Export controls and economic sanctions are receiving increasing attention of late. There are a number of reasons for this, including a growing emphasis on security and anti-terrorism initiatives, aggressive enforcement by United States authorities, and substantially increased penalties.
High-profile investigations and costly settlements on trade control infractions have prodded a number of US companies to scrutinize domestic and foreign operations to ensure compliance and avoid crippling penalty assessments. Further, companies are increasingly aware of the potentially disastrous consequences to their public image when, for example, news headlines announce that their products are being used as components in unfriendly government weapons programs or that one of their foreign branches has been financing a terrorist organization.
Whether US companies provide goods or services in Canada through a subsidiary or branch, or simply do business with Canadian partners from home base, it is important that they be aware of those critical areas where they can easily get tripped up under Canadian law. Although Canadian and US laws governing export controls and trade sanctions can be very similar, there are a number of significant differences — and, in some cases, even direct conflict.
At a recent meeting of US trade control compliance experts in Dallas, Texas, John Boscariol of our International Trade and Investment Law Group spoke on the application of Canadian trade controls to US company operations in Canada. His presentation, Canadian Trade Controls for American Companies: Navigating Consistency and Conflict, included a general overview of the Canadian legal regime, as well as the following practical tips and traps for Americans doing business in or with Canada.
1. What are Canada’s "red flag" destinations? Under Canadian law, your trade control compliance system should identify for further examination business dealings involving any of the following:
Listed Terrorists and
Al-Qaeda and Taliban
Democratic Republic of the Congo
Such dealings may be subject to a range of Canadian restrictions depending on the destination, individual, organization, goods, services or technology involved. These restrictions may apply to any transactions with a Canadian connection.
2. Canadian trade controls apply not only to goods, but also to technology and services. This is an area rife with danger of contravention. Like their US counterparts, Canadian trade controls and sanctions programs apply to technology or "know-how." For example, Canadian export controls cover: a) technical data, including diagrams, specifications or instruction manuals; and b) technical assistance, including consulting services, skills training, and the like. A transfer of technology, potentially requiring an export permit, occurs wherever such information or services are dispensed or disclosed from a place in Canada to a place outside Canada. This can include information transmission by fax or e-mail or during telephone discussions.
3. Canadian trade controls apply not only to countries, but also to listed individuals and organizations. Canadian sanctions programs are not limited to shipments or transfers to specified countries. Of particular interest to financial institutions, they include asset freezes and other measures applied to designated individuals and organizations. Anti-terrorism measures and Canadian regulations governing trade with Liberia, Iraq, Iran, North Korea, Burma, Côte d'Ivoire, Democratic Republic of the Congo, and Sudan include restrictions on dealing with listed individuals and organizations. This requires that compliance systems include screening of all parties involved in a given transaction, and that those screening lists be regularly updated. Because of implementation timing differences and other factors, these lists may differ from those maintained under US law.
4. "Since US trade controls are always more stringent than Canadian controls, can’t we comply with both by simply following our US policies?" No. Although US sanctions programs are often more aggressive than their Canadian counterparts, this is not always the case. Canada’s Burma sanctions program, the most aggressive elements of which came into effect in December 2007, is a case in point. It is among the most stringent in the world and covers trade in goods and services, data transfers, and investment. Further, strict adherence to US trade control laws can sometimes result in a violation of Canadian law. Simply grafting US compliance policy onto Canadian operations, or expecting that Canadian customers or suppliers will have no difficulty accepting terms and conditions based on US trade controls, will lead to significant problems in the future.
5. Conflict: Doing business (or not doing business) with Cuba. Canada is one of Cuba’s largest trading partners and one of its most significant sources of foreign direct investment. An Order issued under Canada’s Foreign Extraterritorial Measures Act prohibits Canadian companies, including those that are US-owned or -controlled, from complying with various elements of the US trade embargo of Cuba. This "blocking order" also requires them to inform the Canadian Attorney General of any communications they receive from anyone in a position to control their activities in Canada, including a US parent, relating to the US trade embargo of Cuba. There may be instances, particularly where the issues have not been carefully considered, that action or inaction regarding Cuban business opportunities may mean compliance with the laws of one country but at the same time violation of the laws of another.
6. Conflict: Application of US trade controls to individuals of certain nationalities or born in certain countries. The US International Traffic in Arms Regulations, and in some cases the US Export Administration Regulations, can restrict the ability of foreigners in Canada, dual nationals, and even Canadian citizens if they were born in certain proscribed countries, from accessing controlled technology or defence services. Compliance with these US rules by Canadian companies dealing with controlled technologies can lead to a violation of anti-discrimination obligations imposed by Canadian labour and human rights laws.
7. Despite conflicts, Canadian export control law, to an extent, recognizes US jurisdiction over US-origin goods and technology. In order to ensure that Canada is not used as a diversionary route to circumvent US sanctions, Canada requires that exporters apply for and obtain permits before exporting US-origin goods or technology from Canada to Cuba, Iran, North Korea, Syria, Myanmar or Belarus. This excludes "goods that have been further processed or manufactured outside the United States so as to result in a substantial change in value, form or use of the goods or in the production of new goods." However, US rules can control the re-export from Canada of goods that have as little as 10 or 20 percent US origin, and complications can arise when the Canadian authorities do not consider those goods to be of US origin.
8. Aside from any legal issues, the imposition of US trade controls in Canada can meet cultural resistance. Even if all legal concerns have been identified and addressed, cultural sensitivities often arise when requesting Canadian businesses to take steps to address their US partner’s compliance with US trade control laws. Differing corporate cultures and individual personalities can result in a range of reactions from immediate cooperation to steadfast refusal on grounds that cooperation would offend their sense of Canadian sovereignty. In these cases, once any legal conflicts have been resolved, it is important that both sides come to an understanding of what Canadian and US trade controls require of each of them and work together towards a compliance strategy acceptable not only to governments but to personnel on both sides of the border.
It is important to keep all of these issues in mind when undertaking each of the key steps in developing and following a US-Canadian trade control compliance strategy, including when:
drafting and executing compliance manuals;
- designing and implementing training programs
- appointing trade control compliance officers;
- conducting internal compliance audits;
- issuing communications and instructions to your Canadian operations;
- determining what materials and information Canadians can access, including from US-based servers;
- conducting meetings and telephone conversations involving these issues;
- addressing customer, supplier or business partner questions or concerns;
- responding to inquiries from Canadian or US authorities; and
- submitting voluntary disclosures to enforcement agencies.