Canada: U.S. Relaxes Security Rules On Dual-Nationals But Risks Remain

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on International Trade & Investment, May 2011

The U.S. Department of State has announced that certain export control rules, which have created difficulties for Canadian companies working in the defence industry, will be amended. Canadian companies handling controlled U.S.-origin defence-related goods and technology have risked violation of U.S. law by allowing employees of certain nationalities access to those goods or technologies. However, complying with these restrictions has exposed Canadian companies to the risk of violation of Canadian human rights laws. The U.S. Department of State has introduced amendments designed to alleviate these difficulties, but the risk of violating human rights laws will likely remain.

The Current Dilemma

The International Traffic in Arms Regulations (the ITARs) are U.S. regulations controlling the export and import of military and dual-use (i.e., both civilian and military applications) goods, services, and "technical data". The ITARs require that covered articles and services may not be exported from the U.S. unless authorization has been granted by the Department of State or a special exemption is used. Moreover, re-export or re-transfer of a controlled item must also be made under the authority of a permit or exemption.

The ITARs contain a broad exemption for exports to Canada, allowing the transfer into Canada of many ITARs-controlled articles without a licence. For those controlled articles not covered by the broad exemption, a licence may be available. Under either of these mechanisms, exemption or licence, controlled items may be exported to Canadian companies and individuals. Included, however, in the broad exemptions and particular permits is a carve-out restricting access to the controlled items by persons who are dual-nationals or third-country nationals of specified countries. Included in the carve-out restrictions are nationals of China, North Korea and Iran, among other countries.

As a consequence of these restrictive carve-outs, Canadian companies that possess ITARs-controlled articles risk violation of the ITARs on giving access to employees who are dual-national or third-country nationals of those listed countries. By complying with this aspect of the ITARs, however, companies may run afoul of Canadian human rights legislation: excluding employees from projects on the basis of national origin may constitute impermissible discrimination.

Indeed, complaints have been filed in recent years with provincial human rights tribunals over the exclusion of dual-nationals from defence work by Canadian companies acting in accordance with U.S. security-focused regulations. This issue has been a very real source of potential liability and a concern of the Canadian defence sector and other industries that receive U.S.-origin goods and technology with potential military applications.

Amendments to ITAR for dual-nationals

On May 16, 2011, the U.S. Department of State announced that it will amend the ITARs to address these concerns. The amendments, expected to come into effect on August 15, 2011, remove the outright prohibition on access to controlled articles by employees who are nationals of listed countries. Instead, to grant access to employees, an employer handling controlled goods or technologies will be required to screen its employees. The screening will require that the employer verify that its employees do not have "substantive contacts" with the listed countries that may lead to an unlicensed transfer of the controlled articles. The regulations provide a list of several types of activities that could constitute "substantive contacts". If no substantive contacts with a listed country are identified, the employer is allowed to give the employee, even if the employee is a dual-national or third-country national of a listed country, access to the controlled item. However, if substantive contacts are identified, the employee is presumed to present a risk of technology diversion to that country and cannot be given access under the ITARs. The U.S. Directorate of Defense Trade Controls (DDTC) will then have the discretion to review files on a case-by-case basis and may grant an exemption for the individual dual-national or third-party national.

To comply with the amended regulations, an employer must set up a technology security plan which includes a procedure for screening dual-national and third-party national employees. Records of each employee screening must be kept for five years and made available to the DDTC upon request. The DDTC may then choose to use the information for civil and criminal law enforcement.

Improvement For Employers?

While these amendments may reduce some risk to Canadian companies of running afoul of human rights laws, compliance with the amended ITARs may still expose companies to some risk in this regard. For one thing, the modification of the rules applies only to "regular employees": access by workers whose employment is more temporary will still be prohibited. Moreover, if a company were to determine that the employee had "substantial connections" to a listed country of which they are a citizen, the ITARs require the employer to prohibit giving access to that employee. A denial of access may constitute a violation of Canadian human rights laws, as the exclusion might largely be based on the employee's citizenship.

Under Canadian law, employers are under certain obligations concerning the privacy of employees' personal information. The requirement to submit information to the DDTC, as contemplated under the ITARs, could lead to a violation of the employer's privacy obligations. Finally, the adoption of a screening mechanism may create an additional administrative burden for companies.

Government and industry have lobbied for changes to the ITARs for some time. While this U.S. amendment is a positive step, Canadian companies that handle goods or technology covered by the ITARs should be aware that compliance with the new rules may still introduce the risk of violation of Canadian law. Companies should consider reviewing and revising, as appropriate, their compliance systems to ensure they will be able to meet the new requirements under the ITARs and any consequential amendments in Canadian law, but also ensure that they strike a balance with the company's obligations under relevant Canadian human rights law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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