International Trade Law News

Published by Jacobson Burton Kelley PLLC

Guest Post: Final US ITAR Rule on Dual and Third Country Nationals Raises New Challenges for Canadian Business

by: John W. Boscariol, Brenda C. Swick

Today, the U.S. State Department’s Directorate of Defense Trade Controls (DDTC) published in the Federal Register the final rule containing its long-awaited amendments to the International Traffic in Arms Regulations (ITAR) governing the access of dual and third-country nationals to ITAR-controlled defence articles, including technical data. These, together with ongoing changes to Canada’s Controlled Goods Program (CGP) generally covering similar goods and technology, are anticipated to have a significant effect on Canadian companies in the aerospace, defence and satellite sectors, and in particular on their security, compliance and screening processes.

Up to now, Canadian firms have faced numerous difficulties with ITAR rules that prohibit employees of certain nationalities or born in certain proscribed countries from accessing US-controlled defence goods and technology in Canada. In order to comply with these restrictions, Canadian companies have had to risk violating provincial and federal anti-discrimination laws, as well as exposure to human rights complaints, when denying employees access to projects involving ITAR-controlled items because of their nationality or country of birth. Companies in affected sectors have had to address, defend and settle costly, and in some cases very public, anti-discrimination claims arising from ITAR compliance.

DDTC officials have stated that the final rule is intended to move away from nationality-based screening and avoid the human rights conflicts that have plagued trade partners in Canada and other countries.

These proposed changes were first released on a preliminary basis for comment by DDTC in August of 2010. Our legal update discussing the preliminary rule can be found here. The final rule retains the essence of what was initially proposed, with some minor changes to the text and some other more significant revisions referred to below.

ITAR Defence Articles May Now be Transferred to 3rd Country or Dual National Employees

Under new ITAR section 126.18, DDTC approval will not be required for the transfer of defence articles, including technical data, to a foreign business entity, foreign government entity, or international organization that is an approved end-user or consignee for those items, "including the transfer to dual nationals or third-country nationals who are bona fide regular employees, directly employed by the foreign consignee or end-user." This exemption will apply provided the transfer takes place completely within the territories where the end-user is located or where the consignee operates, and must be within the scope of an approved export licence, other export authorization, or licence exemption.

Key Condition — Effective Procedures to Prevent Diversion

As a condition of transferring to foreign person employees under this provision, the recipient of the defence article is required to have in place "effective procedures to prevent diversion to destinations, entities, or for purposes other than those authorized by the applicable export licence or other authorization in order to comply with the US Arms Export Control Act and the ITAR."

In order to be considered to have such effective procedures, Canadian firms that are consignees or end-users of the defence articles must either (i) require a security clearance approved by the Canadian government for its employees or (ii) implement a screening process for their employees and execute Non-Disclosure Agreements that provide assurances that employees will not transfer any information to persons or entities unless specifically authorized by the employer.

Under the new rule, Canadian firms will be required to screen all employees who are to access controlled items for "substantive contacts" with the 25 restricted or prohibited countries under the ITAR— including China, Vietnam, Haiti, Venezuela and other countries subject to US military sanctions. The final rule has expanded upon what is meant by substantive contacts — these now include:

regular travel to those countries;
recent or continuing contact with agents, brokers and nationals of those countries;
continued demonstrated allegiance to those countries;
maintenance of business relationships with persons from those countries;
maintenance of a residence in those countries;
receiving salary or other continuing monetary compensation from those countries; or
acts otherwise indicating a risk of diversion.

The amendments provide that, although an employee’s nationality is not in and of itself a determinative factor prohibiting access to defence articles, if an employee is determined to have substantive contacts with persons from the ITAR-restricted or prohibited countries, this is presumed to raise a risk of diversion "unless DDTC determines otherwise".

Companies are also required to maintain a technology security/clearance plan that includes procedures for screening employees’ substantive contacts and maintaining records of the same for five years. The technology security/clearance plan and screening records are to be made available to DDTC or its agents for civil or criminal law enforcement upon request.

Other Significant Aspects of the New Rule

The final rule and DDTC’s accompanying commentary address a number of additional significant issues for Canadian companies:

Perhaps most significant from the Canadian perspective is that, despite requests from parties commenting on the proposed changes, DDTC did not agree to an explicit exemption for companies that comply with other countries’ domestic industrial security programs that provide for effective screening and other security measures for the protection of these controlled items. This means that Canadian companies that are registered and comply with Canada’s Controlled Goods Program (which applies to essentially the same items) must still review and revise existing security measures to ensure compliance with this new ITAR rule for all their employees that will access ITAR-controlled goods or technology.
A number of commenting parties had expressed concern that contract employees would not be subject to the new rule. Although DDTC resisted applying the rule to all contract employees, they agreed to narrowly extend it to workers who have a long-term employment relationships with licensed end-users. This is reflected in a new definition of "regular employee". In addition to an individual permanently and directly employed by the company, "regular employee" now also includes "an individual in a long term contractual relationship with the company where the individual works at the company’s facilities, works under the company’s direction and control, works full time and exclusively for the company, and executes nondisclosure certifications for the company, and where the staffing agency that as seconded the individual has no role in the work the individual performs (other than providing that individual for that work) and the staffing agency would not have access to any controlled technology (other than where specifically authorized by a license)".

Many Canadian companies currently benefit from ITAR section 124.16 special retransfer authorizations. They permit retransfers of defence articles and technical data to employees of foreign (including Canadian) entities who are nationals exclusively of NATO or EU countries or Australia, Japan, New Zealand or Switzerland. DDTC initially proposed to eliminate 124.16 with the implementation of the new rule. In its final rule, however, DDTC reconsidered its position and noted a major concern expressed by commenting parties was that the proposed dual national rule did not include transfer to approved sub-licencees (which are included under section 124.16). Under the new amendments, section 124.16 is now retained and its definition of "regular employee" has been amended to include workers who have long-term employment relationships with end-users as discussed above.
Academic institutions in Canada have encountered particular challenges with compliance issues arising in the context of ITAR-controlled goods and technology. Any uncertainty regarding the application of the new rule to Canadian universities was put to rest by DDTC when it noted in its commentary that it is not prepared to extend the exemption to academic institutions at this time.

Interaction with Canada’s Controlled Goods Programs

Despite DDTC’s refusal to allow an explicit exemption for CGP-registrants at this time, Canada is developing measures to accommodate these new ITAR requirements in an attempt to facilitate compliance for Canadian companies. Following a security threat and risk review, Canada’s Controlled Goods Directorate at Public Works and Government Services (CGD) recently implemented its Enhanced Security Strategy which includes the development of a risk matrix for identifying individuals at risk of unauthorized transfer of controlled goods.

New Questionnaire Developed for Canadian Companies

CGD has indicated that a screening questionnaire is being developed and will be provided to Canadian companies to assist them to identify risks during the security assessment of their employees under the CGP. Factors to be considered in such an assessment are not unlike those in the "substantive contact" analysis under the new ITAR rule and include the following:

contacts with government officials, agents or proxies;
business and/or family contacts;
continuing allegiance to a foreign country;
relationship with a foreign country government (e.g., employment);
frequent travel:
residence and/or bank accounts in a foreign country; and
affiliations within or outside Canada.

CGD has also indicated that the nature and substance of these contacts will be used to determine if an individual should be subject to broader security assessment or denied registration. Where the risk threshold is exceeded, CGD, working with a number of other government departments, will undertake a risk assessment of the individual to determine whether or not access should be granted.

Additional Measures Under the Enhanced Security Strategy

Also included in CGD’s Enhanced Security Strategy are measures to tighten security requirements for Canadian registrants under the CGP in a number of areas, including: students, interns and collectors; broader security assessments of foreign temporary workers and visitors; broader security assessments of transportation companies (together with Transport Canada); additional requirements for a company’s security plan, especially relating to cyber-security risks; more in-depth inspection processes; and the development of a list of debarred individuals and companies.

Next Steps

The new ITAR rule becomes effective August 15, 2011. This, along with Canada’s new CGP requirements, will require Canadian companies to implement enhanced security measures, including screening of all employees requiring access to controlled items. What this exactly entails will have to be determined on a case-by-case basis for each particular employer. It is expected that there will be challenges for Canadian companies undertaking these measures to ensure their procedures satisfy the diligence required by ITAR but at the same time do not expose them to risk of non-compliance with human rights and privacy laws in Canada.

It will be important for Canadian companies in the military, aerospace and satellite sectors that access controlled goods and technology to work closely with their US and Canadian counsel to ensure compliance with the applicable defence control regimes in both countries as well as the requirements for employment, privacy and human rights laws.

McCarthy Tétrault’s International Trade and Investment Law Group has extensive experience in dealing with defence trade control measures and is available to advise on related enforcement, compliance and strategic planning issues.

Labels: Canada, Export Controls, ITAR

Thanks to Canadian international trade and export controls lawyer John Boscariol for alerting International Trade Law News that the Canadian Government's Export Controls Division recently published guidelines for applying for and obtaining Advisory Opinions on whether certain goods or technology are controlled for export or transfer from Canada.

One of the stated purposes of the Advisory Opinion process is for exporters to gain greater certainty regarding the control status of their goods and technology. 

The Advisory Opinion guidelines provide information on what specific information should be contained in the Advisory Opinion request, such as specifications of the product and whether a product is subject to the ITAR or not; the procedures for submitting Advisory Opinion requests; and the limitation on the scope of such Advisory Opinions, including that the decisions are not binding. Among other things, the guidelines emphasize that where legal certainty is required or the matter is urgent, the exporter or manufacturer should submit a formal application for an export permit.

Labels: Canada, Export Controls

Canada's National Post newspaper reports that Canada is seeking to extradite to Toronto a Chicago-based gun dealer who was arrested in the U.S. in June and has been charged with violating the Arms Export Control Act for allegedly exporting more than 200 firearms from the United States to Canada.

The article indicates that the "extradition case against Ugur "Mike" Yildiz began on August 18 but was kept under seal until late Friday, when a Chicago court released documents showing that Toronto police have charged the Turkish-born American with conspiracy to traffic firearms." The story notes that "two of the firearms registered to Yildiz were used in attempted homicides in the Greater Toronto Area."

The story notes that this case appears to the be the first in many years that Canada has attempted to extradite a person charged with smuggling firearms from the U.S. to Canada.

Labels: Canada

The Ottawa Business Journal reports that Canada's leading aerospace and defense trade associations will ask the Canadian government to request the U.S. to expand the May 2007 arrangement between the Canadian Department of National Defence (DND) and U.S. Department of State that permits DND employees holding secret-level security clearances, including dual nationals, to work on certain defense-related projects in Canada that are subject to the ITAR. The trade associations want the arrangement to be expanded to cover employees of private companies in Canada that hold secret-level security clearances.

The article notes that the "the dual-nationality issue has hampered Canadian defence and security firms for years because American International Traffic in Arms Regulations (ITAR) prohibit secure data from being exported to Canadian companies who employ certain workers – in particular, employees holding citizenship from countries the United States deems sponsors of terrorism or in non-compliance with nuclear or biological weapon treaties."

Labels: Canada, ITAR

The Canadian Government last week imposed targeted sanctions on Zimbabwe. These sanctions, which are being implemented through the Special Economic Measures (Zimbabwe) Regulations, include the following restrictions:

• Ban on the export of arms and related material to Zimbabwe or to any person in Zimbabwe;
• Prohibition on the transport of arms and related material to Zimbabwe aboard a Canadian vessel or aircraft;
• Prohibition on the provision of technical or financial assistance or services relating to arms and related material, including the provision, transfer or communication of technical data, to Zimbabwe or any person in Zimbabwe;
• Requirement on any person in Canada and Canadian outside of Canada to freeze the assets of listed Zimbabwean persons and entities;
• Prohibition on Zimbabwean aircraft from flying over or landing in Canada.

Under these regulations, the Canadian Government can approve a list containing the names of persons for which there are reasonable grounds to believe that they are connected with the Government of Zimbabwe or persons or entities engaged in activities that seriously undermine democracy, respect for human rights and the rule of law in Zimbabwe. The Regulations also provide a review mechanism to remove names from the schedule upon receipt of a petition from a designated person.

The U.S. has imposed an arms embargo on Zimbabwe since April 17, 2002 and other economic sanctions administered by OFAC on the Mugabe regime since 2003.

Labels: Canada, Zimbabwe

Canada's Globe and Mail newspaper contains a front page story today on the adverse impact of the U.S. International Traffic in Arms Regulations (ITAR) on Canada's acquisition of new military equipment. Below are some excerpts of the story. The complete story can be found here:

Ottawa is facing an uphill battle to carry out a promised purchase of $17-billion in new military equipment because of stringent U.S. security rules and ballooning costs caused by a series of delays, newly released documents show.

According to Foreign Affairs briefing notes, the government is blaming U.S. security measures that limit the export of military technology to Canada, as American authorities fear some Canadian workers will engage in espionage.

* * *

In addition, documents released by the Department of Foreign Affairs reveal government fears that the purchase of military equipment "is in jeopardy" because of U.S. regulations called the International Traffic in Arms Regulations.

* * *

The Canadian government argues that ITAR is discriminatory and goes against the Charter of Rights. However, Ottawa has so far been unable to persuade the U.S. government to ease the restrictions for private-sector workers.

The Foreign Affairs documents show that U.S. firms are tired of ITAR, which hamper their sales to the Canadian government and cause delays.

"U.S. industry is becoming increasingly frustrated with the status quo as it impeded its own defence trade," a document said.

Labels: Canada, Export Controls, ITAR

In response to the recent events in Zimbabwe, the Government of Canada announced today that it will immediately put in place a series of measures to severely restrict its relationship with the Government of Zimbabwe. These measures include:

• Imposing restrictions on travel, work and study on senior Zimbabwean government, military and police officials and their families.
• Summoning the Ambassador of Zimbabwe to Canada to convey messages to her home government.
• Reconfirming its long-standing policy against exporting military goods to Zimbabwe.
• Not allowing any aircraft registered in Zimbabwe to land in, or to fly over, Canada.

Labels: Canada, Zimbabwe

For those readers interested in Canadian export control issues, Canada's Controlled Goods directorate is organizing a series of domestic and export control seminars across Canada this year.

These full-day seminars will review the role of Canadian industry in safeguarding strategic and sensitive goods and technology, with a focus on Canada's Controlled Goods Program, Canadian export controls, and contract security as it relates to federal government procurement and will cover the following issues:

• Overview of Export Control Process
• Applying for an Export Permit Using Export Controls Online (EXCOL)
• Understanding the Application Review Process
• Common Errors Made by Exporters

• Controlled Goods Directorate
• Export Controls Division (Foreign Affairs and International Trade Canada)
• Customs and Excise Program (Royal Canadian Mounted Police)
• Canadian Industrial Security Directorate
• Canada Border Services Agency

Ottawa – May 29, 2008
Montreal – June 11, 2008
Toronto – June 25, 2008
Halifax – September 2, 2008
Vancouver – September 16, 2008
Calgary – September 18, 2008
Winnipeg – October 8, 2008

Labels: Canada

Labels: Canada, DDTC, ITAR

The U.S. and Canada today announced that they have completed an exchange of letters documenting an arrangement between the U.S. Department of State and the Canadian Department of National Defence (DND) permitting dual citizens in Canada to work on certain military projects that are subject to the U.S. International Traffic in Arms Regulations (ITAR).

Under the arrangement announced today, the State Department's Directorate of Defense Trade Controls (DDTC) will implement procedures to grant access to defense articles and services exported to Canada under the ITAR to DND personnel who are Canadian citizens holding a minimum secret-level security clearance, including dual nationals. DND personnel covered by this agreement include Canadian Forces members, civilian employees, embedded contractors and employees of other federal government departments and agencies working within DND. Canadian standards and procedures will continue to be used to process security clearances.

This agreement, which has been negotiated for more than one year, was necessary since the U.S. has been limiting access to ITAR-controlled defense articles and services to Canadian citizens, and denying access to Canadian citizens who possess dual nationality with a U.S. proscribed country. Canada objected to these restrictions claiming they would be inconsistent with the Canadian Charter of Rights and Freedoms and human rights legislation, which prohibit discriminatory treatment of Canadian citizens, regardless of their country of origin or other nationality. This arrangement will allow Canada to proceed with the purchase of U.S.-produced CH-47 helicopters, C-17 transport aircraft and C-130 aircraft.

The U.S. and Canada both indicated that they consider this arrangement as an important first step in resolving these ITAR-related issues. The State Department has offered to conclude similar arrangements with other Canadian government agencies provided they can assure the U.S. of their commitment to "vigorously implement and oversee similar procedures".

The press releases issued by the U.S. Department of State and Canada's Department of National Defence can be found here and here.

Labels: Canada, ITAR

Canada's The Globe and Mail newspaper reported today that the U.S. and Canada have reached an agreement on how to handle the recent controversy involving dual citizens that work on military projects in Canada which are subject to the U.S. International Traffic in Arms Regulations (ITAR). The paper reports that:

The Harper government has come to terms with Washington on a deal exempting Department of National Defence employees from U.S. restrictions that prevent dual nationals from 17 countries from having access to data related to U.S. military technology.

Under the deal, the exemption could eventually be extended to other federal bureaucrats, and then, with the agreement of the U.S. government, to people in the private-sector industry.

"It's a step-by-step approach," a federal source said.

Labels: Canada, ITAR

Canada's Export Controls Division today posted an announcement on the agency's website advising Canadian exporters that the Export and Import Permits Act (EIPA) was recently amended to clarify specific controls over technology contained on Canada's Export Control List (ECL).

According to the Export Controls Division, the amendments to Canada's export control law:

Clarif[ies] specific controls over technology, including technical data, technical assistance and information necessary for the development, production or use of military and other strategically sensitive goods listed in the Export Control List (ECL). The amendments also provide explicit authority to control transfers, including electronic transfers, of technology listed in the ECL. These changes respond to the need for enhanced controls over the export and electronic transfer of military and strategically sensitive technology.

Labels: Canada, Export Controls

Canada's The Globe and Mail newspaper today reports that ITAR "restrictions on military purchases are causing so much paralysis in Ottawa" that the Canadian Government proposed "scrapping its project" to purchase Sikorsky Cyclone helicopters to replace its aging fleet of Sea Kings. The paper reports that "the Canadian government is refusing to sign documents containing ITAR restrictions -- such as technical assistance agreements and export licences -- that are crucial to the production of the Sikorsky Cyclones."

The article also indicates that "some federal officials feel that a solution to ITAR is close to being made public. However, senior officials in the defence industry fear the new rules will favour only government bureaucrats, and that employees in the private sector will continue facing the same discriminatory measures."

Labels: Canada, Export Controls, ITAR