As we start the New Year, it is an opportune time for Canadian companies engaged in international or cross-border activities to review the key changes to Canada’s economic sanctions, anti-terrorism and trade and technology controls during 2013 to ensure compliance programs, including due diligence and screening processes, are fully up-to-date and risks of contravention and enforcement action are minimized. This is particularly important in light of the substantial financial and reputational costs of violating these laws.1
For Canada, 2013 was another very active year as trade and technology control measures were liberalized in some areas while significantly tightened in others. The most important developments of this past year and some thoughts on what to expect for 2014 are discussed below.
Further Liberalization of Encryption Controls
In its continuing effort to level the playing field for Canadian companies subject to export and technology transfer controls over information security goods and technology, on January 14, 2013 the Canadian government issued a General Export Permit - GEP No. 46 (Cryptography for Use by Certain Consignees) - which allows for the transfer of finished products containing controlled cryptography to affiliates without having to apply for an individual export permit.2
Under this GEP, transfers may be made to a consignee in another country that is (i) controlled by a resident of Canada or (ii) is controlled by an entity that has its head office in one of 29 designated countries and controls the resident of Canada who is making the transfer. The exporter must notify Foreign Affairs, Trade and Development Canada’s Export Controls Division (ECD) prior to the first transfer in each calendar year and then report on transfers made during the previous calendar year by January 31. Transferors must respond to ECD information requests within 15 days. In the case of physical exports, "GEP-46" must be specified on the export report filed with the Canada Border Services Agency.
Update of Export Control List
On February 13, 2013, the Canadian government announced a number changes to Canada’s Export Control List (ECL), which sets out the goods, services and technology subject to export and technology transfer controls that include permit and reporting requirements.3 Many additions and removals of controls, as well as clarifications to existing controls, were made in order to reflect Canada’s obligations and commitments under international control regimes – in this case, the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, the Nuclear Suppliers Group, the Missile Technology Control Regime and the Australia Group. The amendments brought Canada up to date with its commitments under these international arrangements as of April 2011.
The changes impact goods, software and technology that are dual-use commercial items in ECL Group 1 (including encryption), military items in Group 2, missile control-related items in Group 6, as well as chemical and biological items in Group 7.
The new Guide to Canada's Export Controls (April 2011) reflecting these changes came into effect on March 15, 2013.
Comprehensive Economic Sanctions Imposed Against Iran
Effective May 29, 2013, Canada expanded its existing economic sanctions measures against Iran under the Special Economic Measures (Iran) Regulations (Iran Regulations).4 Up until that time, Canada’s sanctions against Iran had been restricted to nuclear and military activities, financial services, as well as activities in certain sectors of the Iranian economy, including oil and gas, mining, telecommunications and shipping.
These are the most significant changes to Canada’s economic sanctions against Iran since a financial services ban was imposed on November 22, 2011. The amendments include three key measures that apply to persons in Canada and Canadian outside Canada:
- a prohibition against exporting, selling, supplying or shipping goods, wherever situated, to Iran, to a person in Iran, or to a person for the purposes of a business carried on in or operated from Iran;
- a prohibition against importing, purchasing, acquiring, shipping or transhipping any goods that are exported, supplied or shipped from Iran, whether the goods originated in Iran or elsewhere; and
- a prohibition against making an investment in an entity in Iran.
Goods that are sourced or supplied under a contract entered into before May 29, 2013 are exempted, provided that they were not already banned pursuant to the pre-existing measures and certain other conditions are satisfied. There are some other limited exceptions, including for informational materials, personal and settlers’ effects, and non-commercial packages sent by mail. Exemptions have also been added for equipment, services and software that facilitate secure and widespread communications via information technologies (provided that an export permit has been issued in respect of any export-controlled goods) and for goods used to purify water for civilian and public health purposes.
Prohibited Dealings Involving Designated Persons
There are now over 600 entities and individuals that have been designated under Canada’s Special Economic Measures (Iran) Regulations.
Companies and individuals are prohibited from engaging in a wide range of dealings with designated persons under Canada’s numerous economic sanctions programs, including its measures against Iran. Canadians are also subject to reporting requirements in respect of property owned or controlled by designated persons and related proposed or actual transactions. Financial institutions, including federally regulated banks and provincial trust and loan companies and securities dealers, are required to monitor and determine on a continuing basis whether they are in possession or control of property owned or controlled by or on behalf of a designated person under these measures.
Potential for Relaxation?
On November 23, 2013 an agreement between Iran and the P5+1 (the United States, United Kingdom, Germany, France, Russia, and China, facilitated by the European Union) was announced that provides for the halting of Iran’s nuclear program in return for the relaxation of certain sanctions measures. However, the Canadian government has been clear that it is skeptical of Iran’s commitments and that comprehensive sanctions will remain in force while it reviews the deal and Iran’s progress in implementation and granting access to its nuclear facilities.5
Major Changes Coming to the Defence Production Act and Controlled Goods Program
On November 19, 2013, Public Works and Government Services Canada launched consultations on proposed amendments to the Defence Production Act (DPA) which will have a significant impact on Canadian companies in the defence, aerospace, security and satellite sectors.6
Companies that are subject to the DPA and its Controlled Goods Regulations must comply with significant registration, screening and security obligations in their dealings with controlled goods and technology within Canada. The proposed amendments to the Schedule to the DPA will significantly change the scope of products and technology subject to the Controlled Goods Program (CGP), including by removing just over half of the current entries.
The Canadian CGP was designed to work hand-in-hand with the U.S. International Traffic in Arms Regulations (ITAR) regime so that, generally speaking, the kinds of goods and technology controlled for ITAR purposes would also be subject to domestic security controls in Canada under the CGP. These latest amendments have been proposed in response to complaints that CGP requirements are overly burdensome and there have been problems specifically with the intersection of the Canadian and U.S. regimes. This has included instances in which items that were no longer controlled under the U.S. ITAR regime are still being controlled under the Canadian CGP regime, a challenge that would become more difficult as the United States reforms its export controls and moves items from United States Munitions List control under the U.S. State Department to dual-use control under the U.S. Commerce Department.
It is important to note that none of the proposed changes will impact Canadian controls on the export or transfer of controlled goods or technology from Canada.
Prospects for 2014
In addition to the DPA defense trade control changes discussed above, amendments to export controls are also anticipated as Canada continues to update its Export Control List in accordance with its international obligations, including under the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies. Canadian companies engaged in cross-border transactions should be closely monitoring developments under Wassenaar and other international control regimes to anticipate coming changes to Canadian law in this area – this includes new controls over goods and technology associated with internet and network surveillance.7
Further, all indications are that Canada will continue to implement an aggressive economic sanctions and anti-terrorism regime, not simply based on multilateral initiatives through the United Nations Security Council, but also through unilateral measures where Canada is of the view that UN measures are insufficient or non-existent. This continues to be the case for Canada’s measures controlling dealings with a number of countries, including Iran, Syria, Belarus, Burma (Myanmar), Zimbabwe and North Korea.
Canadian companies and financial institutions should be carefully reviewing their compliance policies and screening lists in light of these latest developments. Because of the substantial financial and reputational impact that contraventions in this area can have, it is important that any company doing business internationally, whether in the goods, services or technology sector, ensure appropriate compliance and due diligence measures are in place. These include: maintaining compliance manuals; appointing responsible compliance officers; screening customers, end-users and suppliers; providing training programs; conducting internal audits; establishing disclosure procedures; and reviewing contracts and other legal documentation on a regular basis.
At the present time, Canada imposes trade controls of varying degrees on activities involving the following countries (and in many cases, listed entities and individuals associated with them): Belarus, Burma (Myanmar), Côte d'Ivoire, the Democratic Republic of the Congo, Cuba, Egypt, Eritrea, Guinea, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Pakistan, Somalia, Sudan, Syria, Tunisia and Zimbabwe. Any involvement of these countries or any "designated person" in proposed transactions or other activities should raise a red flag for further investigation to ensure compliance with export and technology transfer controls and economic sanctions.