Worldwide: Key Developments In Economic Sanctions And Export Controls And What To Watch For In 2015

Last Updated: February 10 2015
Article by John W. Boscariol

Most Read Contributor in Canada, September 2018

In recent years, Canada has significantly expanded its multilateral and unilateral trade control measures. Broader scope and increased enforcement in the areas of economic sanctions, export and technology transfer controls, and defence trade controls have raised the stakes for Canadians engaged in cross-border activities. Enforcement and reputational risk is higher than ever and it is critical for any Canadian company doing business abroad to ensure it has internal controls in place to mitigate the growing risk exposure.

During 2014, developments in Russia, the Ukraine and Middle East brought into focus the sanctions risk exposure of Canadian companies regardless of where they do business. In addition, new developments in export and technology transfer controls as well as defence trade controls highlight the importance of keeping apprised of these evolving rules. The following summarizes the most significant of these developments and what they mean for trade control enforcement and compliance in 2015.

Economic Sanctions

Russia and Ukraine

Without a doubt, Russia's invasion of Ukraine was the big sanctions story of 2014. Canada has been particularly vociferous in its opposition to the Putin regime, being among the first of any country to threaten sanctions over Russian interference in the Ukraine even before the departure of former President Viktor Yanukovych.

Beginning in March and continuing throughout 2014, Canada implemented broad listed-based sanctions in response to Russian aggression towards Ukraine and the annexation of the Crimea region. Under the Special Economic Measures (Russia) Regulations (the "Russia Regulations"), persons in Canada and Canadians outside Canada are prohibited from engaging in a broad range of dealings with listed Russian individuals and entities, generally referred to as "Designated Persons" under Canadian sanctions law. The Special Economic Measures (Ukraine) Regulations applies similar restrictions in respect of listed Designated Persons in Ukraine. The Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations prohibits dealings involving listed persons associated with the former Yanukovych regime. Currently, Canada has listed more individuals and entities than either the United States or the European Union under their respective Russia/Ukraine sanctions.

Under the Russia Regulations, Canada also now prohibits providing financing for or dealing in new debt of longer than 30 or 90 days' maturity (depending on the entity) in relation to certain listed entities, their property or any interests or rights in their property. Dealing in new securities, including shares or any other ownership interest in relation to certain listed entities, their property or any interests or rights in their property is also prohibited.

On December 19, 2014, Canada implemented restrictions on the supply of certain goods and technology to Russian oil exploration and production activities. Persons in Canada and Canadian outside Canada are now prohibited from exporting, selling, supplying or shipping any listed goods, wherever situated, to Russia or to any person in Russia for use in offshore oil exploration or production at a depth greater than 500 metres, oil exploration or production in the Arctic, or shale oil exploration or production. The new measures also prohibit the provision to Russia or to any person in Russia of any financial, technical or other services related to such prohibited goods.

Iran

Although no new measures have been imposed by Canada against Iran since a comprehensive trade embargo was put in place on May 29, 2013, Canada has made it clear that it will continue to enforce its sanctions measures aggressively even as the United States and other members of the P5 +1 seek to negotiate the cessation of Iran's nuclear program in return for the relaxation of economic sanctions.

The investigation and conviction of Lee Specialties Ltd. ("Lee") for violation of Canada's Iran sanctions is an example. On April 14, 2014, Lee pled guilty to violating the Special Economic Measures (Iran) Regulations ("Iran Regulations") by attempting to export to Iran a shipment containing 50 Viton O-rings worth approximately 30 cents apiece. These items are listed as prohibited goods under Schedule 2 of the Iran Regulations. According to the Agreed Statement of Facts, Lee's customer had locations in Dubai and Iran. Although there was some confusion with respect to the shipping address, the shipment eventually went out addressed to the customer's Tehran location. The shipment was seized by the Canada Border Services Agency and, as a result of a plea, Lee was convicted and fined $90,000.

Cuba

The December 17, 2014 announcement by the Obama administration that it would be seeking normalization of US relations with Cuba and the spectre of potential relaxations in the trade embargo has reignited interest in Cuban business opportunities. Although a complete repeal of the US embargo does not appear to be the cards at this time, the pursuit of Cuba-related business brings in to focus longstanding conflicts between Canadian and US law in this area.

An order issued under Canada's Foreign Extraterritorial Measures Act make it a criminal offence for companies in Canada and their officers, directors and employees in a position of authority to comply with the US trade embargo of Cuba – this includes Canadian companies that are owned or controlled from the United States and are therefore prohibited from doing business with Cuba under the Cuban Assets Control Regulations. Further, the FEMA order requires immediate written notification to the Attorney General of Canada of any communication relating to the US trade embargo. Companies dealing with Cuban trade or investment opportunities should be treading carefully to mitigate risk on both sides of the border.

Other Countries

During 2014, Canada also imposed new economic sanctions measures under its Special Economic Measures Act against South Sudan and under its United Nations Act against Yemen and the Central African Republic. These are all list-based measures targeting identified Designated Persons. Canada also intensified its existing sanctions measures against Syria by prohibiting various activities relating to chemicals that can be used as precursors to chemical weapons agents and dual-use equipment that can be used in a chemical weapons program.

What to Watch For in 2015

Russia, Ukraine and Iran will continue to be Canadian sanctions "hotspots". At the present time, Canada imposes trade controls of varying degrees on activities involving 22 other countries and well over 2,000 listed entities and individuals associated with them, including Belarus, Burma (Myanmar), the Central African Republic, Côte d'Ivoire, the Democratic Republic of the Congo, Cuba, Egypt, Eritrea, Guinea, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Pakistan, Somalia, Sudan, Syria, Tunisia, Yemen and Zimbabwe. In addition to monitoring their activities as they may relate to sanctioned countries, Canadian companies need to be screening their international business partners and end-users against the lists of designated entities and individuals under Canada's sanctions measures regardless of where they are doing business.

A lack of written and verbal guidance from the Canadian government continues to present significant challenges for those seeking to understand and comply with Canadian economic sanctions law. In his February 11, 2014 Budget, the late Finance Minister Jim Flaherty recognized significant improvements to the sanctions regime were required, including making available a consolidated list of Designated Persons. Although DFATD's sanctions website has undergone some mostly cosmetic changes, the Canadian business community continues to wait for more substantive changes and assistance akin to what their competitors benefit from in the United States, the European Union, Australia and elsewhere.

Export and Technology Transfer Controls

Export and technology transfer controls are more narrow in scope than economic sanctions as they only apply to transfers of goods and technology from Canada to a place outside of Canada. However, they continue to present significant compliance challenges for Canadian businesses across all sectors of the economy.

Keeping Up With Changes in International Regimes

Canada made significant amendments to its controls governing the export and transfer of goods and technology twice during 2014 – on April 10 and December 5. In both instances, the changes were intended to bring Canada's Export Control List ("ECL") into conformity with its commitments under international export control regimes, including the Wassenaar Arrangement, the Nuclear Suppliers Group, the Missile Technology Control Regime, and the Australia Group.

Notably, the most recent changes introduce new export and technology transfer controls on intrusion software and related technology and systems and IP network communication surveillance systems.

Israel and Kuwait Cleared for Firearms Exports

Canada maintains strict controls over the transfer of certain prohibited firearms, weapons, and devices and their components and parts – including, for example, fully automatic weapons, electric stun guns and large-capacity magazines. Applications for export permits for these items may be submitted only if they are for transfers to one of the 37 countries listed on the Automatic Firearms Country Control List. Effective January 14, 2015, Israel and Kuwait have been added to that list. The government is currently in consultations for adding the United Arab Emirates as well.

What to Watch for in 2015

Over the last few years, the Canadian government has been releasing new General Export Permits ("GEPs") to facilitate the transfer of controlled items from Canada to "safe" destinations. These GEPs differ from individual export permits in that exporters may rely upon them by meeting specified conditions, including reporting and record keeping, without having to prepare and submit an export permit application. GEP 45 and GEP 46 were issued in 2012 and 2013, respectively, for certain transfers of certain encryption goods and technology to eligible destinations.

The government continues to work on GEP No. 41 which is expected to allow for the export of a broad range of dual-use items (Group 1 and item 5504 of the ECL) to countries that are members of the four multilateral export regimes noted above. We understand that the government is also preparing GEPs for goods exported for repair abroad as well as for goods exported after repair in Canada. The government has also advised that it is reviewing all existing GEPs to ensure their continued relevance.

Canadian companies should also expect further changes to the ECL to bring it in line with commitments under the four multilateral export regimes negotiated after 2013. To get a head-start on this, the websites for those regimes, including the Wassenaar Arrangement, will be a key resource.

Canadian companies engaged in cross-border activities should continue to carefully monitor compliance with these complex rules. The reputational impact of export control violations, even alleged violations, is evident from the recent reports of a $10 million plus settlement against the Canadian government related to its investigation against two Vancouver business people, Stephen and Perienne de Jaray. On April 29, 2010, the CBSA Criminal Investigations Division charged them for their failure to obtain export permits for the shipment of 5,100 dual-use electronic chips and circuit boards to Hong Kong, charges that carry with them the possibility of unlimited penalties and up to 10 years in jail. Those charges were later withdrawn but with their reputations and business destroyed, the de Jarays filed a $17 million suit against the Canadian government. In January 2015, it was reported that the claim was settled with the second largest payout of its kind in Canadian history.

Defence Trade Controls

New "Two Stream" Definition of Controlled Goods

On June 4, 2014, significant changes were made to the scope of goods and technology subject to the Controlled Goods Program ("CGP"), Canada's domestic security regime for listed defence, satellite, space and aerospace goods and technology.

The Schedule to the Defence Production Act was amended to create two streams of goods and technology subject to the rigorous security and screening controls of the CGP. This regime now applies to the possession, examination, and transfer in Canada of:

  1. all US-origin goods and technology that are "defense articles" as defined under section 120.6 of the US International Traffic in Arms Regulations ("ITAR") and all non-US-origin items that are manufactured using US-origin "technical data", as defined in US ITAR section 120.10 if the "technical data" is a "defense article", and
  2. certain goods and technology, regardless of origin, listed in Groups 2 (military), 5 (strategic), and 6 (missile technology) of the Export Control List.

In incorporating explicit reference to goods and technology classified under the US ITAR, these changes are intended to ensure that as the United States proceeds with export control reforms that are transferring ITAR-controlled items to dual-use Department of Commerce controls, the coverage of the CGP remains in step with US defence trade controls under the ITAR. The second stream covers items, regardless of their origin, considered by Canada to have strategic significance or pose national security concerns.

New Non-Disclosure Statement

Canada is still experiencing growing pains with the interaction between the CGP and US ITAR section 126.18 – "Exemptions regarding intra-company, intra-organization, and intra-governmental transfers to employees who are dual nationals or third-country nationals". Section 126.18 provides that, under certain conditions, approval of the US Department of Defense Trade Controls ("DDTC") is not required for the transfer of ITAR defence articles to foreign business entities that are approved end-users, including the transfer to bona fide regular employees who are dual or third-country nationals.

Those conditions include implementation of an employee screening process by the recipient of such ITAR defence articles. Security enhancements made to the CGP in 2011 were specifically intended to ensure that Canadian CGP-registered companies would also meet the requirements of ITAR section 126.18 and thereby alleviate the human rights concerns that had historically plagued those Canadian employers seeking to comply with ITAR restrictions based on nationality and country of birth. However, there has been significant uncertainty over whether CGP registrants are also required to have their employees sign the separate non-disclosure agreement ("NDA") required by section 126.18(c)(2) in addition to employee screening. DDTC has published a suggested NDA form, however, it specifically refers to compliance with US laws, including ITAR, and dealings with US embargoed countries, including Cuba.

To address this uncertainty, in October of 2014 Public Works and Government Services Canada's Controlled Goods Directorate ("CGD") issued a new "Notice of Security Assessment, Authorization and Acknowledgment Relating to Controlled Goods" that is required to be signed by all directors, officer, employees and students screened under the CGP. Although it makes no reference to the ITAR or compliance with US laws, it includes a statement that the signatory agrees not to disclose or transfer a controlled good to another person, company or individual, or permit the examination of a controlled good by a person, company or individual who is not registered or exempt from registration with the CGP. The CGD has stated that "this acknowledgement may be used to meet the requirements of ITAR 126.18(c)(2)," however there has been no such confirmation from DDTC.

What to Expect for 2015

Adjusting to the new two-stream definition of controlled goods, which distinguishes between US-origin and "any-origin" goods and technology, may present challenges for CGP-registrants attempting to track the origin of these items within their inventory and other systems. Those companies may find it easier to treat all items identified in both streams as controlled goods regardless of their origin. Also, issues with the relationship between the US ITAR and Canadian CGP will likely continue through 2015.

There are also new CGP initiatives that are expected to be implemented in the coming year. Whether the 2011 security enhancements are permitted under the Controlled Goods Regulations has been an issue of controversy for some time. CGD has indicated that amendments will be made to these regulations this year for purposes of clarification. Further, following rounds of consultations in 2013 and 2014, CGD is expected to implement a service fee regime for CGP-registrants in 2015 or 2016. Annual fees are expected to be $690 for sole proprietorships (businesses with one employee), $920 for businesses with up to 99 employees and $2,230 for businesses with 100 or more employees.

Conclusion

2015 promises to be as busy, if not busier, than 2014 in the area of economic sanctions, export controls and defence trade controls. Although the risks and consequences of non-compliance are higher than ever, those companies that take the time and effort to develop and implement efficient and effective compliance programs will enjoy a substantial advantage over their competitors by avoiding the significant costs of enforcement action, including monetary penalties, border delays, and reputational damage.

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