Canada: Updated National Security Guidelines - Canada signals focus on sensitive technology, personal information, and critical minerals

In brief

On 24 March 2021, the Minister of Innovation, Science and Industry ("Minister") issued updated Guidelines on the National Security Review of Investments ("Updated Guidelines"). The Updated Guidelines outline additional factors and clarify existing factors the Canadian government will consider in assessing investments for potential national security concerns under the Investment Canada Act (ICA).

These new factors include sensitive personal data, intangible assets, certain sensitive technologies, and critical minerals. The Updated Guidelines also formalize that investments by state-owned or state-influenced investors will likely be subject to enhanced national security scrutiny, and confirm the non-exhaustive nature of the enumerated factors. 


Contents

Background

Since 2009, the ICA has explicitly provided for the review of foreign investments where the Minister has "reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security". This regime is separate from the economic "net benefit" regime that applies to a more narrow subset of investments; for a more detailed discussion of the two regimes, see our 30 June 2020 alert, Foreign Investments in Canada: Still Open for Business, but Caveat Emptor

In 2016, the government published the original National Security Review of Investments Guidelines ("2016 Guidelines"), which set out a non-exhaustive list of factors the government would consider when assessing an investment for potential national security risks. As the ICA does not define "national security" or elaborate on when an investment could be "injurious" to national security, the Updated Guidelines expand on the 2016 Guidelines and provide foreign investors with clearer insight into what types of investments may give rise to potential national security concerns. 

The Changes

All risk factors set out in the 2016 Guidelines remain unchanged. In addition, the Updated Guidelines expand the list of factors to include:

  • State-owned enterprises: All investments by state-owned investors or private investors viewed as being closely tied to, or influenced by, foreign governments will be subject to enhanced scrutiny regardless of the value of the investment. 

Within the ICA framework, state-owned enterprises, defined very broadly to include any entity that may be "influenced" by or "acting under the direction" of a foreign state, are already subject to separate considerations. The increased interest in state-owned and state-influenced investors was previously outlined in the April 2020 Policy Statement on Foreign Investment Review and COVID-19, which the government has now confirmed will remain in place for an indefinite period until the Canadian economy recovers from the effects of the COVID-19 pandemic. As this approach has now been formalized in the Updated Guidelines, which do not have an end date, it has become a permanent consideration when assessing the risk of a national security review.

  • Sensitive technologies: While the 2016 Guidelines already referred to transfers of sensitive technology as a potential risk factor, the Updated Guidelines elaborate on the exact nature of these technologies by specifically calling out technologies that have military, intelligence or dual military/civilian applications.

The Updated Guidelines also (i) clarify that when assessing investments, the nature of the "assets", defined broadly to include intangible assets (e.g., data and software), may be considered and (ii) provide examples of industries where these technologies are more likely to be designed or manufactured, including artificial intelligence, energy generation, biotechnology, medical technology, space technology, and robotics and autonomous systems.

  • Critical Minerals: The potential impact of an investment on critical minerals included on the Critical Minerals List and critical mineral supply chains will be considered in determining if national security risks may arise or a review is required.

Critical minerals include those that are (i) essential to Canada's economic security, (ii) required for Canada's transition to a low-carbon economy and (iii) a sustainable source of critical minerals for Canada's trading partners. The publication of the Critical Minerals List follows the Canada - US Joint Action Plan on Critical Minerals Collaboration, a bilateral initiative that aims to develop reliable and integrated North American supply chains for critical minerals. 

  • Sensitive personal data: The potential for an investment to facilitate access to sensitive personal data that could be leveraged to harm Canadian national security will now be considered in the national security analysis. 

While the government did not provide an exhaustive definition of "sensitive personal data", it did provide the following examples: 

  • personally identifiable health or genetic information (e.g., health conditions or genetic test results); 
  • biometric information (e.g., fingerprints); 
  • financial information (e.g., confidential account information, including expenditures and debt);
  • communications (e.g., private communications); 
  • geolocation information; and 
  • personal data concerning government officials, including members of the military or intelligence community. 

The explicit focus on data reflects the government's broad and ongoing concerns relating to protecting Canadians' privacy in an increasingly digital age.1

Lastly, the Updated Guidelines now explicitly codify the widely-accepted interpretation that the list of factors is illustrative only and that the Minister may still scrutinize or formally review investments that do not raise any of the enumerated concerns.

Takeaways:

The Updated Guidelines reflect and confirm recent trends relating to Canadian national security screening and review and provide additional transparency for investors relating to the types of transactions and industries that are more likely to attract enhanced scrutiny.

  • Foreign investment is still encouraged in Canada:

The publication of the Updated Guidelines indicates that the government intends to help non-Canadian investors better understand the government’s evaluation of the potential national security risk of their investments, thus allowing them to consider and implement mitigation strategies. 

  • Investors must be proactive:

The full national security review process can take up to 200 days (or longer with an investor’s consent). Therefore, where any factors outlined in the Updated Guidelines are present, investors are strongly encouraged to involve specialized  counsel as early as possible to assess risk and devise mitigation strategies to ensure smooth and timely transaction implementation. 

  • Continued focus on state-owned enterprises:

The Updated Guidelines codify and emphasize the government's earlier position that investments by state-owned enterprises, regardless of value and regardless of whether any other factors are present, are likely to be subject to enhanced scrutiny. Given the broad statutory language, while in some cases the answer as to whether an investor is a state-owned enterprise will be straightforward (e.g., a sovereign wealth fund), it will not be in others, and in the current climate, the Canadian government may be more likely to take a liberal view of what may constitute "influence" or "direction". Therefore, it is important for private investors to identify the so-called "acquirer risk" early and consider if they could be viewed as closely tied to, or subject to direction from, foreign governments (e.g., due to minority interests held by state-owned enterprises).

  • New focus on key industries:

In addition to the focus on state-owned enterprises, the Updated Guidelines appear to raise the stakes for foreign investments in a number of industries, including those in the mining sector and those handling sensitive personal information.

  • There are no prohibited industries:

While the Updated Guidelines indicate which investments are more likely to be scrutinized and potentially reviewed, an investment is not guaranteed to attract enhanced scrutiny even where the stated factors are present, nor is it necessarily more likely to be blocked or subject to conditions of approval. The majority of investments, even those where national security review factors may be present, are ultimately approved.


1 The Canadian government has also taken steps to protect Canadians' privacy by proposing the Consumer Privacy Protection Act, which, if adopted, will create one of the strictest data protection regimes in the world, accompanied by some of the most severe financial penalties, and likely have the indirect consequence of providing greater transparency for purposes of assessing potential national security risks. For more information on the proposed Consumer Privacy Protection Act, see our previous blog post.


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