Canada: Newsletter: Canadian Export/Domestic Controls And U.S. Export Controls

Last Updated: February 28 2012
Article by Heenan Blaikie

This newsletter is designed to meet the needs of Canadian industry involved in Canadian export controls, U.S. export controls or Canada's Controlled Goods Program (CGP). It identifies amendments or proposed amendments to such programmes and, where appropriate, provides timely and useful assessments on such changes, especially on how such changes might impact Canadian domestic and trade interests.

A. CANADIAN EXPORT CONTROLS

1. Export Control List (ECL)

a. Amendment to ECL

On 16 December 2011 the Export Controls Division (TIE) of the Department of Foreign Affairs and International Trade (DFAIT) implemented regulatory changes to the ECL. DFAIT also issued a revised Guide to Canada's Export Controls dated June 2010. The "Guide" reflects multilateral export control lists in effect at a particular point in time depending in the specific export control regime. The ECL Groups have been amended up to the dates as noted below:

Wassenaar: ECL Groups 1 and 2 reflect Wassenaar changes as of December 2009.

Nuclear Suppliers' Group/International Atomic Energy Agency: ECL Group 3 reflects changes as of 07 November 2007.

Nuclear Suppliers' Group: ECL Group 4 reflects changes as of 30 June 2010.

Missile Technology Control Regime: ECL Group 6 reflects changes as of 13 November 2009.

Australia Group: ECL Group 7 reflects changes as of 25 September 2009.

The amendment to the ECL is found in the Canada Gazette, Part II at: http://www.gazette.gc.ca/rp-pr/p2/2012/2012-01-04/pdf/g2-14601.pdf

The Guide to Canada's Export Controls (June 2010), plus the changes, are found at: http://www.international.gc.ca/controls-controles/about-_propos/expor/guide.aspx?menu_id=72&view=d

b. Multilateral Lists

The lists negotiated in the various multilateral export control regimes are usually finalised well before they appear in the export control lists of various countries. Below are links to those lists as they are currently drafted. Countries undertake to bring those lists into effect in their respective domestic laws as soon as possible. In some cases, these come into effect fairly quickly (e.g., the U.S. and the U.K.) and in other cases many months or years can pass before they form part of the export control lists of participating countries. Exporters should be aware that the lists as identified in the links below will form part of Canada's Export Control List (ECL) at some future point.

The current Wassenaar List (ECL Groups 1 & 2) can be found at: http://www.wassenaar.org/controllists/index.html

The current International Atomic Energy List/Nuclear Suppliers' Group List (Group 3) can be found at: http://www.nuclearsuppliersgroup.org/Leng/PDF/infcirc254r9p1-071107.pdf

The current Nuclear Suppliers' Group List (ECL Group 4) can be found at: http://www.nuclearsuppliersgroup.org/Leng/PDF/infcirc254r8p2.pdf

The current MTCR List (ECL Group 6) can be found at: http://www.mtcr.info/english/annex.html

The current Australia Group List (ECL Group 7 can be found at: http://www.australiagroup.net/en/controllists.html

Assessment: The current ECL Guide dated June 2010 does not fully reflect the current multilateral control lists. Some Canadian companies have been caught off-guard when ECL changes come into effect making their previously uncontrolled exports now subject to export permits. Therefore, companies should familiarise themselves with the above regime lists to ensure that they have a complete understanding of these changes and the impact on future export permit requirements.

2. Proposed General Export Permits

  1. GEP 43: ECL Group 3 (Nuclear) - in effect January- February 2012
  2. GEP 44: ECL Group 4 (Nuclear-related) - in effect January-February 2012
  3. GEP 41: ECL Group 1 and 5504 - Multi-destination Permit to be replaced - April 2012

3. Proposed General Export Permits for Cryptography

  1. GEP 45: ECL cryptography - intra-company transfers
  2. GEP 46: ECL cryptography for co-development

NB: A separate Newsletter is being prepared covering Canada's cryptography controls which compares Canada's export controls with those of other countries, in particular, the U.S., the UK and the European Union. Watch for this in the coming weeks...

Assessment: It has always been difficult for DFAIT to put in place export controls in a timely fashion. For example, the revised ECL Guide dated 2010 is, for the most part, already 2 years out of date even though the revised ECL only came into effect on 16 December 2010. It is understood that this is more a reflection on the regulatory process and not on any lack of desire on the part of DFAIT to get amendments in place ASAP. It is comforting to know that DFAIT continues to try to close this gap and they hope to have a revised ECL out by April-May 2012.

B. U.S. EXPORT CONTROLS

1. Proposed Amendments to the USML and the Commerce Control List (CCL)

The U.S. is moving quickly to overhaul its export control system under President Obama's Export Control Reform Initiative (ECRI). The basic tenet of the ECRI is to eventually move away from a separate US Munitions List (USML) and Commerce Control List (CCL) and establish one list for strategic goods and technology and therefore, one licensing body. To date, the U.S. has reviewed 11 of the 21 USML Categories with proposals to move many items from the USML to the CCL. It is expected that the complete review process will finish by end of March 2012. Items moved from the USML to the CCL will be placed in a new CCL section referred to as the "600 Series".

On December 9, 2011, the Bureau of Industry and Security (BIS) made a number of administrative changes, including the creation of a new division and the expansion of BIS staff, to prepare for an influx of export licence applications expected as a result of the ECRI. BIS will create a "Munitions Control Division" to handle licensing for the thousands of items that move from the U.S. Munitions List (USML) to the CCL.

In November and December 2011 a number of notices appeared in the Federal Register addressing the specific USML to CCL changes being sought. The proposed changes are noted below:

a. Category VI (Vessels of War)

http://www.pmddtc.state.gov/FR/2011/76FR80302.pdf

The proposed revision narrows the types of surface vessels of war and special naval equipment controlled on the USML to only those that warrant control under the stringent requirements of the Arms Export Control Act. Category VI will no longer include submarines, which will be controlled in Category XX. The most significant aspect of this change is that it does not contain controls on all generic parts, components, accessories, and attachments. Rather, it contains a positive list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. All other parts, components, accessories, and attachments will become subject to Commerce controls.

b. Category VII (Military Vehicles)

http://www.pmddtc.state.gov/FR/2011/76FR76100.pdf

The proposed revision narrows the types of ground vehicles controlled on the USML to only those that warrant control under the USML. Changes include the removal of most non-armoured and unarmed military vehicles, trucks, trailers, and trains (unless ''specially designed'' as firing platforms for weapons above .50 calibre), and armoured vehicles (either unarmed or with inoperable weapons) manufactured before 1956. Gas turbine engines controlled under Category VII will move to the new Category XIX. The most significant aspect of this proposed change is that it does not control all generic parts, components, accessories, and attachments that are specifically designed or modified for a defence article. Rather, it contains a positive list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. All other parts, components, accessories, and attachments will become subject to Commerce controls.

c. Category VIII (Aircraft and Related Parts)

http://www.pmddtc.state.gov/FR/2011/76FR68694.pdf

The proposed revision narrows the types of aircraft and related items controlled on the USML to only those that warrant control under the ITAR. The proposal does not contain controls on all generic parts, components, accessories, and attachments that are specifically designed or modified for a defence article. Rather, it contains a positive list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. All other parts, components, accessories, and attachments "specially designed" for a military aircraft and other articles will become subject to Commerce controls.

It is also understood certain items associated with aircraft engines, such as production and development technology for the "hot section" of an engine, will move to the CCL.

d. Category XIX (Military Engines)

http://www.pmddtc.state.gov/FR/2011/76FR76097.pdf

Category XIX will describe gas turbine engines and associated equipment warranting control on the USML. The proposal is to remove gas turbine engines currently controlled under USML Categories VI, VII and VIII and place them under Category XIX but not all articles in those current Categories will be included. The most significant aspect of this proposed USML Category is that it does not contain controls on all generic parts, components, accessories, and attachments. Rather, it contains a list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. All other parts, components, accessories, and attachments will become subject to Commerce controls.

e. Category XX (Submersibles)

http://www.pmddtc.state.gov/FR/2011/76FR80305.pdf

The proposed revision accounts for the movement of submarines from Category VI and consolidates the controls that will apply to all submersible vessels in a single category. In addition, naval nuclear propulsion power plants for submersible vessels controlled under Category XX, formerly controlled under Category VI(e), will now be controlled under Category XX(b). This proposed rule controls only those parts, components, accessories, and attachments that are specifically designed for a defence article controlled in this category. All other parts, components, accessories, and attachments will become subject to Commerce controls.

f. Specially Designed (Definition)

Although one of the goals of the ECRI is to describe USML controls without using design intent criteria, a few of the controls in the proposed revision nonetheless use the term "specially designed". It was therefore believed that a definition for "specially designed" needed to be drafted.

The proposed draft definition of the term "specially designed" means that the end-item, equipment, accessory, attachment, system, component, or part (see ITAR Sec. 121.8) has properties that:

  1. Distinguish it for certain predetermined purposes;
  2. are directly related to the functioning of a defence article; and,
  3. are used exclusively or predominantly in or with a defence article identified on the USML.

It is proposed that this definition be common for both the revised USML and the revised CCL.

http://www.gpo.gov/fdsys/pkg/FR-2011-11-07/html/2011-28502.htm

2. Implementation of UK and Australian Defence Trade Treaties; Impact on the ITAR Canadian Exemptions

On 22 November 2011, under Federal Register Notice Vol. 76, No. 225 (Public Notice 7683) the U.S. Department of State proposed to amend the ITAR to accommodate the UK and Australian Defence Treaties via specific Exemptions. These amendments to the ITAR have impacted the Canadian Exemptions under ITAR Part 126.5.

Specifically, the heart of 126.5, the Defence Service Exemption (126.5(c)), has been deleted in favour of more general exemptions contained in the ITAR. Under the current exemption (126.5(c)) CGP-registered persons who want to bid on a Canadian Federal, provincial or territorial government program, or a U.S. Government Department or Agency procurement but require controlled data packages in order to bid, are not subject to the otherwise ITAR licensing requirements. Other countries must rely on a much-pared back exemption under Part 125.4(c). Unfortunately, this exemption only applies to potential contracts with the U.S. Department of Defence.

If Canadian contractors are required to use Part 125.4(c) and 126.5(c) disappears, the former exemption falls considerably short of 126.5(c) in a number of areas:

  • The current exclusion list in 126.5(b)(1) through (21) is different from the one that is proposed in Supplement No. 1 to Part 126;
  • The current defence service exemption in 126.5(c) applies to all U.S. Federal Departments and Agencies, and to all Canadian Federal, Provincial or Territorial governments whereas 125.4(c) applies only to contracts with the U.S. Department of Defence; and
  • The current 126.5(c) refers to technical data in support of maintenance contracts whereas the exemption under 125.4(c) excludes the transfer of data to Canada for maintenance purposes.

Details of these proposed changes appear in the following website: http://www.pmddtc.state.gov/regulations_laws/documents/proposed_rules/proposed_rule_for_treaties,FR72246.pdf

Assessment: Canada controls the re-export from Canada of goods and technology controlled under the USML and ensures that a US re-export authorisation has been issued prior to the issuance of a Canadian export permit. Canada also imposes registration requirements for "persons" in Canada who 'examine, possess or transfer' "controlled goods" under Canada's Controlled Goods Program (CGP).

If these changes go through there will be a definite impact on, and disadvantage to, Canadian industry and trade. The key impacts relate to:

  • Canada's Export Control List and the requirements for a US export authorisation for USML goods and technology. If the USML is pared back, and Canada's list of USML articles and technology is not pared back, then Canada will be applying a higher standard of export control than the U.S. Early consideration should be given to changing the Canadian list of equivalent USML articles and technology to reflect the revised USML; and
  • The Controlled Goods Program (see Section C, below) and the list of Controlled Goods should be pared back and in fact, consideration should be given to postponing any further implementation until the dust settles on the USML/CCL changes; and
  • The impact on the Canadian Exemptions (ITAR Part 126.5) should be examined because if the changes go through this will largely eliminate any advantage Canada may have had under the Canadian Exemptions and could call into question the necessity and relevancy of the Controlled Goods Program.

C. CONTROLLED GOODS PROGRAM

1. Enhanced Security Strategy (ESS)

A number of meetings have been held with industry since the implementation of the Enhanced Security Strategy (ESS) began on 01 October 2011. The Controlled Goods Directorate (CGD) of the Department of Public Works and Government Services Canada (PWGSC) is pushing through on implementation despite a significant pushback from Canadian industry.

Assessment: While it has been acknowledged that the U.S. ITAR changes could impact the Controlled Goods Program (CGP) and the ESS, the CGD has affirmed that it has no intention of delaying the implementation until all changes are known. At a meeting on 10 January 2012, CGD confirmed there would be no changes to the CGP/ESS despite the major changes being done to the U.S. ITAR and EAR export control systems. However, the CGD did make one concession: It will permit persons possessing a SECRET security clearance to be considered to have met the security assessment requirements of the CGP. However, such individuals must complete sections A to E, and M, of the Security Assessment form. Those persons not holding a security clearance would have to complete the new form in its entirety.

2. Future Changes

It is not clear about what future changes are being contemplated by PWGSC with respect to the CGP. However, at the meeting held on 10 January 2012 it was clearly stated that PWGSC is examining a possible 20 amendments to the Controlled Goods Regulations (CGR).

At that same meeting, the CGD indicated that it has been in discussions with DFAIT, DND, CSE and the RCMP concerning changes to the Controlled Goods Schedule but they did not expect those changes to be in place until later 2012 or early 2013.

CGD also indicated that it had established working groups to review the ESS and was prepared to have industry participate in those discussions. However, it was made clear that the WGs would not entertain any changes to the ESS; it would only look at how to make it easier for industry to comply with the ESS.

Assessment: In the absence of knowing what specific CGR or Schedule changes are being contemplated, it is not known whether such changes will further restrict the handling of controlled goods. Furthermore, any significant delay in addressing amendments will mean that Canadian companies will have to continue to be registered under the CGD in order to bid on certain programs whereas their foreign competition will be subject to no constraints. Obviously, this puts Canadian companies, particularly those that are small and medium-sized that are not CGP-registered, at a distinct, competitive disadvantage.

D. MISCELLANEOUS

Nil.

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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