As 2009 draws to an end, it is an opportune time to review the changes to Canada's economic sanctions and trade controls over the past year in order to ensure compliance programs are fully up-to-date and risks of contravention and enforcement action are minimized.
Because of the significant financial and reputational impact that contraventions in this area can have, it is important that any company doing business internationally, whether in the goods, services or technology sector, ensure appropriate compliance and due diligence measures are in place. These include: maintaining compliance manuals; appointing responsible compliance officers; screening customers, end-users and suppliers; providing training programs; conducting internal audits; establishing disclosure procedures; and reviewing contracts and other legal documentation on a regular basis.
The most significant developments of the past year in the area of Canadian economic sanctions and trade controls are discussed below.
Amendments to Canada's Export Control List
Canada's Export Control List (ECL) identifies the goods and technology that require a permit prior to being exported or transferred from Canada. On April 30, 2009, the ECL was amended, bringing into force a new version of the Guide to Canada's Export Controls.
New items were added to Group 1 of the ECL (dual-use), including in the advanced materials, materials processing, electronics, telecommunications, navigation and aerospace categories; Group 2 (munitions); Group 3 (nuclear); Group 6 (missile control), including in the propulsion, propellant, materials, instrumentation, launch support, testing, and stealth categories; and Group 7 (chemical and biological weapons). Controls were also removed or revised in Groups 1, 6, and 7.
Details on the specific additions, removals and revisions to items on the ECL can be found on the website of the Export Controls Division of Foreign Affairs and International Trade Canada (ECD) at: http://www.international.gc.ca/controls-controles/about-a_propos/expor/guide.aspx?menu_id=72&menu=R
New Export Controls Handbook
In February 2009, the ECD issued, and in May 2009 reissued, its Export Controls Handbook, which replaces the guidelines contained in the Guide to Canada's Export Controls prior to the Guide's amendment discussed above.
The Handbook includes similar administrative information but has been updated, is more detailed, and also contains an overview of Canada's economic sanctions programs. It provides more commentary for exporters on various topics, including: exporting controlled US goods and technology; distinguishing between consignees and end-users in complex cases; evaluating foreign clients, exports of goods temporarily imported, and exports by intangible means such as through services, telephone conversations and face-to-face meetings; and enforcement actions that may be taken by the Canada Border Services Agency (CBSA).
One of the most significant sections of the Export Controls Handbook is its written procedures on voluntary disclosures. It provides that disclosures of non-compliance with the Export and Import Permits Act (EIPA) may be made to the ECD in writing and specifies the information required. It also notes that the ECD will look "favourably upon disclosures if ... satisfied that the exporter has fully cooperated and no further action is warranted." Depending on the circumstances, the ECD may refer matters to the CBSA or the Royal Canadian Mounted Police. Although this may offer some opportunity for comfort for exporters who have potential violations, they should also carefully consider whether a separate voluntary disclosure to the CBSA may also be appropriate, as that agency is responsible for the enforcement of related requirements under both the Customs Act and the EIPA.
A copy of the ECD's Export Controls Handbook can be found at: http://www.international.gc.ca/controls-controles/assets/pdfs/documents/ExportControlHandbook-eng.pdf
Changes to Canada's UN Sanctions Programs
During 2009, Canada amended a number of its regulations governing business with countries subject to United Nations Security Council sanctions, including the following:
- North Korea — Canadian sanctions were amended effective July 30, 2009 to reflect the UN Security Council's strengthening of measures against North Korea. The amendments expand the embargo on arms and related technical assistance, prohibit certain financial transactions and the provision of services to vessels believed to be carrying sanctioned cargo, and expand the list of sanctioned items.
- Rwanda — Measures that had previously imposed an arms embargo against Rwanda were repealed effective June 4, 2009.
- Somalia — On March 12, 2009, Canada implemented new regulations regarding an arms embargo; a prohibition on technical, financial and other related assistance; and an asset freeze against designated persons.
- Liberia — On January 29, 2009, sanctions were amended to provide exceptions to the existing arms embargo and to repeal the ban on imports of rough diamonds, round logs and timber products from Liberia.
Increasing Scrutiny of Transactions Involving Iran
There were strong signals during 2009 that Iranian-related transactions were being very carefully scrutinized for consistency with existing Canadian sanctions measures. Canadian authorities have been publicly expressing their concerns, particularly with the supply of nuclear-related items from Canada for use in Iran and the export or transfer of US-origin goods or technology to Iran through transhipment points located in the United Arab Emirates, Malaysia, Singapore and Hong Kong, among other countries.
In February 2009, Canada's Office of the Superintendent of Financial Institutions issued a Notice that any financial transactions involving Iran should be viewed as "potentially suspicious," and that financial institutions that have correspondent banking relationships with Iranian banks should be implementing "stringent enhanced due diligence measures." See: http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/issues/terrorism/fatf/2009_02_27_e.pdf
In April 2009, in what appears to be the first case of its kind, Canadian authorities arrested and charged a Toronto man with violating Canada's Iran sanctions and related legislations, including the EIPA and the Customs Act. It is alleged that he had sourced from the United States pressure transducers, which can have commercial or military applications, and attempted to export them from Canada to Iran for use in the uranium enrichment process for weapons-grade products. A trial is expected in 2010.
Continued Conflicts with US Trade Controls
Any effective compliance program for businesses operating across the United States-Canada border must address the consistencies and conflicts between US and Canadian export control and sanction regimes. In some cases, the controls will be similar or even identical. In other cases they may differ, while in yet others they actually create conflicting obligations such that compliance with one regime could result in violation of the other. Recently, difficulties have intensified as a result of increased US enforcement initiatives.
During 2009, Canadian companies continued to struggle with conflicting control regimes regarding two areas in particular ─ doing business with Cuba, and working with goods and technology subject to US military controls.
An order issued under Canada's Foreign Extraterritorial Measures Act prohibits Canadian companies, including those that are US-owned or -controlled, from complying with various elements of the US trade embargo of Cuba. The order also requires Canadian companies to notify the Attorney General of any communications relating to the US embargo received from someone in a position to control their activities in Canada. As Canada is one of Cuba's largest trading partners and one of its most significant sources of foreign direct investment, Canadian companies, particularly those governed by US controls because they are owned or controlled by US entities, are increasingly subject to these conflicts.
The US International Traffic in Arms Regulations (ITAR), and in some cases the US Export Administration Regulations, can restrict the ability of foreigners in Canada, dual nationals, and even Canadian citizens if they were born in certain proscribed countries, to access ITAR-controlled technology or defence services. Compliance with these US rules by Canadian companies dealing with controlled goods and technology can lead to a violation of anti-discrimination obligations imposed by Canadian labour and human rights laws.
Because of the differences ─ and in some cases, the conflicts ─ between the US and Canadian regimes, Canadian compliance programs need to be "homegrown" and not simply copied or obtained from US affiliates. These differences and conflicts must also be addressed when undertaking each of the key steps in developing and following a US-Canadian trade control compliance strategy, including when: drafting and executing compliance procedures; implementing training programs; conducting internal compliance audits; issuing communications and instructions to Canadian operations; determining what materials and information Canadians can access, including from US-based servers; and conducting meetings and telephone conversations involving these issues.
Current "Red Flag" Destinations
Any internal compliance system should provide for the effective screening of transactions against "red flag" destinations or parties. If any of these countries, entities, organizations or individuals are or may be involved, the activity should be carefully scrutinized for compliance with applicable Canadian trade controls and economic sanctions.
At the present time, your red flags should include Burma, Belarus, Sudan, Iraq, Lebanon, North Korea, Iran, Democratic Republic of the Congo, Côte d'Ivoire, Liberia, Somalia, Sierra Leone, Zimbabwe, and listed individuals and entities under Canadian measures targeting Al-Qaida and the Taliban and the Suppression of Terrorism Regulations and the Criminal Code. Cuba and Syria should also be added to this list if the proposed activity involves the export or transfer of US-origin goods or technology.
Canada maintains economic sanctions of various degrees in respect of all of these destinations. In many cases, the sanctions also target selected individuals and entities, and it is therefore necessary to maintain up-to-date lists of names that will form part of the screening process.
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.