As we begin 2016, it is an opportune time for Canadian companies engaged in cross-border business to review and, if necessary, revise their policies and procedures regarding compliance with economic sanctions and export and technology transfer controls.
2015 was a busy year for trade control enforcement and compliance, and 2016 promises much more to come. The following highlights the key developments in 2015 and identifies those areas you should keep an eye on in the coming year.
Export Control Investigation and Prosecution Triggers Multi-Million Dollar Award
A record-setting government settlement at the beginning of 2015 started the year off with a stark reminder of the severe reputational impact of export control non-compliance, whether actual or alleged. The case involved a Canada Border Services Agency ("CBSA") investigation against two Vancouver business people, Stephen and Perienne de Jaray. In 2010, they were criminally charged for failure to obtain export permits for the shipment of 5,100 dual-use electronic chips and circuit boards to Hong Kong.
Those charges were later withdrawn after it was agreed the items were not controlled, but with their reputations and business destroyed as a result of the accusations, the de Jarays sued the Canadian government for $17 million. In January 2015, it was reported that their claim was settled for more than $10 million - the second largest payout of its kind in Canadian history.
Sanctions Against Russia and the Crimea Region of Ukraine
During 2015, Canada continued to add parties to its lists of designated persons under the Russia and Ukraine sanctions regulations. On February 17 and on June 29, Canada added 71 entities and individuals, bringing the total number of Russia/Ukraine designated persons to 290. These included designations of United Aircraft Corporation and the CEO of Rostec for purposes of the broad prohibitions against property dealings and facilitation, as well as Gazprom, Rosneft and others that are the target of prohibitions against dealings in debt and/or equity financing.
On June 29, Canada also imposed broad sanctions against the Crimea region of Ukraine, defined as "the Autonomous Republic of Crimea and the city of Sevastopol and includes their land areas and territorial sea." This includes prohibitions against: making investments and providing or acquiring financial or other related services for such investments; importing, purchasing, acquiring, shipping or otherwise dealing in goods exported from the region; exporting, selling, supplying, shipping or otherwise deal in goods destined for the region; transferring, providing or communicating technical data or services to, from or for the benefit of or on the direction of any person in the region; providing or acquiring financial or other services related to tourism to, from or for the benefit of or on the direction of any person in the region; and docking cruise ships in the region.
This broad prohibition contains a standard grandfathering clause. If a contract for a prohibited activity described above was entered into before June 29, there is an exemption from the particular prohibition.
Because the Crimea region is not a recognized country (and may not commonly appear in address or location information), companies may encounter significant challenges in monitoring their international activities to ensure compliance with these new restrictions. Additional diligence and care in regards to transactions with Ukraine-based entities is likely warranted.
New Dual-Use General Export Permit
On August 12, Canada issued a new dual-use general permit, General Export Permit No. 41 – Dual-use Goods and Technology to Certain Destinations ("GEP 41"), allowing for the transfer of certain goods and technology to 32 friendly countries without having to apply for an individual export permit. Dual-use goods and technology covered by GEP 41 include a broad range of items in Group 1 of the Export Control List ("ECL"), such as certain types of aircraft, computers and chips, sensors, protective equipment, information security items, various industrial components, and radar assemblies. GEP 41 also applies to certain Group 5 strategic goods and technology associated with satellite systems and spacecraft.
While GEP 41 provides a streamlined export process for transfers to eligible destinations, exporters must be diligent and confirm that the goods and technology will be used in those recipient countries and not be re-exported or used in non-listed destination countries. GEP 41 explicitly provides that transfers of goods or technology to be used in non-eligible destinations is not authorized. If it is known that the goods will eventually be re-exported to or used in a non-eligible destination, GEP 41 cannot be relied upon.
Changes Coming to the Controlled Goods Program
On May 2, Canada published proposed amendments to its domestic security regime for defence and space goods and technologies, the Controlled Goods Regulations under the Defence Production Act. The proposed amendments clarify current practices under the Controlled Goods Program and introduce new changes regarding high-risk employee screening, the visitor exemption process, reporting on security-assessed individuals, and revocations, suspensions and reinstatements of CGP registrations.
Of particular note are the proposed timelines for reporting requirements under the regulations, including the reporting of security breaches within three days and changes in registrant information within five days. Although the consultation period expired on June 1, the amendments have yet to come into force.
CBSA Initiating New Exporter Audits
On November 16, CBSA issued a Customs Notice advising that it is aware of a large number of businesses that have been exporting goods through the United States to Mexico and other countries without making proper export declarations. There is an exemption from export reporting for shipments to the United States. However, if the ultimate destination is a country other than the United States, such exports must be reported if their value is $2,000 or more. Additionally, in the case of such goods that are controlled and do not fall under a General Export Permit, the appropriate permit, license or certificate and an export declaration must be presented to CBSA prior to export, regardless of the value of the goods.
According to the Notice, CBSA is commencing compliance verification activities on June 1, 2016 to determine whether exporters have complied with these reporting requirements. There will be a six-month grace period starting December 1 during which exporters may come forward to CBSA to disclose export reporting violations in order to avoid penalties.
Charges Laid for Re-Export of US-Origin Items to Iran
On October 13, the Royal Canadian Mounted Police laid charges against two Quebec businessmen regarding the export of US-manufactured rail equipment from Canada to Iran.
All US-origin goods and technology are listed in item 5400 of the ECL and thereby controlled for transfer from Canada. However, Canada has issued a General Export Permit that allows for such transfers to any destination other than Belarus, Syria, North Korea, Cuba or Iran. In this case, the businessmen are accused of committing indictable offences under both the Customs Act and the Export and Import Permits Act by misrepresenting the origin of US railway equipment when exporting it to Iran and also by shipping the equipment through other countries in order to get it to Iran. Conviction under these offences attracts penalties of up to 10 years imprisonment and/or fines in an amount that is in the discretion of the Court.
Court Confirms Role of CBSA in Trade Controls Enforcement
In Master Tech Inc. v. The Minister of Public Safety and Emergency Preparedness, the Federal Court confirmed the role of CBSA in regards to permit and authorization requirements of other government agencies such as Global Affairs Canada ("GAC") and the Canadian Nuclear Safety Commission ("CNSC"). In this case, under the authority of the Customs Act, the CBSA had detained and seized at the border machinery Master Tech attempted to export to Iran. CBSA ultimately allowed the exporter to reclaim the goods but not to export them unless the appropriate permits and licenses were obtained from GAC and CNSC. GAC had refused to issue permits to the exporter and no CNSC license had been sought. Master Tech sought an order from the Court requiring CBSA to authorize export of the goods.
Unsurprisingly, the Court denied the exporter's request holding that CBSA could not authorize the export of the goods. Where Parliament has vested authority in another government agency to authorize exports, the role of CBSA is to monitor and enforce the decisions of that other agency. Here, GAC and the CNSC had not authorized the export of the goods and therefore CBSA could not be required to allow their export at its own discretion.
Other Developments to Watch for in 2016
At the present time, Canada imposes trade controls of varying degrees on activities involving the following countries (and over 2,000 listed entities and individuals associated with them): Belarus, Burma (Myanmar), the Central African Republic, Côte d'Ivoire, Cuba, the Democratic Republic of the Congo, Egypt, Eritrea, Guinea, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Pakistan, Russia, Somalia, South Sudan, Sudan, Syria, Tunisia, Ukraine, Yemen 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 export and technology transfer controls and economic sanctions.
In addition to the foregoing, other areas that will present compliance challenges for Canadians in the coming year include the following:
- Iran – Many companies will be seeking to take advantage of the huge opportunities that arise with the relaxation of international economic sanctions and Iran's re-entry into the global economy. Although Canada will shortly begin to relax its United Nations sanctions in accordance with UN Security Council Resolution 2231, a separate broad trade embargo remains against Iran under Canada's unilateral Special Economic Measures Act, including export, import and financial services bans and prohibitions against dealings involving hundreds of blacklisted entities and individuals. The new Liberal Government in Canada has not indicated what, if any, changes will be made to these measures.
- Cuba – The recent thaw in Cuba-US relations is leading to much speculation about new business opportunities in Cuba, but keep in mind that the US trade embargo of Cuba will for the most part remain in place until the US Congress decides otherwise. Although Canada does not have broad trade restrictions against Cuba, there are Canadian export controls that prohibit the transfer of US-origin technology and goods to Cuba without applying for and obtaining a permit. Further, under a blocking order issued pursuant to the Foreign Extraterritorial Measures Act, Canadian companies and their directors and employees are prohibited from complying with the US trade embargo of Cuba – a measure that will continue to cause problems for Canadian companies with any US connections.
- Burma – Over the past three years sanctions against Burma have been steadily lifted or eased in the US and EU in recognition of the steps taken to re-establish constitutional civilian rule. While Canada's broad sanctions were eased in 2012, significant sanctions remain, especially in relation companies and individuals associated with the Burmese state. Given the relatively free and fair elections held in December 2015, and the significant oil and gas and mining opportunities in the region, companies should watch to determine what steps the Liberal Government takes to further ease or remove these sanctions.
- Blacklisted Entities and Individuals – Canadians are prohibited from engaging in activities involving any of the over 2,000 entities and individuals listed under Canada's economic sanctions and anti-terrorism legislation. Canadian companies, and not just banks and financial service entities, should be screening their transactions and activities to ensure that they do not involve these blacklisted persons.
- Technology Transfers – Transfers of technology continue to be a challenge for Canadian firms doing business abroad. Technology transfers, whether they occur in physical form or through email, phone, teleconferences, or server uploads or downloads, are subject to export controls and economic sanctions. Compliance policies and procedures need to be carefully constructed to ensure that transfers by intangible means are also monitored and addressed.
Footnotes "Federal government pays businessman one of the largest settlements in Canadian history: report", National Post, January 31, 2015.
 Regulations Amending the Special Economic Measures (Russia) Regulations (SOR/2015-39), February 17, 2015 and Regulations Amending the Special Economic Measures (Ukraine) Regulations (SOR/2015-40), February 17, 2015.
 Regulations Amending the Special Economic Measures (Russia) Regulations (SOR/2015-178), June 29, 2015 and Regulations Amending the Special Economic Measures (Ukraine) Regulations (SOR/2015-179), June 29, 2015.
 Regulations Amending the Special Economic Measures (Ukraine) Regulations (SOR/2015-179), June 29, 2015.
 General Export Permit No. 41 — Dual-use Goods and Technology to Certain Destinations (SOR/2015-200), July 22, 2015.
 Regulations Amending the Controlled Goods Regulations, Canada Gazette Part I, Vol. 149, No. 18, May 2, 2015.
 CN 15-035: "Voluntary Disclosure of Unreported Goods Transiting Through the United States to a Subsequent Country", November 16, 2015.
 See "Railway Equipment Exported Illegally to Iran: Two Men and their Company Face Justice", RCMP Press Release, October 13, 2015.
 2015 FC 1395, December 18, 2015.
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