In an economic slowdown, when every sale is important, it is more critical than ever to focus on export controls compliance. Why? Because (1) employees (sales personnel) are more desperate to make sales commissions and they may put their own interests before the interests of the company, (2) staff turnover/reductions often result in paperwork errors and/or missing paperwork or shortcuts, (3) profit margins are often smaller, (4) mistakes cost money, and (5) negative publicity about export control mistakes may have negative reputational effects on future sales.

Let's first focus on the cost of mistakes. As a general rule, all exports of goods from Canada (including technology that is transferred electronically) may be subject to an export reporting requirement under Canadian law. If a Canadian manufacturer, reseller, or exporter exports goods without completing the proper paperwork and submitting it to the Canada Border Services Agency (CBSA) or an other government department (OGD), one or more administrative monetary penalties (AMPs) may be applied.

An exporter of goods from Canada may be penalized under the AMPs regime for any failure to complete the necessary export declarations (even if the exported goods are not subject to Canada's export controls) and subsequent export summary reports. If the goods are subject to a general export permit (GEP), the export declarations must make specific reference to the GEP number. An exporter of goods from Canada may be penalized under the AMPs regime for any failure to completely identify the applicable GEP number on the export documentation.

It is illegal to export controlled goods (excluding goods controlled by way of a GEP) without first obtaining an individual export permit. Controlled goods are set out in the Export Control List made pursuant to Export and Import Permits Act (Canada) ("EIPA") (e.g., dual use goods, military or defence goods, goods of U.S. origin, etc.) and detailed in the Guide to Canada's Export Controls. If an exporter fails to obtain an individual export permit for a controlled good prior to the exportation of that good, the exporter may be penalized more severely under both the AMPs civil penalty regime and one of the export controls regimes (which include quasi-criminal prosecutions and may result upon conviction in fines and/or imprisonment). The multiple AMPs penalties and export controls fines may add up to significant amounts, wipe out any profit made on the sale of the good, and put future business in jeopardy.

Consider a simple example of where a Canadian exporter may be off-side the Canadian export controls rules. Suppose a seller of a computer program that may be used for both commercial and military purposes exports a copy of the program to a Chinese buyer after the order is received by FedEx without additional export documentation being completed. The exporter could be subjected to several AMPs penalties for a first infraction of over $4,000 ($1,000 because the exporter failed to report the export of the goods on an export declaration [penalty C170]; $1,000 because the exporter failed to provide to the CBSA any export permit, license or certificate required under statutory time frames [penalty C315]; and at least $2,000 because the exporter failed to report goods subject to export control prior to the actual export of the goods [penalty C345]). If the computer program contains U.S source code, the U.S. export controls regime may also apply extraterritorially and the United States may impose additional penalties on the Canadian exporter.

The following is a short summary of some of the AMPs contraventions and penalties applied against an exporter of goods which does not understand its obligations or ignores its obligations:

  • C001 - Person failed to keep electronic records in an electronically readable format for the prescribed period (applies in respect of any exports whether or not controlled) – Penalties applied per incidence:
    • 1st: $1,000
    • 2nd: $5,000
    • 3rd: $10,000
    • 4th and Subsequent: $25,000
  • C005 - Person provided information to an officer that is not true, accurate and complete (applies in respect of any exports whether or not controlled) ) – Penalties applied per incidence:
    • 1st: $100
    • 2nd: $200
    • 3rd and Subsequent: $300
  • C170 - Exporter failed to report the export of goods on an export declaration (Form B13A, CAED, or G7 EDI Export Reporting) within the legislative timeframes prior to export (applies in respect of any exports whether or not controlled) – Penalties applied per shipment:
    • 1st: $1,000
    • 2nd: $2,000
    • 3rd and subsequent: $3,000
  • C315 - Exporter failed to provide to the CBSA any export permit, licence or certificate required within statutory time frames (applies in respect of exports of controlled goods) – Penalties applied per document:
    • 1st: $1,000
    • 2nd: $2,000
    • 3rd and Subsequent: $3,000
  • C341 - Exporter failed to report a shipment on an export summary report (applies in respect of any exports whether or not controlled) – Penalties applied per shipment:
    • 1st: $1,000
    • 2nd: $2,000
    • 3rd and Subsequent: $3,000
  • C345 - Exporter failed to report goods subject to export control prior to export (applies in respect of exports of controlled goods) – Penalties applied per incidence:
    • 1st: $2,000 or 20% of the value of goods (whichever is greater)
    • 2nd: $4,000 or 40% of the value of goods (whichever is greater)
      • 3rd and Subsequent: $6,000 or 60% of the value of goods (whichever is greater) seizure when there is evidence that exporter willfully avoided compliance with export requirements
      • if seizure of goods is impractical, or goods are not found, an ascertained forfeiture may be taken in addition to AMPS penalty
  • C348 - Person who has reported goods under subsection 95(1) of the Customs Act that are subject to export control, failed to answer truthfully any question asked by an officer with respect to the goods (applies in respect of exports of controlled goods) – Penalties applied per incidence:
    • 1st: $2,000 or 20% of the value of goods (whichever is greater)
    • 2nd: $4,000 or 40% of the value of goods (whichever is greater)
    • 3rd and Subsequent: $6,000 or 60% of the value of goods (whichever is greater)
  • C362 - Exporter failed to indicate the GEP number in the permit field of the export declaration Applied when the exporter fails to insert the GEP number in the permit field of the export declaration (B13A, CAED or EDI/G7) (applies in respect of exports of controlled goods which may be exported under a General Export Permit (GEP)) – Penalties applied per GEP:
    • 1st: $100
    • 2nd: $200
    • 3rd and Subsequent: $300

Most contraventions are generally dealt under the AMPs regime. However, there are situations where non-compliance with export controls rules is considered to be more serious and the imposition of a monetary penalty will likely not deter non-compliance with the security-focused export controls. In these circumstances, the CBSA is authorized under the Customs Act (Canada) to seize the goods that are being exported. A seizure is a legal action, the result of which calls for certain goods taken from offenders to become the property of the Government of Canada and which are destroyed after a 90-day appeal period has lapsed. When seizure would be impractical or impossible, as in the case of goods that have already been exported, or constitute excessive punishment, the CBSA is authorized to conduct an ascertained forfeiture. An ascertained forfeiture normally results in a monetary penalty equivalent to seizure of the goods. The ascertained forfeiture penalty would be applied in addition to any AMPs penalties and, therefore, the cost of non-compliance with export controls laws can exceed the cost of the exported goods themselves. Any outstanding amount not paid on time is subject to interest.

In addition to the AMPs penalties, seizures and ascertained forfeitures, an exporter of controlled goods who either (1) failed to obtain an export permit for controlled goods or (2) who exported goods to Burma/Myanmar or Belarus may be prosecuted under the EIPA. The EIPA provides for potentially severe sanctions for a violation. Penalties range from maximum fines of $25,000 and/or 1 year imprisonment for less severe contraventions (i.e., for contraventions prosecuted by summary judgment), to up to unlimited fines (amounts established at the discretion of the Court) and/or 10 years imprisonment for more severe contraventions (i.e., for contraventions prosecuted by indictment). A director, an officer and/or a shareholder of a corporation may also be prosecuted for contraventions of the EIPA.

Contraventions of the EIPA or Customs Act are recorded in the exporter's history of non-compliance. A history of non-compliance may negatively affect a company's ability to obtain new export permits or renew existing permits for export of controlled goods. Furthermore, a poor compliance history could affect a company's status in the eyes of U.S. regulators and they could be added to the denied persons list, or export permits may be denied to supplies located in the United States and technical assistance arrangements (TAAs) may be rejected or renewals may be denied. 

A compliance/risk management program is critical to preventing AMPs penalties, seizures, ascertained forfeitures, prosecutions and imprisonment. Top management has to be committed to export controls compliance. Exporters of military equipment, munitions, items related to nuclear, biological or chemical non-proliferation, missile technology, other defence technology, dual use (civilian and military, commercial/national security) technology, equipment, materials and goods (e.g., goods produced by the nuclear power generation industry, the aviation/aerospace industry, geographic positioning industry, other technology and services, etc.) should conduct a compliance audit to determine their export controls responsibilities. In the development of a successful export compliance program the first question that any exporter must ask is what are the reporting requirements in Canada's export control regime. This question will be answered in the next issue of GST & Commodity Tax.