted and misapplied the sanctions laws, and it commenced a lawsuit against Loyal.
Loyal did not dispute that it had withheld the funds, taking the position instead that Canadian sanctions laws prohibited payment. Loyal argued that paying RN Cardium would violate the Special Economic Measures Act (“SEMA”) and the Russia Regulations because RN Cardium was controlled by, or on behalf of, an entity designated on Schedule 1 to the Russia Regulations. Schedule 1 of the Russia Regulations is a list containing persons and entities that Canadians and persons in Canada are forbidden from transacting or otherwise dealing with.
The Court agreed with Loyal that RN Cardium was controlled by Rosneftegaz, granted Loyal’s application for summary dismissal of the action and dismissed RN Cardium’s cross-application seeking payment of the withheld funds into Court.
Canadian Sanctions Prohibitions Extend Beyond Listed Persons or Entities
The central issue in RN Cardium v Loyal was whether RN Cardium was controlled by a person listed on Schedule 1 such that dealings with RN Cardium were prohibited by the SEMA.
The Court provided guidance on the definition of “control” under the Russia Regulations. In doing so, the Court examined the SEMA’s “deemed ownership” provisions, which were enacted on June 22, 2023, under subsection 2.1 of the SEMA:
Deemed ownership
2.1 (1) If a person controls an entity other than a foreign state, any property that is owned — or that is held or controlled, directly or indirectly — by the entity is deemed to be owned by that person.
Criteria
(2) For the purposes of subsection (1), a person controls an entity, directly or indirectly, if any of the following criteria are met:
(a) the person holds, directly or indirectly, 50% or more of the shares or ownership interests in the entity or 50% or more of the voting rights in the entity;
(b) the person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; or
(c) it is reasonable to conclude, having regard to all the circumstances, that the person is able, directly or indirectly and through any means, to direct the entity’s activities.
While the deemed ownership provisions did not add any new restrictions to Canadian sanctions laws, in Justice Jeffrey’s words, the provisions “more clearly revealed Parliament’s intention that the prohibitions apply not only to property that is owned by a sanctioned person, but also to property that is possessed by or controlled, directly or indirectly” by sanctioned persons.
Ownership and Control Turns on Practical Governance, Not Just Formal Ownership
RN Cardium was a wholly owned subsidiary of Rosneft. Rosneft’s controlling shareholder at the time was Rosneftegaz. While Rosneftegaz was listed on Schedule 1 to the Russia Regulations, Rosneft itself was listed only on Schedule 3. Designation on Schedule 3 carries much narrower restrictions compared to designation on Schedule 1, restricting only certain financial transactions and dealings related to new debt of longer than 90 days maturity. On the other hand, a Schedule 1 listing entails a broad ban that restricts “deal[ings] in any property” owned or controlled by that entity.
RN Cardium argued that the designation of Rosneft on Schedule 3 settled the matter, as it demonstrated an intention by the Government of Canada to permit dealings with Rosneft that would otherwise have been prohibited if Rosneft had been listed on Schedule 1.
The Court disagreed, stating that the Russia Regulations prevent dealings in property owned, held, or controlled by a Schedule 1 person and instead the Court dug deep into the extent to which Rosneftegaz controlled Rosneft. The Court found that Rosneft was controlled by Rosneftegaz. Rosneft’s property was therefore subject to the broad dealings ban despite its Schedule 3 listing. Rosneftegaz controlled Rosneft and, in turn, Rosneft controlled RN Cardium. Following this chain of control, RN Cardium was therefore indirectly controlled by a person listed under Schedule 1 to the Russia Regulations. In making this determination, the Court examined practical indicators of control, including:
- Ownership and Control Structure: RN Cardium was a subsidiary of Rosneft, and Rosneft’s controlling shareholder was Rosneftegaz. Rosneftegaz was listed in Schedule 1 under the Russia Regulations. That structure gave the Court a basis to examine whether control moved through the corporate chain to RN Cardium.
- Voting Power: Although Rosneftegaz held a significant stake in Rosneft, it was not a majority shareholder on paper. However, the Court examined voting power rather than shareholdings alone and found that Rosneftegaz effectively controlled almost 58 percent of the possible votes at Rosneft shareholder meetings.
- Ability to Direct Activities: Rosneft’s CEO, Mr. Igor Sechin, was also designated on Schedule 1 to the Russia Regulations. The composition of Rosneft’s board pointed in the same direction. Of Rosneft’s 11 directors, five were also listed persons. This evidence supported a conclusion that sanctioned persons could direct Rosneft and thus RN Cardium’s activities.
- The Broader Sanctions Context: Rosneft’s own listing on Schedule 3 at the time Loyal ceased payments to RN Cardium also provided support for the Court’s determination that Rosneft was controlled by Rosneftegaz, as the grounds for Rosneft’s listing on Schedule 3 suggested ownership and control by Rosneftegaz.
In evaluating these indicators, the Court concluded that Rosneftegaz indirectly controlled RN Cardium at the time Loyal stopped making payments in February 2023. The Court found that control by Rosneftegaz was present by February 2023 and that the deemed ownership provisions made that conclusion even clearer because Rosneftegaz was able to direct Rosneft’s activities pursuant to subsection 2.1(2) of SEMA.
In considering the evidence, the Court relied on several publicly available corporate materials. This evidence included corporate communications, governance materials, shareholder information, and public representations.
For businesses conducting sanctions compliance, this is an important practical point. A corporate registry search may identify the direct shareholder, but it may not show who controls votes, who influences board composition, or how decision-making power is exercised in practice.
The decision therefore confirms that sanctions due diligence cannot stop at a check of an entity’s legal name against various sanctions lists or schedules. Where an entity sits within an ownership structure involving a sanctioned person, the relevant question will be whether that sanctioned person can be viewed as controlling the entity in question. If there is any doubt, deeper due diligence into the nature of the relationship between the entities is necessary.
A Finding of Control Makes Payment Legally Prohibited
By determining that RN Cardium was controlled by a listed person, the Court held that Loyal was prohibited from paying RN Cardium.
The Russia Regulations prohibit dealings involving property owned, held, or controlled by listed persons or on their behalf, including conduct that knowingly assists or facilitates a prohibited activity. Both “dealings” and “property” are broadly defined and encompass a wide array of activities.
RN Cardium relied on the JV operating agreement and argued that it was entitled to payment. Loyal responded that the agreement incorporated applicable laws, and that Canadian sanctions laws required it to cease payments to RN Cardium.
The Court accepted Loyal’s position. Paying RN Cardium would have contravened the Russia Regulations and, for that reason, would also have been contrary to the parties’ agreement. So rather than Loyal breaching its contract with RN Cardium, the Court determined it was acting in compliance with its contract by refusing to pay RN Cardium.
Key Takeaways for Canadian Businesses
RN Cardium v Loyal provides helpful clarification on how to assess control under Canadian sanctions law. In addition to assisting with interpretation of control under the SEMA, this decision has several important implications for Canadian businesses undertaking sanctions due diligence.
First, the decision confirms that a mere review of applicable sanctions lists or schedules is not enough where a party of interest sits within a layered corporate group or has state-linked ownership. While RN Cardium believed that its immediate corporate parent’s sanctioned status was determinative (i.e., Rosneft being listed only on Schedule 3 of the Russia Regulations), an evaluation of what it means to be owned, held, or controlled under Canadian sanctions requires a deeper review of ownership and control relationships (here, in respect of Rosneftegaz being listed on Schedule 1 of the Russia Regulations).
If there is a risk of sanctioned ownership in a corporate structure, businesses must consider identifying not only the legal owner of a proposed counterparty, but also whether a listed person can direct that party’s decisions or activities.
Second, assessing sanctions risk requires continual evaluation of business relationships. Sanctions risk can change during a commercial relationship. A deal or contract that appears permissible at the start of the relationship may become higher risk or even impossible to continue if sanctions designations change, ownership shifts, or new control information becomes available. The decision highlights the role that sanctions-compliance clauses in contracts may play when sanctions risks arise after the contract has been executed.
Third, sanctions risk analyses are always fact-specific. A party relying on sanctions regulations to justify non-compliance with a contract will likely need evidence showing why the listed person can direct the relevant entity. A party seeking enforcement of the contract may argue that the alleged control for sanctions purposes is too remote, is unsupported, or is not tied to the payment or property at issue under contract.
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