Proposed ITAR Amendment Regarding Dual Nationals and Third-Country Nationals

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1 Proposed ITAR Amendment Regarding Dual Nationals and Third-Country Nationals Introduction The United States Department of State is proposing to amend the International Traffic in Arms Regulations ( ITAR ) requirements regarding dual nationals and third-country nationals employed by end-users. The proposed amendment is characterized by the Department of State as an attempt to address existing restrictions applicable to dual nationals and third-country nationals that have caused a tremendous administrative burden on approved end-users and has evolved into a human rights issue, which has become the focus of contention between the U.S. and allies and friends without a commensurate gain in national security. 1 On its face, the proposed amendment provides a way for dual nationals and third-country nationals from ITAR prohibited countries to access ITAR-controlled goods and technology. 2 However, the prescribed eligibility requirements outlined in the proposed amendment are very restrictive. Whether the proposed amendment actually results in a relaxation of the current restrictions and/or addresses existing conflicts with Canadian laws will depend on how the requirements are interpreted and implemented in both Canada and the United States ( US ), particularly by the Directorate of Defense Trade Controls ( DDTC ) which administers the ITARs at the Department of State. Context: Current ITAR Restrictions The integration of Canada-US defence production activities requires co-ordinated laws and policies concerning security of information. Canada amended its laws in 2001 to create the Controlled Goods Regulations ( CGRs ), which met US demands that Canada have laws that strictly control the release of ITAR controlled goods and technical data. ITAR requirements are designed to ensure goods and technical data that have potential military or strategic applications are not made available to countries, groups or persons who pose a security threat. The CGRs have the same purpose. 1 Federal Register, Vol. 75, No. 154, Wednesday, August 11, 2010, p The proposed amendment does not apply to defence services. We understand that the regulations applicable to defence services may be addressed in a separate proposed amendment.

2 2 One aspect of the current ITAR requirements has raised an issue for Canadian companies with respect to compliance with Canadian human rights legislation. The essence of the issue that is raised by the interplay of these two regimes is that the ITAR controls include a prohibition under which ITAR-controlled material cannot be accessed by Canadian employees who are nationals of ITAR embargoed countries, 3 even if the employee is also a Canadian citizen. Under the Canadian exemption provisions of ITAR, 4 a Canadian citizen may, under certain circumstances, access ITAR controlled information, but a Canadian employee who is also a national from a prohibited country may not. What this means is that employers seeking to comply with ITAR may be required to impose measures in the workplace that raise concerns under human rights legislation. Human rights considerations are engaged when measures are implemented to ensure that ITAR proscribed nationals or dual nationals (i.e., Canadian citizens who also hold a citizenship from an ITAR proscribed country) are not given access to ITAR goods or technical data. Such measures may, prima facie, constitute discrimination by limiting job opportunities for certain employees on the basis of their nationality or place of origin. Thus, employers must often struggle to balance the competing requirements of these two statutory regimes. Several cases brought before provincial human rights tribunals have highlighted the issue faced by Canadian employers who comply with existing ITAR requirements. However, it must be noted that employers are not without defences against human rights claims related to enforcement of ITAR. First, in the event of a legal challenge brought under provincial human rights legislation, employers may have a valid defence based on the constitutional principles of inter-jurisdictional immunity or paramountcy. In other words, provincial human rights legislation would be inapplicable or inoperable in relation to employers efforts to comply with ITAR, as this is a matter of exclusive federal competence and because the application of provincial human rights legislation in such circumstances conflicts with federal regulations incorporating ITAR requirement in Canadian law. Second, in any challenge brought under provincial or federal human rights laws, employers may raise the bona fide occupational requirement defence, which allows an employer to implement measures that may, on their face, appear to be inconsistent with human rights legislation. To successfully rely on this defence, an employer must show that it cannot accommodate employees without incurring undue hardship. In order to resolve difficulties that were being faced by the federal government, the Government of Canada and the US Department of State reached a negotiated agreement under which the State Department agreed to revise its export authorizations. In May of 2007 the Canadian Department of National Defence ( DND ) and the Department of State reached an agreement which satisfied 3 The current list of ITAR restricted countries includes: Afghanistan, Burma, Belarus, China, Côte d Ivoire, Cuba, Cyprus, Democratic Republic of Congo, Eritrea, Haiti, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Sierra Leone, Somalia, Sri Lanka, Sudan, Syria, Venezuela, Vietnam, Yemen and Zimbabwe. 4 CFR, s.126.5

3 3 US concerns over the protection of sensitive information and material, while allowing the Canadian government to permit dual nationals to access to ITAR controlled products. Under the arrangement, access to defence articles and services exported under the ITAR would only be granted to DND personnel who are Canadian citizens, including dual nationals, on a need-toknow basis and then only to individuals who had obtained a minimum secret level security clearance. In June of 2007, a further agreement was reached under which Canada s Communications Security Establishment, the Canadian Space Agency and National Research Council Canada would be given the same treatment as the DND. Under this new agreement, employees who were citizens of one of the proscribed countries could access ITAR controlled defence articles and services provided they maintained a minimum secret level security clearance and accessed them on a need-to-know basis. These agreements now ensure that extremely sensitive areas of intergovernmental military cooperation are insulated from a legal challenge under the Canadian Charter of Rights and Freedoms (the Charter ) or the Canadian Human Rights Act. However, these agreements do not mitigate the challenges faced by private sector employers who must continue to find ways to reconcile competing human rights and ITAR compliance obligations. Proposed Amendment The proposed amendment provides that no approval is needed from the DDTC for the transfer of defense articles, including technical data within a foreign business entity (e.g., a Canadian company), 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 business entity The terms bona fide, regular employees and directly employed are not defined. The scope of these terms appears to exclude temporary employees, contract employees and consultants from eligibility for the exemption. The transfer must also take place completely within the physical territories of the country where the end-user is located or the consignee operates, and must be within the scope of an approved export licence, other export authorization or license exemption. There are significant conditions that must be satisfied in order to qualify for the proposed exemption. The end-user or consignee must: 1. Either obtain a security clearance for employees from the Canadian government, or have in place a process to screen employees and have executed a non-disclosure agreement that provides assurances that the employee will not transfer any information to unauthorized parties; 2. Screen employees for substantive contacts with prohibited countries; and,

4 4 3. Maintain a technology/security plan that details the procedures for screening employees for such substantive contacts and maintaining records which must be made available to DDTC on request. The proposed amendment indicates that the criteria for determining if an employee has substantive contacts which would render the employee ineligible for the exemption include: 1. Recent or regular travel to a prohibited country; 2. Recent or continuing contact with agents and nationals of such countries ; 3. Continued allegiance to such countries; and, 4. Engaging in acts otherwise indicating a risk of diversion. Comments on the Proposed Amendment The proposed amendment has the benefit of removing the express ITAR distinctions based on nationality or place of origin. This amendment ostensibly neutralizes the criteria for obtaining access to ITAR controlled goods or technology by implementing the neutral substantive contacts test. However, ITAR compliant employers may still face claims that the substantive contacts screening, although neutral on its face, has a discriminatory effect on dual nationals or third-country nationals from a proscribed country. Depending on how these criteria are implemented by DDTC, many dual nationals or thirdcountry nationals who maintain routine contacts with family and friends in a proscribed country could be ineligible for the exemption. This could give rise to potential claims of de facto discrimination on the basis of nationality or place of origin. This potential shortcoming could be alleviated if the substantive contacts test were incorporated as one of several criteria in an overall assessment of the security risk posed by a given individual. The goal of ensuring robust national security can be achieved without declaring dual nationals or third country nationals who have substantive contracts presumptively ineligible for the exemption based on that single criterion. For example, an overall analysis of an individual s security risk provides a more accurate risk assessment and a more flexible approach. Moreover, implementing the test as part of an overall security assessment would allow the test to be applied to all individuals that require access to ITAR controlled goods and technology, and not just dual nationals and third-country nationals.

5 5 The proposed amendment will inevitably raise concerns about compliance with Canadian federal and provincial privacy legislation. Legislation protecting privacy generally allows the collecting of personal information only for specifically defined purposes. However, it is not clear what specific information employers will be expected to collect to comply with the screening obligation provided for in the proposed amendment. However, because the Charter does not recognize a right to privacy, it is possible that the federal legislation incorporating ITAR might shield employers from potential privacy claims. In addition to privacy, the practical implementation of such a screening process may well generate many legal issues for employers. Employees who are negatively affected will certainly have incentive to challenge the reliability of the process on various grounds, such as abuse of rights, unfair distinctions, mistakes in application, etc. For example, if employees are removed from projects because of ITAR ineligibility, they may claim that they have been constructively dismissed by their employer. If the proposed amendment is finalized in its present form, Canadian companies will continue to face challenges complying with overlapping Canadian and US legal requirements, including Canadian privacy and human rights law. The potential challenges faced by employers would be substantially diminished if the Government of Canada were to incorporate the substantive contacts test into the existing security screening process. The nature of this assessment lends itself well to incorporation into the existing security screening process administered by the Department of Public Works and Government Services Canada ( PWGSC ). Having PWGSC administer the assessment would promote consistency in the application of the test. PWGSC is also well positioned to liaise with other Canadian and US government agencies. Incorporating the substantive contacts test into the Canadian security clearance process would assist Canadian companies in their ability to comply with the proposed ITAR amendment and domestic Canadian legal requirements. The Department of State is accepting comments on the proposed amendment until September 10, KEY CONTACTS R. Luc Beaulieu Senior Partner Montreal Office T: F: E: lbeaulieu@ogilvyrenault.com Paul Conlin Partner Ottawa Office T: F: E: pconlin@ogilvyrenault.com Richard A. Wagner Senior Partner Ottawa Office T: F: E: rwagner@ogilvyrenault.com