Canada: Final U.S. ITAR Rule On Dual-And Third-Country Nationals Raises New Challenges For Canadian Business

Today, the U.S. State Department's Directorate of Defense Trade Controls (DDTC) published in the Federal Register the final rule containing its long-awaited amendments to the International Traffic in Arms Regulations (ITAR) governing the access of dual- and third-country nationals to ITAR-controlled defence articles, including technical data. These amendements, together with ongoing changes to Canada's Controlled Goods Program (CGP) generally covering similar goods and technology, are anticipated to have a significant effect on Canadian companies in the aerospace, defence and satellite sectors, and in particular on their security, compliance and screening processes.

Up to now, Canadian firms have faced numerous difficulties with ITAR rules that prohibit employees of certain nationalities or born in certain proscribed countries from accessing US-controlled defence goods and technology in Canada. In order to comply with these restrictions, Canadian companies have had to risk violating provincial and federal anti-discrimination laws, as well as exposure to human rights complaints, when denying employees access to projects involving ITAR-controlled items because of their nationality or country of birth. Companies in affected sectors have had to address, defend and settle costly, and in some cases very public, anti-discrimination claims arising from ITAR compliance.

DDTC officials have stated that the final rule is intended to move away from nationality-based screening and avoid the human rights conflicts that have plagued trade partners in Canada and other countries.

These proposed changes were first released on a preliminary basis for comment by DDTC in August of 2010. Our legal update discussing the preliminary rule can be found here. The final rule retains the essence of what was initially proposed, with some minor changes to the text and some other more significant revisions referred to below.

ITAR Defence Articles May Now be Transferred to Third Country or Dual National Employees

Under new ITAR Section 126.18, DDTC approval will not be required for the transfer of defence articles, including technical data, to a foreign business entity, foreign government entity, or international organization 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 consignee or end-user." This exemption will apply provided the transfer takes place completely within the territories where the end-user is located or where the consignee operates, and must be within the scope of an approved export licence, other export authorization, or licence exemption.

Key Condition — Effective Procedures to Prevent Diversion

As a condition of transferring to foreign person employees under this provision, the recipient of the defence article is required to have in place "effective procedures to prevent diversion to destinations, entities, or for purposes other than those authorized by the applicable export licence or other authorization in order to comply with the U.S. Arms Export Control Act and the ITAR."

In order to be considered to have such effective procedures, Canadian firms that are consignees or end-users of the defence articles must either (i) require a security clearance approved by the Canadian government for its employees, or (ii) implement a screening process for their employees and execute Non-Disclosure Agreements that provide assurances that employees will not transfer any information to persons or entities unless specifically authorized by the employer.

Under the new rule, Canadian firms will be required to screen all employees who are to access controlled items for "substantive contacts" with the 25 restricted or prohibited countries under the ITAR — including China, Vietnam, Haiti, Venezuela and other countries subject to U.S. military sanctions. The final rule has expanded upon what is meant by "substantive contacts." These now include:

  1. regular travel to those countries;
  2. recent or continuing contact with agents, brokers and nationals of those countries;
  3. continued demonstrated allegiance to those countries;
  4. maintenance of business relationships with persons from those countries;
  5. maintenance of a residence in those countries;
  6. receiving salary or other continuing monetary compensation from those countries; or
  7. acts otherwise indicating a risk of diversion.

The amendments provide that, although an employee's nationality is not in and of itself a determinative factor prohibiting access to defence articles, if an employee is determined to have substantive contacts with persons from the ITAR-restricted or prohibited countries, this is presumed to raise a risk of diversion "unless DDTC determines otherwise."

Companies are also required to maintain a technology security/clearance plan that includes procedures for screening employees' substantive contacts and maintaining records of the same for five years. The technology security/clearance plan and screening records are to be made available to DDTC or its agents for civil or criminal law enforcement upon request.

Other Significant Aspects of the New Rule

The final rule and DDTC's accompanying commentary address a number of additional significant issues for Canadian companies:

  1. Perhaps most significant from the Canadian perspective is that, despite requests from parties commenting on the proposed changes, DDTC did not agree to an explicit exemption for companies that comply with other countries' domestic industrial security programs that provide for effective screening and other security measures for the protection of these controlled items. This means that Canadian companies that are registered and comply with Canada's Controlled Goods Program (which applies to essentially the same items) must still review and revise existing security measures to ensure compliance with this new ITAR rule for all their employees that will access ITAR-controlled goods or technology.
  2. A number of commenting parties had expressed concern that contract employees would not be subject to the new rule. Although DDTC resisted applying the rule to all contract employees, they agreed to narrowly extend it to workers who have a long-term employment relationships with licensed end-users. This is reflected in a new definition of "regular employee." In addition to an individual permanently and directly employed by the company, "regular employee" now also includes "an individual in a long term contractual relationship with the company where the individual works at the company's facilities, works under the company's direction and control, works full time and exclusively for the company, and executes non-disclosure certifications for the company, and where the staffing agency that has seconded the individual has no role in the work the individual performs (other than providing that individual for that work) and the staffing agency would not have access to any controlled technology (other than where specifically authorized by a license)."
  3. Many Canadian companies currently benefit from ITAR Section 124.16 special retransfer authorizations. They permit re-transfers of defence articles and technical data to employees of foreign (including Canadian) entities who are nationals exclusively of NATO or EU countries or Australia, Japan, New Zealand or Switzerland. DDTC initially proposed to eliminate 124.16 with the implementation of the new rule. In its final rule, however, DDTC reconsidered its position and noted a major concern expressed by commenting parties was that the proposed dual national rule did not include transfer to approved sub-licensees (which are included under Section 124.16). Under the new amendments, Section 124.16 is now retained and its definition of "regular employee" has been amended to include workers who have long-term employment relationships with end-users as discussed above.
  4. Academic institutions in Canada have encountered particular challenges with compliance issues arising in the context of ITAR-controlled goods and technology. Any uncertainty regarding the application of the new rule to Canadian universities was put to rest by DDTC when it noted in its commentary that it is not prepared to extend the exemption to academic institutions at this time.

Interaction with Canada's Controlled Goods Programs

Despite DDTC's refusal to allow an explicit exemption for CGP registrants at this time, Canada is developing measures to accommodate these new ITAR requirements in an attempt to facilitate compliance for Canadian companies. Following a security threat and risk review, Canada's Controlled Goods Directorate at Public Works and Government Services (CGD) recently implemented its Enhanced Security Strategy, which includes the development of a risk matrix for identifying individuals at risk of unauthorized transfer of controlled goods.

New Questionnaire Developed for Canadian Companies

CGD has indicated that a screening questionnaire is being developed and will be provided to Canadian companies to assist them in identifying risks during the security assessment of their employees under the CGP. Factors to be considered in such an assessment are not unlike those in the "substantive contact" analysis under the new ITAR rule and include the following:

  1. contacts with government officials, agents or proxies;
  2. business and/or family contacts;
  3. continuing allegiance to a foreign country;
  4. relationship with a foreign country government (e.g., employment);
  5. frequent travel:
  6. residence and/or bank accounts in a foreign country; and
  7. affiliations within or outside Canada.

CGD has also indicated that the nature and substance of these contacts will be used to determine if an individual should be subject to broader security assessment or denied registration. Where the risk threshold is exceeded, CGD, working with a number of other government departments, will undertake a risk assessment of the individual to determine whether access should be granted.

Additional Measures Under the Enhanced Security Strategy

Also included in CGD's Enhanced Security Strategy are measures to tighten security requirements for Canadian registrants under the CGP in a number of areas, including: students, interns and collectors; broader security assessments of foreign temporary workers and visitors; broader security assessments of transportation companies (together with Transport Canada); additional requirements for a company's security plan, especially relating to cyber-security risks; more in-depth inspection processes; and the development of a list of debarred individuals and companies.

Next Steps

The new ITAR rule becomes effective August 15, 2011. This, along with Canada's new CGP requirements, will require Canadian companies to implement enhanced security measures, including screening of all employees requiring access to controlled items. What this exactly entails will have to be determined on a case-by-case basis for each particular employer. It is expected that there will be challenges for Canadian companies undertaking these measures to ensure their procedures satisfy the diligence required by ITAR but at the same time do not expose them to risk of non-compliance with human rights and privacy laws in Canada.

It will be important for Canadian companies in the military, aerospace and satellite sectors that access controlled goods and technology to work closely with their US and Canadian counsel to ensure compliance with the applicable defence control regimes in both countries as well as the requirements for employment, privacy and human rights laws.

McCarthy Tétrault's International Trade and Investment Law Group has extensive experience in dealing with defence trade control measures and is available to advise on related enforcement, compliance and strategic planning issues.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions