The beginning of the new year is an opportune time to review and revise internal compliance programs and procedures to ensure they are fully up to date and properly address the significant risk exposure arising from export control and economic sanctions law and policy. 2012 was another very busy year for legal developments in this area. The most significant changes involved amendments to the Export Control List, further liberalization of controls over information security exports and technology transfers, changes in nuclear goods and technology controls, expanded sanctions measures against Syria and Iran, and the relaxation of sanctions against Burma.
1. Significant Changes to the Export Control List
Although they were not officially published until January of 2012, on December 19, 2011 Foreign Affairs and International Trade Canada's Export Controls Division (ECD) announced a number of changes to the Export Control List (ECL) which had already become effective December 16, 2011. This caused significant concern for a number of exporters. The latest list of controlled goods and technology is now set out in a new Guide to Canada's Export Controls (2010).1 Accordingly, the Guide to Canada's Export Controls (2007) is no longer in force. These changes were made to update Canada's controls in accordance with its commitments as of 2010 under various multilateral export control regimes, including the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies (Wassenaar Arrangement).
These amendments to the ECL include the addition of numerous goods and technology which now require an export permit for their transfer from Canada. The amendments also include the removal of various items from control as well as clarifications regarding existing controlled items. Goods and technology that are affected by these changes include items in ECL Group 1 (dual use items), Group 2 (munitions list), Group 5 (miscellaneous items), Group 6 (missile technology), and Group 7 (chemical and biological weapons items).2
Because of concerns expressed with the timing of the publication and the coming into force of these changes, ECD has indicated that next set of changes (to bring the ECL up to date with more recent changes under the Wassenaar Arrangement) will not come into force until 30 days after they are announced. This is currently anticipated to occur sometime in early 2013.
2. Some Liberalization of Encryption Export and Technology Transfer Controls
Included in the above-noted changes to the ECL was the long-awaited implementation of the "ancillary cryptography" decontrol note. Note 4 to the ECL Group 1, Category 5 – Part 2: "Information Security" provides a decontrol for crypto items the primary function or set of functions of which is not any of the following: information security, a computer (including operating systems, parts and components therefor), sending, receiving or storing information or networking. Further, their cryptographic functionality must be limited to supporting their primary function or set of functions, and when necessary, details of the items must be accessible and provided, upon request, to ascertain compliance with conditions of the decontrol note.
On July 31, 2012, General Export Permit No. 45 (Cryptography for the Development or Production of a Product) (GEP No. 45) was issued. This new GEP allows for the export of controlled cryptographic items, subject to some exceptions, that are used for the development or production of a product without having to apply for an individual export permit. The transfer may be made to (i) a non-government entity in one of 29 designated countries or (ii) a non-government entity in any country (other than sanctioned or Area Control List countries) provided that the entity is controlled by a Canadian resident or a non-government affiliated entity located in one of the 29 designated countries. The exporter must notify ECD prior to the first transfer in each calendar year and then report on transfers made during the previous calendar year by January 31. ECD information requests must be responded to within 15 days. In the case of physical exports, GEP No. 45 must be specified on the export report filed with Canada Border Services Agency (CBSA).3
ECD has proposed another General Export Permit – GEP No. 46 – which will allow for the transfer of finished products containing controlled cryptography to certain companies. More specifically, this would permit transfers to consignees that have a parent whose head office is located in Canada, the United States, or one of 29 designated countries.It would also have similar notification and reporting requirements as GEP No. 45. According to ECD, this is anticipated to come into force sometime in early 2013.
3. Changes to Nuclear Export Controls
On May 3, 2012, two new GEPs were issued for nuclear-related goods and technology allowing these items to be transferred without having to obtain an individual export provided certain conditions are satisfied. These new GEPs replace GEP No. 27 – Nuclear-related Dual-Use Goods.
GEP No. 43 – Nuclear Goods and Technologies to Certain Destinations covers the export of eligible goods and technology referred to in the ECL. GEP No. 44 – Nuclear Related Dual-Use Goods and Technology to Certain Destinations applies to the export of eligible goods and technology listed in the ECL Group 4. Certain Group 3 and 4 items do not qualify for these GEPs.4
These GEPs may only be used for transfers to one of 29 eligible countries and have certain notification and record retention requirements. Although touted as a liberalization of nuclear-related controls, some have noted that depending on the product and destination, these changes have resulted in more restrictive controls.
4. Expanded Sanctions Measures Against Syria
Effective March 5, 2012, Canada expanded its economic sanctions against Syria by imposing a financial services ban. It prohibits persons in Canada and Canadians outside Canada from providing or acquiring financial or other related services to, from or for the benefit of or on the direction or order of Syria or any person in Syria. There are some exemptions, including for:
i. loan repayments to any person in Canada or any Canadians abroad in respect of loans entered into before March 5, 2012 as well as enforcement of security in respect of such loans or payments by guarantors guaranteeing such loans;
ii. financial services required to be provided or acquired further to a contract entered into before March 5, 2012; and
iii. financial services in respect of non-commercial remittances of $40,000 or less sent to or from Syria, or any person in Syria, if the person providing the financial services keeps a record of the transaction.
On May 18, 2012, Canada imposed a ban on exporting, selling, supplying or shipping to Syria or any person in Syria any luxury goods. These are defined to mean "goods such as jewellery, gems, precious metals, watches, cigarettes, alcoholic beverages, perfume, designer clothing and accessories, furs, sporting goods, private aircraft, gourmet foods and ingredients, lobster, computers, televisions and other electronic devices."
Sanctions were again expanded on July 6, 2012 with the implementation of a prohibition against the export, sale, supply or shipping to Syria of goods that can be used for internal repression or in the production of chemical and biological weapons.
In addition, throughout the year, dozens of companies, government entities and individuals were listed as "designated persons" under Canadian sanctions measures against Syria. Canadian companies and individuals are prohibited from engaging in a wide range of dealings with designated persons under Canada's sanctions regime. Canadians are also subject to reporting requirements in respect of property owned or controlled by designated persons and related proposed or actual transactions.
Financial institutions, including federally regulated banks and provincial trust and loan companies and securities dealers, are required to monitor and determine on a continuing basis whether they are in possession or control of property owned or controlled by or on behalf of a designated person.
5. Expanded Sanctions Measures Against Iran
There were also significant changes to Canadian sanctions against Iran during 2012. On January 31, five companies and three individuals were added to the list of designated persons. On December 11, another 98 companies and one individual were added to the list.
Also effective December 11, new measures were implemented prohibiting the supply to Iran of various goods, as well as any related financial services and technical data, including the following:
i. equipment or machinery designed for the building, maintenance or refitting of ships;
ii. vessels designed for the transport or storage of crude oil, or any petroleum or petrochemical products;
iii. goods designed for drilling, mineral surveying and exploration, including specialized equipment used in the mining industry;
iv. specialized equipment used to provide broadcasting, telecommunications, or satellite service to Iran or an entity acting on behalf of Iran; and
v. hard currency from any country if the total value is in excess of CAD$40,000.
There are also new prohibitions against importing natural gas, oil, and petroleum or petrochemical products from Iran, providing marketing and other financial or related services in respect of certain prohibited goods, providing flagging or classification services to Iranian oil tankers or cargo vessels, and providing insurance or reinsurance to or for the benefit of Iran or any entity in Iran.
Notably, the December 11 amendments also included two new exceptions to the existing ban on financial services to Iran. The first allows for the provision of financial services in respect of transfers of CAD$40,000 or less between family members in Canada and Iran. (This is in addition to the existing exception for non-commercial remittances of CAD$40,000 or less sent to or from Iran.) The second exception is for financial services required for a person in Iran to obtain legal services with respect to the application of the sanctions measures.
6. Sanctions Against Burma Relaxed, But Proceed Carefully
On April 24, 2012, most of Canada's economic sanctions against Burma (Myanmar) were been repealed. Enacted in 2007 and touted as being among the most aggressive in the world, Canada's sanctions and export controls had prohibited most activities with Burma, including investment, exports and imports, the provision of financial services and technical data, the transiting of ships and aircraft, and dealings with designated persons. These developments will raise new trade and investment opportunities for Canadian business, however firms should proceed with caution as certain significant restrictions remain in effect.
Burma had also been listed on Canada's Area Control List (ACL) since 1997. With these changes, Burma has now been removed from the ACL so that exports and transfers of goods or technology from Canada to Burma are no longer prohibited.
Certain significant sanctions remain in effect. Persons in Canada and Canadians outside Canada are prohibited from dealing with designated persons as listed in the regulations. The list of designated persons currently includes 44 companies and 38 individuals.
Further, there is a military trade embargo of Burma. Persons in Canada and Canadians outside Canada are prohibited from supplying, transporting or otherwise dealing in any arms or related material destined for Burma or any person in Burma. These prohibitions also apply to the transfer of technical data and provision of financial services related to military activities or dealings in arms and related materials.
7. Canada's Current "Red Flag" Destinations
The increasing use and enforcement of economic sanctions by Canada and its trading partners, including the United States and the European Union, is significantly raising exposure to financial, operational and reputational risk. It is important for any company doing business internationally to have in place comprehensive internal control measures for compliance with economic sanctions and export controls.
In addition to Syria, Iran and Burma as discussed above, Canada currently imposes trade controls of varying degrees on activities involving the following countries (and in many cases, individuals and entities associated with them): Belarus, Côte d'Ivoire, the Democratic Republic of the Congo, Cuba, Egypt, Eritrea, Guinea-Bissau, Iraq, Lebanon, Liberia, Libya, North Korea, Pakistan, Sierra Leone, Somalia, Sudan, Tunisia and Zimbabwe. Any involvement of these countries or any "designated person" in proposed transactions or other activities should raise a red flag for further investigation to ensure compliance with economic sanctions.
2 These changes are further described in detail at http://www.international.gc.ca/controls-controles/about-a_propos/expor/guide.aspx?menu_id=72&view=d.
3 For further information, see Notice to Exporters No. 182: General Export Permit – Cryptography for the Development or Production of a Product (August 2012) at http://www.international.gc.ca/controls-controles/systems-systemes/excol-ceed/notices-avis/182.aspx?lang=eng&view=d.
4 For further information, see Notice to Exporters No. 181: General Export Permits for Certain Nuclear and Nuclear-related Dual-use Goods and Technology to Certain Destinations (May 2012) at http://www.international.gc.ca/controls-controles/systems-systemes/excol-ceed/notices-avis/181.aspx?lang=eng&view=d.
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.