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CANADIAN AND U.S. EXPORT CONTROLS: WHAT YOU NEED TO KNOWU.S. Aerospace Supplier Mission:

3 May 2011Montreal, Quebec

HB Global and Canadian Export Consulting ServicesDominique Babin & Thomas Jones

Canadian Export Consulting Services2

OUTLINE

History of Canada-U.S. Export Controls

U.S. Export Controls

Canadian Export Controls

Alignment, differences and reconciliation

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History of Canada-U.S. Export Controls

Unique RelationshipApril 1941 – The Hyde Park DeclarationUntil 1954 U.S. export control list used as basis for Canadian controlsHundreds of DND-DOD Agreements & ArrangementsDefence Production Sharing Arrangement (DPSA) – 1957Defence Development Sharing Arrangement (DDSA) – 1963North American Defence Industrial Base (NADIB) (mid 1980’s) Joint Certification Program (JCP) -1985Controlled Goods Program (CGP) – 2001Canadian Export Controls: Major Amendments

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History of Canada-U.S. Export Controls

Licences required for USML goods to Canada

Pre-1999 Canadian Exemptions were broader in scope

Post-1999, full USML licence-free trade ended

More positive note, EAR goods/technology remain licence-free to Canada

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U.S. Export Controls

General

U.S. export control regulations cover almost everything

U.S. controls re-exports of US-made goods

U.S. also controls almost everything made in other countries using U.S. goods/technology

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U.S. Export Controls

Furthermore…

Export control violations are seriousSignificant fines and incarcerationMost foreign-made products of US technology are subject to some form of U.S. export controlsWhen they are required varies within the EAR and ITARAuthorisations = licences-agreements-exceptions-exemptionsU.S. rules could inadvertently affect your company

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U.S. Export Controls

ITAR Administration

US companies expending huge costs on compliance programmesUS companies have moved export controls to the legal departmentsBroad and diverse ITAR interpretations have resultedInconsistent ITAR interpretations

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U.S. Export Controls

Extraterritorial Application of the ITAR

US ITAR laws apply broadlyUS made parts, components, hardware, software, technology controlledAll US ITAR items are subject to US re-export controlsIn-country and country-to-country transfers controlled

Controls apply to:– US manufactured end-items and components;– US components incorporated into non-U.S. end items– Non-U.S. end items produced using US technology

“Authorisation” to export or re-export, and in most cases, to transfer in-country“Authorisations” are licences, agreements or exemptions

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U.S. Export Controls

Nationality: The Unforeseen Outcome

ITAR fix of 2001 created unexpected resultsPersons born prohibited countries (Part 126.1) affectedUS law requires 3rd country nationals be identifiedDefence articles/services are licensed to identified countries

and persons (deemed exports)ITAR appears to be moving away from country of birth as

being a major factor in determining nationalityFederal Register proposed amendment dated 11 August 2010 Not a panacea!

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U.S. Export Controls

By way of illustration…

A Western national, born in Iran, emigrates to a Western country with her parents at 6 months of ageAt 18 years of age, she becomes a citizen of her adopted countryIndividual receives all of her education in the Western country,graduating with an engineering degree from a domestic UniversityDomestic defence company hires the 26 year old engineer to manage the manufacturing of a military radioThe radio is based partially on a U.S. design

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U.S. Export Controls

126.5 Comprises Four Components

The 4-in-1 Exemption…main elements of 126.5–Exports to the US (126.5(a))–Exports to Canada (126.5(b))–Defence Services to Canada (126.5(c))–Re-exports/re-transfers from Canada/in Canada (126.5(d))

How to make the most of126.5…A Practical Guide/6 Step Process

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U.S. Export Controls

Proposed Amendment to ITAR

Direct result of President Obama’s Export Control Reform effort

U.S. industry losing ground in trade

One of the proposed amendments is to allow dual-nationals access to ITAR goods and technology

However, there is a lot of work to be done in order to reach this objective

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U.S. Export Controls

Proposed Amendments to ITAR (Cont’d)

Parts 124 and 126 being proposed for amendment

Will permit transfers to dual-national employees

Applies to licences and agreements

Responsibility of foreign approved entity (e.g., employer) to implement measures

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U.S. Export Controls

Proposed changes will affect Canadian HRs. They include:

That the foreign employer screen the employee; and

That employers of 126.1 employees conduct additional due diligence; and

That employers be required to determine whether the 126.1 employees “might have substantive contacts 1 in their countries of birth”

1. “Substantive contacts include, but are not limited to, recent or regular travel to such countries, recent or continuing contact with agents and nationals of such countries, continued allegiance to such countries, or acts otherwise indicating a risk of diversion.”

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The Canadian Legislation – an overview

Export and Import Permits Act– Export Control List– Area Control List

Defence Production Act– Controlled Goods = certain strategic goods included in the Export

Control List– Controlled Goods Regulations

Customs Act and Criminal Code– Canada Border Services Agency (CBSA) and the RCMP

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Alignment of US and Canadian Regimes

US and Canada adhere to the same multilateral agreements regarding exportsUS and Canada agreed in 2001 to add certain elements that are only controlled by the US and Canada (Item 5504 of the ECL)The re-export from Canada of US-origin goods requires an export permit (see next slide)In-country transfers of strategic goods and technology are covered by the Controlled Goods regime

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Re-export Authorisations

A Canadian export permit is required for all goods listed in the ECL, including goods that originate from the U.S.

– Export to the U.S.: no permit required in most cases– General export permit No 12

Section 3 of the Export Permits Regulations requires to submit, with the export permit application, a U.S. re-export authorisation for:

– US-made goods classified under the US Munitions List (USML);

– non-US-made goods incorporating any US-made goods classified under the USML; and

– non-US-made goods manufactured, in whole or in part, using US origin technical data classified under the USML.

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Main Differences between US and Canadian Regimes

United States CanadaExtraterritorial Not extraterritorial

Heavy administrative fines and criminal prosecution

Nominal fines under the Customs Act and limited criminal prosecution

Leans heavily on direct enforcement action

Leans heavily on voluntary compliance

U.S. country policies based on domestic, self-interests and international agreement (e.g., UN)

Canadian country policies based almost exclusively on international agreements (e.g., UN)

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Main Differences between US and Canadian Regimes

United States CanadaDenials of export privileges based in law

No such laws exist in Canada – everyone has the right to request Minister to issue a permit

Deemed export rule applies No deemed export ruleVoluntary disclosures based on law

Voluntary disclosures policy based, not legislated

Control lists based partially on multilateral agreement and partially on domestic interests

Control lists almost exclusively based on multilateral agreements

Domestic registration programme (basic for USML-ITAR)

Domestic registration programme (more prescriptive than ITAR registration)

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Practical Advice to US Investors

Identify ITAR components correctlySet the standards – but understand local laws and adjustKnow your Canadian partner/subsidiary (due diligence)Ensure your Canadian partner/subsidiary commits to your standards – as adjusted (Contracts, policies)Ensure your Canadian partner/subsidiary meets thesestandards (monitoring, audits)

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HB Global and CECS: How we can help

We have over 50 years of combined experience in export controlsWe understand the rules on both sides of the borderWe can help you structure your business and projects to meet both export control regimesWe can provide expert training for staff in Canadian and U.S. export controls, enforcement and the Controlled Goods ProgramWe can provide timely and valuable audits and capture problem areas or potential problems earlyWe can anticipate problems and get them addressed before they become major issuesWe can resolve issuesWE CAN ALLOW YOU TO GROW YOUR BUSINESS IN AND FROM CANADA

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Canadian and U.S. Export Controls: What you need to know

QUESTIONS?