Canada: Proposed ITAR Amendment Regarding Dual Nationals and Third-Country Nationals

The United States Department of State is proposing to amend the International Traffic in Arms Regulations ("ITAR") requirements regarding dual nationals and third-country nationals employed by recipients of controlled goods and technology.

The proposed amendment is an attempt to address existing restrictions applicable to dual nationals and third-country nationals that have placed a "tremendous administrative burden on approved end-users and [have] evolved into a human rights issue, which has become the focus of contention between the US and allies and friends without a commensurate gain in national security."1

Under the current system, foreign companies employing dual or third-country nationals have to apply for a separate export licence to transfer controlled goods or technology. The amendment does away with the separate licence procedure and substitutes an obligation on employers to screen employees based on specified criteria.

On its face, the proposed amendment provides a way for companies employing dual nationals and third-country nationals of ITAR-prohibited countries to access ITAR-controlled goods and technology.2 However, the effect of the new eligibility requirements is unclear. Whether the proposed amendment will actually result in a relaxation of the current restrictions and/or address existing conflicts with Canadian employment and privacy laws will depend on how the new requirements are implemented in both Canada and the US.

Current ITAR Restrictions

The integration of Canada-US defence production activities requires coordinated laws and policies concerning security of information. Canada amended its laws in 2001 to create the Controlled Goods Regulations ("CGR"), which met US demands that Canada have laws that strictly control the release of ITAR controlled goods and technical data.

ITAR requirements are designed to ensure that goods and technical data that have potential military or strategic applications are not made available to countries, groups or persons that pose a security threat. The CGRs have the same purpose.

One aspect of the current ITAR requirements that has raised an issue for Canadian companies is compliance with Canadian human rights legislation. Under the "Canadian" exemption provisions of ITAR,3 a Canadian citizen may, under certain circumstances, access controlled material, but a Canadian employee who is also a national of a prohibited country4 may not. Canadian employers seeking to comply with ITAR may be required to impose measures in the workplace that raise concerns under Canadian human rights legislation.

Such measures may constitute discrimination by limiting job opportunities for certain employees on the basis of their nationality or place of origin. Several cases brought before provincial human rights tribunals have highlighted the issue faced by Canadian employers that comply with existing ITAR requirements.

However, employers are not without defences against human rights claims related to enforcement of ITAR. First, under provincial human rights legislation, employers may have a valid defence based on the constitutional principles of interjurisdictional immunity or paramountcy. In other words, provincial human rights legislation would be inapplicable or inoperable in relation to employers' efforts to comply with ITAR, as this is an exclusively federal matter and because the application of provincial human rights legislation in such circumstances conflicts with federal regulations incorporating ITAR requirements in Canadian law.

Second, employers may raise the bona fide occupational requirement defence, which allows measures that may appear to be inconsistent with human rights legislation. To successfully rely on this defence, an employer must show that it cannot accommodate the employees concerned without incurring undue hardship.

In order to resolve the difficulties associated with implementation of ITAR requirements, Canada and the US Department of State have negotiated an agreement whereby the State Department revised its export authorizations. Under the agreement, access to defence articles and services exported under ITAR would only be granted to Department of National Defence personnel who are Canadian citizens, including dual nationals, on a need-to-know basis, and then only to individuals who had obtained a minimum secret-level security clearance. This agreement was subsequently expanded to include the Communications Security Establishment, the Canadian Space Agency and the National Research Council.

These agreements now ensure that sensitive areas of intergovernmental military cooperation are insulated from legal challenges under the Canadian Charter of Rights and Freedoms or the Canadian Human Rights Act. However, these agreements do not mitigate the challenges faced by private sector employers who must reconcile competing human rights and ITAR compliance obligations.

Proposed Amendment

The proposed amendment provides that no approval is needed from the US for the transfer of defence articles, including technical data, within a "foreign business entity" (e.g., a Canadian company), that is an approved end-user or consignee for those items, "including the transfer to dual nationals or third-country nationals who are bona fide, regular employees, directly employed by the foreign business entity." The expressions "bona fide, regular employees" and "directly employed" are not defined. The scope of these expressions appears to exclude temporary employees, contract employees and consultants from eligibility for the exemption.

The transfer must also take place completely within the physical territory of the country where the end-user is located or the consignee operates and must be within the scope of an approved export licence, other export authorization or licence exemption.

There are significant conditions that must be satisfied in order to qualify for the proposed exemption. The end-user or consignee must:

  1. either obtain a security clearance for employees from the Canadian government, or have in place a process to screen employees and have executed a non-disclosure agreement that provides assurances that the employee will not transfer any information to unauthorized parties;
  2. screen employees for "substantive contacts" with prohibited countries; and,
  3. maintain a technology/security plan that details the procedures for screening employees for such substantive contacts and maintain records which must be made available to US authorities on request.

The proposed amendment indicates that the criteria for determining whether an employee has "substantive contacts" which would render the employee ineligible for the exemption include:

  1. recent or regular travel to a prohibited country;
  2. recent or continuing contact with "agents and nationals of such countries";
  3. continued allegiance to such countries; and,
  4. engaging in acts otherwise indicating a risk of diversion.

Comments on the Proposed Amendment

The proposed amendment has the benefit of removing the express ITAR distinctions based on nationality or place of origin. This amendment ostensibly neutralizes the criteria for obtaining access to ITAR controlled goods or technology by implementing the neutral "substantive contacts" test. However, ITAR compliant employers may still face claims that the "substantive contacts" screening, although neutral on its face, has a discriminatory effect on dual nationals or third-country nationals of proscribed countries, as well as raising privacy concerns.

Depending on how these criteria are implemented, many dual nationals or third-country nationals who maintain routine contacts with family and friends in a proscribed country could be ineligible for the exemption, giving rise to claims of de facto discrimination on the basis of nationality or place of origin. 

This shortcoming could be addressed if the "substantive contacts" test were incorporated as one of several criteria in an overall assessment of the security risk posed by a given individual. The goal of ensuring robust national security can be achieved without declaring dual nationals or third-country nationals who have substantive contracts presumptively ineligible for the exemption based on that single criterion. For example, an overall analysis of an individual's security risk provides a more accurate risk assessment and a more flexible approach. Moreover, implementing the test as part of an overall security assessment would allow the test to be applied to all individuals who require access to ITAR controlled goods and technology, not just dual nationals and third-country nationals.

The proposed amendment will inevitably raise concerns about compliance with Canadian federal and provincial privacy legislation. Legislation protecting privacy generally allows the collection of personal information only for specifically defined purposes. However, it is not clear what specific information employers will be expected to collect to comply with the screening obligation provided for in the proposed amendment.

In addition to privacy concerns, the practical implementation of a screening process may well generate many legal issues for employers. Employees who are negatively affected may challenge the reliability of the process on various grounds, such as abuse of rights, unfair distinctions, mistakes in application, etc. If employees are removed or disqualified from projects because of ITAR ineligibility, they may claim that they have been constructively dismissed by their employer.

If the proposed amendment is finalized in its present form, Canadian companies will continue to face challenges in complying with overlapping Canadian and US legal requirements, including Canadian privacy and human rights law. The potential challenges faced by employers would be substantially diminished if the Government of Canada were to incorporate the "substantive contacts" test into the existing security screening process. A substantive contacts test lends itself well to the existing security screening process administered by the Department of Public Works and Government Services Canada ("PWGSC"). Having PWGSC administer the assessment would promote consistency in the application of the test. PWGSC is also well positioned to liaise with other Canadian and US government agencies. Incorporating the substantive contacts test into the Canadian security clearance process would assist Canadian companies in their ability to comply with the proposed ITAR amendment and domestic Canadian legal requirements.

The Department of State is accepting comments on the proposed amendment until September 10, 2010.

PDF Version

Footnotes

1. Federal Register, Vol. 75, No. 154, Wednesday, August 11, 2010, p. 48625.

2. The proposed amendment does not apply to "defence services".  We understand that the regulations applicable to defence services may be addressed in a separate proposed amendment.

3. CFR, s.126.5

4. The current list of ITAR restricted countries includes: Afghanistan, Burma, Belarus, China, Côte d'Ivoire, Cuba, Cyprus, Democratic Republic of Congo, Eritrea, Haiti, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Sierra Leone, Somalia, Sri Lanka, Sudan, Syria, Venezuela, Vietnam, Yemen and Zimbabwe.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, Calgary and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at www.ogilvyrenault.com.

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