Canada: Canada Launches Consultations On Major Changes To The Defence Production Act And The Controlled Goods Program

Yesterday, Public Works and Government Services Canada (PWGSC) launched consultations on proposed amendments to the Defence Production Act (DPA) which will have a significant impact on Canadian companies in the defence, aerospace, security, and satellite sectors. Companies that are subject to the DPAand its Controlled Goods Regulations are subject to significant registration, screening and security obligations in their dealings with controlled goods and technology within Canada. The proposed amendments will significantly change the scope of products and technology subject to the Controlled Goods Program (CGP), including by removing approximately 52% of the current entries covered by the DPA Schedule.

It is strongly recommended that companies dealing with defence, aerospace, security, and satellite goods and technology carefully review the proposals to ensure that they understand the changes and, if necessary, address any concerns through submissions to PWGSC. The deadline for submissions is December 20, 2013.

Background – Canada's Controlled Goods Program

Canada's CGP was established in 2001 to address U.S. concerns over Canada's treatment of defence and other related goods and technologies subject to control under the U.S. International Traffic in Arms Regulations (ITAR). The CGP was intended to harmonize defence trade controls, practices and enforcement between Canada and the United States and, inter alia, to allow for the transfer of various ITAR-controlled items from United States to Canada without a license.

More recently, in response to human rights, employment and privacy concerns, the United States implemented changes to the ITAR that permit transfers of ITAR-controlled items to certain dual and third country nationals within Canada. In conjunction with those changes, Canadian authorities have implemented an Enhanced Security Strategy that significantly tightened many of the requirements under the CGP, including extensive screening of individuals in Canada who are to have access to CGP-controlled items. For more information, see Final U.S. ITAR Rule on Dual and Third-Country Nationals Raises New Challenges for Canadian Business.

The Canadian and U.S. Defence Control Regimes

The Canadian CGP was designed to work hand-in-hand with the U.S. ITAR regime so that, generally speaking, goods and technology controlled for ITAR purposes would also be subject to domestic controls in Canada under the CGP.

Some Canadian companies have found the requirements to be overly burdensome and have encountered problems specifically in the intersection of the Canadian and U.S. regimes. This has included instances in which items that were no longer controlled under the U.S. ITAR regime are still be controlled under the Canadian CGP regime (and vice-versa).

Proposed Amendments to the Defence Production Act

In response to a number of concerns expressed regarding administrative burden and inconsistencies between the Canadian and U.S. regimes, PWGSC has proposed significant amendments to the DPA Schedule that identifies the goods and technology subject to the CGP.

A key proposal involves the identification of two streams of goods and technology in the new Schedule. Stream 1 will be all ITAR-controlled goods and technology imported from the United States and Stream 2 will be all other items with strategic significance or national security implications regardless of their country of origin. For Stream I, the Schedule will make direct reference to the United States Munitions List (USML) that identifies all ITAR-controlled items. This is intended to ensure that as the United States reforms its export controls and moves items from USML control under the US State Department to dual-use control under the US Commerce Department, the Canadian CGP regime will reflect those changes (subject of course to any items that Canada may otherwise control for CGP purposes under Stream 2).

In PWGSC's Consultation Paper, there is a long list of items to be removed from CGP control that are currently referred to in the DPA Schedule and set out in Group 2 (Munitions List), Item 5504 (Strategic Goods and Technology), and Group 6 (Missile Technology Control Regime) of Canada's Export Control List (ECL).

It is important to note that none of the proposed changes will impact Canadian controls on the export or transfer of ECL goods or technology from Canada.

Timeline for Next Steps

PWGSC is accepting submissions on the proposed changes until December 20, 2013. After taking into account responses received, PWGSC will issue a Consultation Report in January of 2014 and then publish a notice of the changes in the Canada Gazette – Part 1 between May and June of 2014. Publication in the Canada Gazette – Part 2 will occur between October and November of 2014. It is presently anticipated that the amended DPA Schedule will come into force in November of 2014.

Canadian companies should be closely reviewing the proposals to determine whether there are any positive or negative impacts to their operations as well as whether any additional items should be removed from CGP control. Monitoring two streams of controlled items for CGP purposes and a different set of items for export control purposes may also create complications for some organizations.

McCarthy Tétrault's International Trade and Investment Law Group and its Procurement Group have extensive experience in advising on compliance and enforcement matters under the Defence Production Act and its Controlled Goods Regulations and will be carefully following the proposed amendments as they progress in the coming months.

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