addressing critical differences between canadian and us ... · december 2014 ¬ intrusion software:...

Addressing Critical Differences BetweenCanadian and US Trade Controls: Challenges

& Solutions

John W. Boscariol

February 18, 2016

1

Growing Impact of Canadian TradeControls

¬ what’s driving this?

¬ since 9/11, new emphasis of Canadian authorities on security (vs.government revenues)

¬ more recently, increased penalties, enforcement by U.S. authorities

¬ pressure from U.S. affiliates, suppliers and customers (and U.S. government)

¬ Canada’s reputation as an emerging “sanctions hawk”?

¬ penalty, operational, reputational exposure

¬ Canadian companies are now more concerned than ever before aboutwhom they deal with, where their products and technology end up, andwho uses their services

¬ financings, banking relationships, mergers and acquisitions

John W. Boscariol, International Trade and Investment Law Group, McCarthy Tétrault LLP / mccarthy.ca

2

What Are Canada’s Trade Controls?

¬ export and technology transfer controls – Export and Import PermitsAct

¬ Export Control List

¬ Area Control List

¬ economic sanctions

¬ Special Economic Measures Act

¬ United Nations Act

¬ Freezing Assets of Corrupt Foreign Officials Act

¬ Criminal Code

¬ domestic industrial security

¬ Defence Production Act, Controlled Goods Program

¬ other legislation of potential concern

¬ blocking orders (Cuba)

¬ anti-boycott policy and discriminatory business practices laws

¬ anti-bribery law (Corruption of Foreign Public Officials Act/FCPA)


3

Key Elements of Your Export Control /Economic Sanction ComplianceProgram¬ basic components of the compliance program should include:

¬ corporate compliance manual

¬ screens and lists

¬ appointment of compliance officers

¬ internal audit procedures

¬ correction / voluntary disclosure process

¬ training programs

¬ contracts

¬ conflict procedures

¬ “home grown”


4

Canada’s Export Control Regime

¬ based on Canada’s internationalcommitments

¬ Wassenaar (Convention on Arms and Dual-Use Goods andTechnologies)

¬ Missile Technology Control Regime

¬ Australia Group, Chemical Weapons Convention

¬ Nuclear Non-Proliferation Treaty, etc.

¬ various non-strategic export controls

¬ United Nations resolutions

¬ agreement with United Stated concerning USML goods


5

Canada’s Export Control Regime

¬ role of Global Affairs Canada’s Export Controls Division (ECD)

¬ issuance of permit and related documentation

¬ interpretation of ECL and ACL

¬ decision as to whether a permit is required

¬ role of CBSA

¬ enforcement of export control regime at the border

¬ export reporting

¬ ensuring the permit is valid

¬ quantities, consignees, goods, expiry, etc.

¬ they can detain and seize your goods

¬ role of Royal Canadian Mounted Police


6

Do You Need to Apply for an ExportPermit?

¬ key questions

¬ is the destination on the Area Control List?

¬ are the goods on the Export Control List?

¬ goods, technology and software

¬ Guide to Canada’s Export Controlsincorporates changes to the multilateral exportcontrol regimes up to December 2013


7

Where Are the Goods Destined?

¬ the Area Control List (applies to export of anygoods or technology)

¬ Belarus

¬ North Korea

¬ individual permits may be issued forhumanitarian purposes

¬ do not forget countries subject to Canada’strade embargo legislation


8

Canadian Controls Over Encryption¬ Export Control List, Group 1, Category 5 – Part 2:

“Information Security”¬ goods, software, technology designed or modified to use

cryptography or performing any cryptographic function¬ exceptions

¬ authentication/digital signature (no encryption except asdirectly related to the protection of passwords, PINs, or similardata to prevent unauthorized access)

¬ not user-accessible and is specially designed for copyprotection

¬ software and technology “in the public domain”¬ “mass market” – generally available to the public from retail

selling points

¬ ancillary encryption (effective December 2011)


9

Canadian Controls Over Encryption

¬ individual permits

¬ multidestination permits (require export control compliance plan)

¬ broadbased

¬ co-development

¬ bona fide Cdn/US corporations

¬ regime decontrol – ancillary crypto

¬ java

¬ financial institutions

¬ contrast between Canadian and U.S. approach

¬ impact on Canadian competitiveness

¬ recent crypto initiatives (General Export Permits 45 and 46)


10

Canadian Cybersecurity Controls

¬ not adopted in United States, but in force in Canada sinceDecember 2014

¬ intrusion software: “software” specially designed or modified toavoid detection by ‘monitoring tools’, or to defeat ‘protectivecountermeasures’, of a computer or network-capable device, andperforming any of the following:

¬ the extraction of data or information, from a computer or network-capable device, or the modification of system or user data; or

¬ the modification of the standard execution path of a program orprocess in order to allow the execution of externally providedinstructions


11

Canadian Cybersecurity Controls

¬ cybersecurity items on Canada’s Export Control List:

¬ 1-4.A.5: Systems, equipment, and components therefor, speciallydesigned or modified for the generation, operation or delivery of, orcommunication with, “intrusion software”

¬ and related software and technology

¬ 1-5.A.1.j: specific IP network communications surveillance systemsor equipment, and specially designed components therefor

¬ and related software and technology


12

Canadian Controls on U.S.-OriginGoods and Technology

¬ U.S. origin goods (ECL item 5400) –“designed to ensure Canada is not used as adiversionary route to circumvent U.S.

embargoes”

¬ e.g., embargoes of Cuba, Iran, Syria and

North Korea


13

Canadian Controls on U.S.-OriginGoods and Technology (cont’d)

¬ ECL item 5400: a permit is required for theexport of all U.S.-origin goods and technologyfrom Canada

¬ excludes “goods that have been furtherprocessed or manufactured outside of theUnited States so as to result in a substantialchange in value, form or use of the goods or inthe production of new goods”

¬ 50% rule of thumb used to be applied


14


¬ available GEP No. 12 permits export ofU.S.-origin goods and technology to alldestinations except Belarus, Cuba, NorthKorea, Iran and Syria

¬no written ECD policy for granting permits forexport of U.S.-origin goods or technology tothese countries


15


¬ ECD’s verbal administrative policy currentlypermits U.S.-origin goods to be shipped toCuba (or Iran) in only three circumstances:

¬ a U.S. licence has been obtained or

¬ humanitarian purposes (for the “basicnecessities of human life”) or

¬ in support of a previously permitted export orCanadian operations


16

Canada’s Controlled Goods Program

¬ domestic industrial security program

¬ Defence Production Act and its Controlled GoodsRegulations

¬ administered by the Controlled Goods Directorate(CGD) (part of Public Works and GovernmentServices Canada)

¬ background and history

¬ relationship with U.S. ITAR and “Canadian exemption”


17

Integration of Canadian and US DefenceTrade Controls

¬ examples

¬ ITAR 126.5(b) “Canadian exemption” – permanent and temporaryexports of certain defence articles and technical data to “Canadian-registered persons” defined by reference to Canada’s DefenceProduction Act

¬ Canada’s ECL item 5504(i) controls export of US-origin goods ortechnology “which have been determined under Parts 120 to 130 ofTitle 22 of the International Traffic in Arms Regulations of the Codeof Federal Regulations (United States) as having substantial militaryapplicability…”

¬ Canada’s Export Permit Regulations paragraph 3(2)(c) requires thata US ITAR authorization be obtained for the export from Canada ofdefence-controlled US-origin goods, goods incorporating defence-controlled US-origin goods, and goods manufactured in Canadausing defence-controlled US-origin goods


18

What Is a Controlled Good?

¬ defined in the Schedule to the DefenceProduction Act as:

¬ any US-origin good or technology that is a “defensearticle” as defined under the ITAR or a non-USorigin good that is manufactured using “technicaldata” of United States origin, as defined under theITAR if the “technical data” is a “defense article”,and

¬ goods and technology, regardless of origin, that arespecifically listed in the Schedule (and refer toGroups 2, 5 and 6 of the Export Control List withamendments)


19

How Does Canada’s Controlled GoodsProgram Work With ITAR 126.18?

¬ problem: the final ITAR rule does not contain anexplicit exemption for companies that are registeredunder and comply with CGP

¬ CGD Enhanced Security Strategy (October 1, 2011)

¬ August 2011 Exchange of Letters Between US DDTCand PWGSC

¬ DDTC has “high regard for the CGP as a means tomitigate the risks of diversion”


20


¬ what has DDTC policy section said (May2012)?

¬ gives CGP the “golden seal of approval”

¬ no circumstances in which CGP screening willbe insufficient for 126.18 substantive contactscreening

¬ non-disclosure agreement is not required ifCGP-screened – but has since retracted

¬ endeavouring to put it in writing


21

How Does Canada’s Controlled GoodsProgram Work With ITAR 126.18?¬ employee concerns and pushback

¬ on sensitive and personal information regarding:

¬ travel frequency, duration and location

¬ “significant and meaningful” associations

¬ criminal history

¬ financial issues

¬ previous broad Privacy Act statement: consent to disclosure“to law enforcement and other government departments andagencies, including foreign governments, which conductchecks and/or investigations in accordance with Memorandaof Understanding (MOUs) established with Public Works andGovernment Services Canada (PWGSC)”

¬ no longer references foreign governments


22

How Does Canada’s Controlled GoodsProgram Work With ITAR 126.18?¬ continuing ITAR/CGP challenges

¬ no guarantee yet that screening in accordance withESS, CGP and Canadian law will meet the ITARsection 126.18 requirements

¬ are US exporters/partners comfortable relying onsection 126.18?

¬ does this resolve human rights and privacy issues?

¬ practical issues remain

¬ highly sensitive area for employees

¬ continue education and explanation

¬ careful adherence to the CGP application and guidance


23

How Does Canada’s Controlled GoodsProgram Work With ITAR 126.18?¬ continuing ITAR/CGP challenges

¬ DDTC’s suggested non-disclosure agreement (NDA)requires employees to comply with ITAR and certify that theyhave never acted for or provided information to 126.1countries, including Cuba, etc.

¬ October 2014 - “made in Canada” NDA screening form tobe signed by the security-assessed employee in Canada(http://ssi-iss.tpsgc-pwgsc.gc.ca/dmc-cgd/ft-fo/aaee-nsaa-eng.html)

¬ CGD states that “for those CGP registrants accessingU.S. International Traffic in Arms Regulations (ITAR)goods, this acknowledgement may be used to meet therequirements of ITAR 126.18(c)(2)”


http://ssi-iss.tpsgc-pwgsc.gc.ca/dmc-cgd/ft-fo/aaee-nsaa-eng.html

http://ssi-iss.tpsgc-pwgsc.gc.ca/dmc-cgd/ft-fo/aaee-nsaa-eng.html

24


¬ continuing ITAR/CGP challenges

¬ does not resolve anything for academic institutions

¬ broader issues:

¬ is this consistent with Canadian constitutional(Charter) law?


25

May 16, 2014 Changes to Coverage ofCGP – Defence Production Act Schedule

¬ seeks to resolve issues regarding differences in coverage ofITAR and CGP by creating two streams of controlled goods

¬ Stream 1 – goods of United States origin that are “defensearticles” under ITAR and goods manufactured using ITAR-controlled “technical data” of United States origin

¬ addresses US export control reform

¬ what does “United States origin” mean?

¬ overzealous ITAR destination control statements?


26

May 16, 2014 Changes to Coverage ofCGP – Defence Production Act Schedule

¬ concerns with Stream 2 – certain Group 2, 5504, andGroup 6 items of US and other origin

¬ administrative burden of tracking two streams vsone

¬ consistent with original purpose of CGP?

¬ competitiveness vis-à-vis United States and othercountries?


Canada’s Economic Sanctions Regime

¬ United Nations Act

¬ implementation of UN Security Council resolutions

¬ Special Economic Measures Act

¬ impose economic sanctions absent or in addition to a UN SecurityCouncil resolution

¬ Freezing Assets of Corrupt Foreign Officials Act

¬ politically exposed persons

¬ Egypt, Tunisia and Ukraine

¬ Criminal Code – terrorist groups

¬ Area Control List under Export and Import Permits Act

¬ Belarus and North Korea

27


Special Economic Measures ActRegulations

28

¬ targeted countries

¬ Iran

¬ Syria

¬ Burma

¬ Zimbawe

¬ North Korea

¬ Ukraine

¬ Russia

¬ South Sudan


Transactions Involving Iran

¬ starting in 2010, escalating SEMA measures against Iran culminating inbroad trade embargo (May 29, 2013):

¬ included prohibitions against

¬ exporting, selling, supplying or shipping goods, wherever situated,to Iran, to a person in Iran, or to a person for the purposes of abusiness carried on in or operated from Iran

¬ importing, purchasing, acquiring, shipping or transhipping anygoods that are exported, supplied or shipped from Iran, whetherthe goods originated in Iran or elsewhere

¬ making an investment in an entity in Iran

¬ providing or acquiring financial services to, from or for benefit of aperson in Iran

¬ over 600 entities and individuals had been designated under Canada’sSpecial Economic Measures (Iran) Regulations

29



¬ effective February 5, 2016, broad trade embargomeasures have been removed, leaving only:

¬ prohibitions on activities involving 202 listed persons

¬ prohibitions supplying any Schedule 2 items, whereversituated, to Iran, to a person in Iran, or to a person forthe purposes of a business carried on in or operatedfrom Iran (and related technology transfer restrictions) –

¬ Schedule 2 has 41 categories, including:

¬ Aluminum and aluminum alloy products - Piping, tubing, fittings, flanges, forging,castings, valves, any unfinished products in any form and any waste or scrap that aremade of aluminum and its alloys that are not specified in the Export Control List.

¬ Stainless steel valves, piping, tubing and fittings - Any valves, piping, tubing andfittings that are made of stainless steel type 304, 316 or 317 and that are notspecified in the Export Control List.

30


31


¬ note separate export controls regime - Export andImport Permits Act

¬ February 5, 2016 Notice to Exporters No. 196 –policy of denial for broad range of items on ExportControl List

¬ ECL item 5400 controls export and transfer of US-origin goods and technology

¬ require a permit for transfer from Canada to Iran

¬ conditions for obtaining a permit


32


¬must now address new “disconnect” between US andCanadian sanctions

¬ re-exports/re-transfers of US-origin items to Iran

¬ differing interpretations of US-origin by US andCanadian authorities

¬ involvement of US persons

¬ OFAC General License H authorizes certaintransactions for US-owned foreign entities that areotherwise prohibited for US persons under thecontinuing embargo


Russia / Ukraine Economic Sanctions Measures

¬ designated person restrictions – 290 entities and individuals

¬ broad prohibition on range of activities

¬ debt financing prohibition (30 or 90 days maturity)

¬ equity financing prohibition

¬ prohibitions against supply of listed goods or related financial,technical or other services for use in

¬ offshore oil exploration or production at a depth greater than 500meters;

¬ oil exploration or production in the Arctic; or

¬ shale oil exploration or production

33



¬ prohibitions on dealing with Crimea region of Ukraine,including:

¬ investment and related services

¬ importing, purchasing, acquiring, shipping or otherwisedealing in goods exported from the region

¬ exporting, selling, supplying, shipping or otherwise dealingin goods destined for the region;

¬ transferring, providing or communicating technical data orservices;

¬ providing or acquiring financial or other services related totourism

34



¬ export control policy

¬ no export permit issued for items on Export Control List ifmaterial benefit to Russian military

¬ March 25, 2015 unanimous Parliamentary motion:

¬ imposition of “sanctions against foreign nationals involved in thedetention, torture and death of Sergei Magnitsky.”

¬ government to “explore sanctions as appropriate against anyforeign nationals responsible for violations of internationallyrecognized human rights in a foreign country, when authorities inthat country are unable or unwilling to conduct a thorough,independent and objective investigation of the violations”

35


36

Latest on Burma

¬ Canada had most aggressive sanctions of anycountry

¬ effective April 24, 2012 most Burma sanctionsmeasures repealed

¬ currently

¬ 44 companies and 38 individuals are designatedpersons

¬ arms and related material embargo (including datatransfers)


37

The Cuban Conundrum

¬ problem, whether or not you trade with Cuba

¬ Canada’s expanding economic relationship withCuba

¬ Canada is one of Cuba’s largest trading partners

¬ Canadian exports to Cuba - machinery, agrifood products,sulphur, electrical machinery, newsprint

¬ Canadian imports from Cuba - ores, fish and seafood, tobacco,copper and aluminum scrap and rum

¬ Canada is one of Cuba’s largest source of foreigndirect investment

¬ Canadian FDI - nickel and cobalt mining, oil and gas, powerplants, food processing


38

The Cuban Conundrum (cont’d)

¬ expanding extraterritorial reach of U.S. trade embargo

¬ 1962 – imposition of full trade embargo under TradingWith the Enemy Act

¬ 1975 – elimination of general license allowing trade byforeign non-banking entities

¬ had to apply for specific license and demonstrate independent operationre decision-making, risk-taking, negotiation and financing

¬ 1990 – Mack Amendment proposed outright prohibitionon issuance of licenses to foreign affiliates of U.S. firms

¬ 1992 – Cuban Democracy Act

¬ 1996 – Helms-Burton Act extends aspects of Cuban embargoto Canadian companies that have no connection withU.S. entities


39

Current U.S. Measures vs. Cuba

¬ Cuban Assets Control Regulations

¬ administered by U.S. Treasury’ Office of Foreign Assets Control

¬ prohibition on foreign entities owned or controlled by U.S. persons from doingbusiness with Cuba

¬ Export Administration Regulations

¬ administered by the U.S. Department of Commerce’s Bureau of Industry andSecurity

¬ requires that a re-export license be applied for where U.S. content is 25% ormore

¬ Helms-Burton Act

¬ Title III – private right of action vs. “traffickers” in “confiscated property” (rightsuspended)

¬ Title IV – bar on entry in the United States for traffickers, their spouses andminor children


40

Canadian Response to U.S. TradeEmbargo of Cuba

¬ diplomatic

¬ NAFTA/WTO?

¬ primarily FEMA and the 1996 FEMA Order


41

The Foreign Extraterritorial Measures Act

¬ 1996 “blocking” order

¬ obligation to notify Canadian Attorney Generalof certain communications

¬ prohibition against complying with certain U.S.trade embargo measures

¬ penalty exposure: up to $1.5 million and/or 5years imprisonment


42

The Notification Obligation

“Every Canadian corporation and every director and officer ofa Canadian corporation shall forthwith give notice to theAttorney General of Canada of any directive, instruction,intimation of policy or other communication relating to anextraterritorial measure of United States in respect of anytrade or commerce between Canada and Cuba that theCanadian corporation, director or officer has received from aperson who is in a position to direct or influence the policies ofthe Canadian corporation in Canada.”


43

The Non-Compliance Obligation

“No Canadian corporation and no director, officer, manageror employee in a position of authority of a Canadiancorporation shall, in respect of any trade or commercebetween Canada and Cuba, comply with an extraterritorialmeasure of United States or with any directive, instruction,intimation of policy or other communication relating to sucha measure that the Canadian corporation or director, officer,manager or employee has received from a person who is ina position to direct or influence the policies of the Canadiancorporation in Canada.”


44

What is an “Extraterritorial Measureof the United States”?

¬ U.S. laws that may be considered“extraterritorial measures of the UnitedStates”:

¬ Cuban Assets Control Regulations

¬ Export Administration Regulations

¬ Helms-Burton (?)

¬ other


45

FEMA Enforcement Experience

¬ there has never been an attempted prosecution of the Canadianblocking order

¬ no case law or administrative/prosecutorial guidelines

¬ no guidance from the Canadian government

¬ numerous investigations - American Express, Eli-Lilly, Heinz,Red Lobster, Wal-Mart and others

¬ Wal-Mart’s Cuban pyjamas

¬ nationalistic sensitivities


46

Critical FEMA Conflict Points

¬ training programs

¬ compliance manuals

¬ communications and instructions

¬ server accessibility

¬ meetings and telephone conversations

¬ M&A due diligence

¬ contracts – e.g., supply agreements with U.S. companies,intercompany agreements, purchase orders, etc.

¬ end-use certificates


47Canadian Rules on Boycotts andDiscriminatory Practices

¬ in addition to export controls, trade embargoes, assetfreezes and blocking orders

¬ Canada’s boycott policy

¬ provincial discriminatory business practice legislation


48Canada’s Boycott Policy

¬ October 21, 1976 federal policy; does not prohibit compliance withinternational economic boycotts

¬ identifies “unacceptable” activities taken in connection with suchboycotts

¬ requiring a firm or individual to engage in discrimination based onrace, nationality, etc. of another Canadian firm

¬ refusing to purchase from or sell to another Canadian firm

¬ refusing to sell Canadian goods to any country or refraining frompurchasing from any country

¬ restricting commercial investment or other economic activity in anycountry

¬ sanction is denial of government support and assistance in suchtransactions


49Provincial Discriminatory BusinessPractices Legislation

¬ Discriminatory Business Practices Act (Ontario)

¬ prohibits refusing to engage in business with others where:

¬ refusal is an account of on “attribute” (e.g., geographical location) of theothers or of a third person with whom the others do business; and

¬ refusal “is a condition of the engaging in business” of the companymaking the refusal and another person

¬ prohibits entering into a contract in which one party refuses toengage in business with another person on account of an attribute ofthat other person or of a third person with whom that personconducts business

¬ prohibits seeking or providing negative statements of origin

¬ requires reporting of requests to engage in discriminatory businesspractices


50Provincial Discriminatory BusinessPractices Legislation (cont’d)

¬ penalty/sanction exposure

¬ cause of action for damages against person whocontravenes

¬ banned for providing goods or services to Ontariogovernment for five years

¬ up to $100,000 fine


51

What Are Your “Red Flag” Destinations?¬ incorporate ACL, UN and SEMA embargo destinations into your compliance

program

¬ raise red flag where you have knowledge, suspicions, or reason to believe thattechnology, goods or services are ultimately destined for or may be accessed orused in or by any of the following countries or entities:

– Myanmar (formerly Burma)

– Belarus

– Syria

– Libya

– Sudan

– South Sudan

– Iraq

– terrorists andterrorist organizations

– Al-Qaida and Taliban

– Zimbabwe

– Afghanistan

– Pakistan

– Cuba

– Guinea

– Iran

– Democratic Republic of the Congo

– Eritrea

– Côte d’Ivoire

– Liberia

– Sierra Leone

– North Korea

– Lebanon

– Somalia

– Yemen

– Central African Republic

– Tunisia

– Egypt

– Russia

– Ukraine


Key Issues in Interaction With US andOther Regimes

¬ do you screen against Canadian lists?

¬ lists of over 2,000 designated persons – individuals, companies,organizations

¬ Special Economic Measures Act regulations

¬ United Nations Act regulations

¬ Freezing Assets of Corrupt Foreign Officials Act regulations

¬ Criminal Code anti-terrorism provisions

¬ any involvement in the transaction – purchaser, ultimate user,vendor, creditor, broker, service provider

¬ applies regardless of where Canadian company is doing business

¬ applies to non-Canadians in Canada

52



¬ Canadian measures may be broader thanthose of the United States and other countries

¬ Russia / Ukraine – 273 designated persons

¬ Belarus, Burma, Libya, North Korea

¬ importance of “home grown” compliancepolicies

53



¬ Canadian measures can be in direct conflictwith those of the United States

¬ Foreign Extraterritorial Measures Act “blocking” order inrespect of US trade embargo of Cuba

¬ obligation to notify Canadian Attorney General of certaincommunications

¬ criminal penalty exposure: up to $1.5 million and/or 5 yearsimprisonment

¬ provincial business discriminatory practices legislation

54



¬ Canadian measures can be in direct conflictwith those of the United States

¬ Canadian human rights / employment laws andpotential conflict with deemed re-export rules

¬ US controls under International Traffic in ArmsRegulations – Department of Defense Trade Controls(US State)

¬ US Export Administration Regulations (CommerceControl List) - Department of Commerce

55



¬ significant differences in administration and guidanceon economic sanctions

¬ no FAQs, guidelines, rulings, opinions

¬ no consolidated lists

¬ no voluntary disclosure process

¬ no deferred or non-prosecution agreements

¬ reporting obligations

¬ mandatory for property of designated persons

¬ when Global Affairs Canada becomes aware of potentialviolation, immediate notification to RCMP

56


Implications for Trade ControlsCompliance and Enforcement

¬ internal compliance programs must be “home grown”

¬ training and internal communications

¬ screening process and providers

¬ coordination of internal investigations and disclosuresinvolving multiple jurisdictions

57


John W. BoscariolMcCarthy Tétrault LLPInternational Trade and Investment Lawwww.mccarthy.caDirect Line: 416-601-7835

E-mail: [email protected]

LinkedIn: www.linkedin.com/in/johnboscarioltradelaw

Twitter: www.twitter.com/tradelawyer

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