Managing the Relationship Between Canadian and U.S. Export Controls and Economic Sanctions: Compliance and Enforcement Issues

Transcription

1 Managing the Relationship Between Canadian and U.S. Export Controls and Economic Sanctions: Compliance and Enforcement Issues John W. Boscariol May 6, 2014 Export Compliance Training Institute U.S. Export Controls on Non-U.S. Transactions A Practical Guide at Le Centre Sheraton Montreal Hotel Montréal, Québec

2 Growing Impact of Canadian Trade Controls 1 what s driving this? since 9/11, new emphasis of Canadian authorities on security (vs. government revenues) more recently, increased penalties, enforcement by U.S. authorities pressure from U.S. affiliates, suppliers and customers (and U.S. government) penalty exposure operational exposure reputational exposure Canadian companies are now more concerned than ever before about whom they deal with, where their products and technology end up, and who uses their services financings, banking relationships, mergers and acquisitions

3 2 What Are Canada s Trade Controls? export and technology transfer controls Export Control List Area Control List economic sanctions Special Economic Measures Act United Nations Act Freezing Assets of Corrupt Foreign Officials Act Criminal Code domestic industrial security Defence Production Act, Controlled Goods Program other legislation of potential concern blocking orders (Cuba) anti-boycott policy and discriminatory business practices laws anti-bribery law (Corruption of Foreign Public Officials Act and FCPA)

4 3 Today s Focus brief background on Canadian export controls and economic sanctions and key issues consistency with U.S. export controls conflicts trade with and investment in Cuba managing the relationship between Canadian and U.S. trade controls

5 Key Elements of Your Export Control / Economic Sanction Compliance Program 4 basic components of the compliance program should include: corporate compliance manual screens and lists appointment of compliance officers internal audit procedures correction / voluntary disclosure process training programs contracts conflict procedures home grown

6 5 Canada s Export Control Regime based on Canada s international commitments Wassenaar (Convention on Arms and Dual-Use Goods and Technologies) Missile Technology Control Regime Australia Group, Chemical Weapons Convention Nuclear Non-Proliferation Treaty, etc. various non-strategic export controls United Nations resolutions agreement with United Stated concerning USML goods

7 Canada s Export Control Regime (cont d) role of Foreign Affairs and International Trade Canada s Export Controls Division (ECD) issuance of permit and related documentation interpretation of ECL and ACL decision as to whether a permit is required role of CBSA enforcement of export control regime at the border export reporting ensuring the permit is valid quantities, consignees, goods, expiry, etc. they can detain your goods 6

8 Do You Need to Apply for an Export Permit? key questions is the destination on the Area Control List? 7 are the goods on the Export Control List? goods, technology and software new Guide to Canada s Export Controls (May 22, 2014) will incorporate changes to the multilateral export control regimes up to December 2012

9 Where Are the Goods Destined? 8 the Area Control List (applies to export of any goods or technology) Belarus North Korea individual permits may be issued for humanitarian purposes do not forget countries subject to Canada s trade embargo legislation

10 9 Are the Goods on the Export Control List? Group 1 dual-use goods, technology and software 9 categories Advanced Materials Materials Processing Electronics Computers Telecommunications Information Security Sensors and Lasers Navigation and Avionics Marine Propulsion

11 Are the Goods on the Export Control List? (cont d) 10 Group 2 munitions goods Group 3 nuclear non-proliferation goods Group 4 nuclear-related dual use goods Group 5 miscellaneous goods (including U.S.-origin goods) Group 6 missile technology control regime goods Group 7 chemical and biological weapon nonproliferation goods

12 Individual Export Permits 11 Groups 1, 3, 4, 6, and 7 generally considered favourably controls on destination, risk of diversion DFAIT has significant discretion

13 12 General Export Permits where a GEP is available, no individual export permit application is necessary GEP Examples GEP No. 12: United States Origin Goods GEP No. 18: Portable Personal Computers and Associated Software GEP No.29: Eligible Industrial Goods (to be replaced by new GEP No. 41) GEP No. 43: Nuclear Goods and Technology to Certain Destinations GEP No. 44: Nuclear-Related Dual-Use Goods and Technology to Certain Destinations GEP No. 45: Cryptography for the Development or Production of a Product GEP No. 46: Cryptography for Use by Certain Consignees reporting/record keeping requirements must cite applicable GEP number in export documentation

14 13 Penalties for Failure to Comply Export and Import Permits Act offences exporting or attempting to export without a permit causing or assisting diversions unauthorized use of permits false or misleading information in connection with application, subsequent use, or exportation inducing, aiding or abetting any person s contravention doing anything that assists shipment or transfer of ECL item from Canada or any other country to an ACL country

15 14 Penalties for Failure to Comply (cont d) upon summary conviction, $25,000 fine and/or imprisonment for up to 12 months upon indictment, a fine in an amount at the discretion of the Court and/or imprisonment for up to 10 years criminal penalties apply both to individuals and corporations civil sanctions customs powers of search, detention, seizure and forfeiture detention/seizure of goods for export

16 Administrative Monetary Penalty System (AMPS) examples of AMPS export control offences C005 - providing information that is not true, accurate and complete C315 - exporting without permit, licence or certificate C341 - failing to report shipment on export summary report C345 - failing to report goods subject to export control C346 - failing to answer truthfully any question regarding goods subject to export control C348 - false information in permit, certificate or licence penalties of up to $8,000 per contravention 15

17 Seizure, Ascertained Forfeiture or Detention 16 CBSA Presidential Directive non-report of goods subject to export control untrue statements in respect of goods subject to export control in addition to AMPS, can demand up to 60% of the value of the goods seizure and no return of goods detention while CBSA investigates compliance with export controls and economic sanctions referral to Export Controls Division for ECL status further investigation regarding economic sanctions

18 17 Export Controls on Technology exporting or transferring technology included in the ECL requires an export permit technology is defined as specific information necessary for the development, production or use of a product, and takes the form of technical data or technical assistance technical data may take forms such as blueprints, plans, diagrams, models, formulae, tables, engineering designs and specifications, manuals and instructions written or recorded on other media or devices, such as disc, tape, read-only memories technical assistance may take forms such as instructions, skills, training, working knowledge, consulting services and may involve transfer of technical data

19 18 Export Controls on Technology (cont d) transfer of technology is considered to occur when it is disposed of or its content is disclosed in any manner, from a place in Canada to a place outside Canada information transmissions may be by fax, or phone

20 19 Export Controls on Technology (cont d) exceptions to technology controls technology which is the minimum necessary for the installation, operation, maintenance, and repair of those products for which the export has been authorized information in the public domain or basic scientific research, or the minimum necessary information for patent application

21 20 Export Controls on Technology (cont d) in the public domain means technology that has been made available without restrictions upon its further dissemination (copyright restrictions do not remove technology from being in the public domain) basic scientific research is experimental or theoretical work undertaken principally to acquire new knowledge of the fundamental principles of phenomena or observable facts, not primarily directed towards a specific practical aim or objective

22 Canadian Controls on U.S.-Origin Goods and Technology 21 U.S. origin goods (ECL item 5400) designed to ensure Canada is not used as a diversionary route to circumvent U.S. embargoes e.g., embargoes of Cuba, Iran, Syria and North Korea

23 Canadian Controls on U.S.-Origin Goods and Technology (cont d) 22 ECL item 5400: a permit is required for the export of all U.S.-origin goods and technology from Canada excludes goods that have been further processed or manufactured outside of the United States so as to result in a substantial change in value, form or use of the goods or in the production of new goods 50% rule of thumb used to be applied

24 Canadian Controls on U.S.-Origin Goods and Technology (cont d) available GEP No. 12 permits export of U.S.-origin goods and technology to all destinations except Belarus, Cuba, North Korea, Iran and Syria no written ECD policy for granting permits for export of U.S.-origin goods or technology to these countries 23

25 24 Canadian Controls on U.S.-Origin Goods and Technology (cont d) ECD s verbal administrative policy currently permits U.S.-origin goods to be shipped to Cuba (or Iran) in only three circumstances: a U.S. licence has been obtained or humanitarian purposes (for the basic necessities of human life ) or in support of a previously permitted export or Canadian operations

26 Canadian Controls Over Encryption Export Control List, Group 1, Category 5 Part 2: Information Security goods, software, technology designed or modified to use cryptography or performing any cryptographic function exceptions authentication/digital signature (no encryption except as directly related to the protection of passwords, PINs, or similar data to prevent unauthorized access) not user-accessible and is specially designed for copy protection software and technology in the public domain mass market generally available to the public from retail selling points ancillary encryption (effective December 2011) 25

27 Canadian Controls Over Encryption (cont d) individual permits multidestination permits (require export control compliance plan) broadbased co-development bona fide Cdn/US corporations regime decontrol ancillary crypto java financial institutions contrast between Canadian and U.S. approach impact on Canadian competitiveness current crypto de-control initiatives (GEPs) 26

28 Multi-Destination Export Permit for Dual-Use Items 27 May 3, multi-destination permit for most dual-use use items in Group 1 and Item 5504 (strategic goods and technology) of ECL consignees and end-users must be located in one of 28 qualifying countries consignees must be reported twice per year and records maintained and provided to ECD upon request valid for up to five years excluded goods and technologies are listed in Schedule 1 to Notice to Exporters 177 crypto goods, software and technology do not qualify

29 28 Canada s Economic Sanctions Regime United Nations Act implementation of UN Security Council resolutions Special Economic Measures Act impose economic sanctions absent or in addition to a UN Security Council resolution Freezing Assets of Corrupt Foreign Officials Act politically exposed persons Egypt, Tunisia and Ukraine Criminal Code terrorist groups Area Control List under Export and Import Permits Act Belarus and North Korea

30 29 Canada s Economic Sanctions Regime Special Economic Measures Act and United Nations Act key measures (depending upon the country program) ban on providing goods, services, technology/data assets freezes cannot deal with listed individuals, companies, organizations ( designated persons ) includes facilitation ban on investment sectoral measures Monitoring and reporting obligations

31 30 Canada s Economic Sanctions Regime Special Economic Measures Act and United Nations Act generally apply to persons in Canada and Canadians outside of Canada permits generally available for anything that is prohibited under the sanctions measures apply to Economic Law Division of Department of Foreign Affairs, Trade and Development (DFATD) no general permits/licenses have been issued, although exemptions may be available enforced by Canada Border Services Agency and Royal Canadian Mounted Police (RCMP)

32 United Nations Act Regulations 31 targeted countries and groups Al-Qaida and Taliban Côte d Ivorie Democratic Republic of the Congo Iran Sudan Sierra Leone Lebanon Iraq Somalia Eritrea terrorists and terrorist organizations Liberia North Korea Libya

33 Special Economic Measures Act Regulations 32 targeted countries Iran Syria Burma Zimbawe North Korea Ukraine Russia

34 Transactions Involving Iran United Nations Act regulations (March 2007) export and import ban on nuclear, uranium enrichmentrelated activities ban on related technical assistance, investment, services asset freeze on designated individuals and entities United Nations Act regulations (June 2010) activities related to investing in commercial activity in Canada involving uranium mining, production or use of specified nuclear materials and technology assets freeze on additional individuals and entities export and supply ban on additional nuclear and military related items 33

35 Transactions Involving Iran Special Economic Measures Act (July 2010): making any new investment in the Iranian oil and gas sector exporting or otherwise providing to Iran items used in refining oil and gas establishing correspondent banking relationships with Iranian financial institutions providing or acquiring financial services to allow an Iranian financial institution (or a branch, subsidiary or office) to be established in Canada, or vice versa purchasing any debt from the Government of Iran dealing with designated persons involved in nuclear, chemical, biological or missile proliferation exporting or otherwise providing to Iran arms and related material not already banned and items that could contribute to Iran s proliferation activities (listed goods in Schedule 2) providing a vessel owned or controlled by, or operating on behalf of the Islamic Republic of Iran Shipping Lines with services for the vessel s operation or maintenance. 34

36 Transactions Involving Iran Special Economic Measures Act (November 21, 2011): a broad prohibition against providing or acquiring any financial services to or for the benefit of, or on the direction or order of, Iran or any person in Iran a broad prohibition against the supply of any goods used in the petrochemical, oil or natural gas industry (this is expanded from the earlier prohibition which applied only to goods used in the refining of oil or liquefaction of natural gas) the addition of various entities and individuals to the list of designated persons there is a general prohibition on dealings with these persons the addition of various items and equipment to the prohibited goods list some limited grandfathering 35

37 Transactions Involving Iran 36 Special Economic Measures Act (January 31, 2012): 5 entities and 3 individuals added to list of designated persons

38 Transactions Involving Iran 37 Special Economic Measures Act (December 11, 2012): prohibition against the supply to Iran of various goods, as well as any related financial services and technical data, including the following: equipment or machinery designed for the building, maintenance or refitting of ships vessels designed for the transport or storage of crude oil, or any petroleum or petrochemical products

39 Transactions Involving Iran 38 goods designed for drilling, mineral surveying and exploration, including specialized equipment used in the mining industry specialized equipment used to provide broadcasting, telecommunications, or satellite service to Iran or an entity acting on behalf of Iran hard currency from any country if the total value is in excess of CDN $40,000.

40 Transactions Involving Iran 39 prohibition against acquiring natural gas, crude oil, and petroleum or petrochemical products from Iran providing marketing and other financial or related services in respect of certain prohibited goods providing flagging or classification services to Iranian oil tankers or cargo vessels providing insurance or reinsurance to or for the benefit of Iran

41 Transactions Involving Iran 40 Special Economic Measures Act (May 29, 2013): prohibition against exporting, selling, supplying or shipping goods, wherever situated, to Iran, to a person in Iran, or to a person for the purposes of a business carried on in or operated from Iran importing, purchasing, acquiring, shipping or transhipping any goods that are exported, supplied or shipped from Iran, whether the goods originated in Iran or elsewhere making an investment in an entity in Iran now over 600 entities and individuals that have been designated under Canada s Special Economic Measures (Iran) Regulations

42 Transactions Involving Iran Export and Import Permits Act ECL item 5400 controls export and transfer of US-origin goods and technology require a permit for transfer from Canada to Iran conditions for obtaining a permit 41 extraterritorial US sanctions Export Administration Regulations license requirements and other US sanctions rules (OFAC) US Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (amends to Iran Sanctions Act) restrictions on dealing with Central Bank of Iran application to Canadian companies owned or controlled by US persons

43 Prosecutions: R. v. Yadegari 42 July 6, 2010, first successful prosecution under the Iran sanctions regulations under United Nations Act attempted shipment to Iran through Dubai dual-use pressure transducers could be used in heating and cooling applications as well as in centrifuges for enriching uranium Ontario provincial court judge found that Yadegari knew or was wilfully blind that the transducers had the characteristics that made them embargoed also violations of Customs Act, Export and Import Permits Act, Nuclear Safety and Control Act, and Criminal Code sentenced to 51 months imprisonment (slight reduction on appeal)

44 43 Prosecutions: R. v. Lee Specialties Ltd. first prosecution under Special Economic Measures Act attempted shipment of 50 Viton O-rings to Iran ($15 total value) although dual-use, these were prohibited goods listed on Schedule 2 to the Iran SEMA regulations multiple changes in account and shipping addresses detained by CBSA guilty plea and $90,000 penalty

45 Latest on Burma Canada had most aggressive sanctions of any country effective April 24, 2012 most Burma sanctions measures repealed currently 44 companies and 38 individuals are designated persons arms and related material embargo (including data transfers) 44

46 The Cuban Conundrum problem, whether or not you trade with Cuba Canada s expanding economic relationship with Cuba Canada is one of Cuba s largest trading partners Canadian exports to Cuba - machinery, agrifood products, sulphur, electrical machinery, newsprint Canadian imports from Cuba - ores, fish and seafood, tobacco, copper and aluminum scrap and rum Canada is one of Cuba s largest source of foreign direct investment Canadian FDI - nickel and cobalt mining, oil and gas, power plants, food processing 45

47 46 The Cuban Conundrum (cont d) expanding extraterritorial reach of U.S. trade embargo 1962 imposition of full trade embargo under Trading With the Enemy Act 1975 elimination of general license allowing trade by foreign non-banking entities had to apply for specific license and demonstrate independent operation re decision-making, risk-taking, negotiation and financing 1990 Mack Amendment proposed outright prohibition on issuance of licenses to foreign affiliates of U.S. firms 1992 Cuban Democracy Act 1996 Helms-Burton Act extends aspects of Cuban embargo to Canadian companies that have no connection with U.S. entities

48 47 Current U.S. Measures vs. Cuba Cuban Assets Control Regulations administered by U.S. Treasury Office of Foreign Assets Control prohibition on foreign entities owned or controlled by U.S. persons from doing business with Cuba Export Administration Regulations administered by the U.S. Department of Commerce s Bureau of Industry and Security requires that a re-export license be applied for where U.S. content is 10% or more Helms-Burton Act Title III private right of action vs. traffickers in confiscated property (right suspended) Title IV bar on entry in the United States for traffickers, their spouses and minor children

49 Canadian Response to U.S. Trade Embargo of Cuba 48 diplomatic NAFTA/WTO? primarily FEMA and the 1996 FEMA Order

50 49 The Foreign Extraterritorial Measures Act 1996 blocking order obligation to notify Canadian Attorney General of certain communications prohibition against complying with certain U.S. trade embargo measures penalty exposure: up to $1.5 million and/or 5 years imprisonment

51 50 The Notification Obligation Every Canadian corporation and every director and officer of a Canadian corporation shall forthwith give notice to the Attorney General of Canada of any directive, instruction, intimation of policy or other communication relating to an extraterritorial measure of United States in respect of any trade or commerce between Canada and Cuba that the Canadian corporation, director or officer has received from a person who is in a position to direct or influence the policies of the Canadian corporation in Canada.

52 51 The Non-Compliance Obligation No Canadian corporation and no director, officer, manager or employee in a position of authority of a Canadian corporation shall, in respect of any trade or commerce between Canada and Cuba, comply with an extraterritorial measure of United States or with any directive, instruction, intimation of policy or other communication relating to such a measure that the Canadian corporation or director, officer, manager or employee has received from a person who is in a position to direct or influence the policies of the Canadian corporation in Canada.

53 What is an Extraterritorial Measure of the United States? U.S. laws that may be considered extraterritorial measures of the United States : Cuban Assets Control Regulations Export Administration Regulations Helms-Burton (?) other 52

54 53 FEMA Enforcement Experience there has never been an attempted prosecution of the Canadian blocking order no case law or administrative/prosecutorial guidelines no guidance from the Canadian government numerous investigations - American Express, Eli-Lilly, Heinz, Red Lobster, Wal-Mart and others Wal-Mart s Cuban pyjamas nationalistic sensitivities

55 Critical FEMA Conflict Points 54 training programs compliance manuals communications and instructions server accessibility meetings and telephone conversations M&A due diligence contracts e.g., supply agreements with U.S. companies, intercompany agreements, purchase orders, etc. end-use certificates

56 Canadian Rules on Boycotts and Discriminatory Practices 55 in addition to export controls, trade embargoes, asset freezes and blocking orders Canada s boycott policy provincial discriminatory business practice legislation

57 Canada s Boycott Policy 56 October 21, 1976 federal policy; does not prohibit compliance with international economic boycotts identifies unacceptable activities taken in connection with such boycotts requiring a firm or individual to engage in discrimination based on race, nationality, etc. of another Canadian firm refusing to purchase from or sell to another Canadian firm refusing to sell Canadian goods to any country or refraining from purchasing from any country restricting commercial investment or other economic activity in any country sanction is denial of government support and assistance in such transactions

58 Provincial Discriminatory Business Practices Legislation 57 Discriminatory Business Practices Act (Ontario) prohibits refusing to engage in business with others where: refusal is an account of on attribute (e.g., geographical location) of the others or of a third person with whom the others do business; and refusal is a condition of the engaging in business of the company making the refusal and another person prohibits entering into a contract in which one party refuses to engage in business with another person on account of an attribute of that other person or of a third person with whom that person conducts business prohibits seeking or providing negative statements of origin requires reporting of requests to engage in discriminatory business practices

59 Provincial Discriminatory Business Practices Legislation (cont d) 58 penalty/sanction exposure cause of action for damages against person who contravenes banned for providing goods or services to Ontario government for five years up to $100,000 fine

60 59 What Are Your Red Flag Destinations? incorporate ACL, UN and SEMA embargo destinations into your compliance program raise red flag where you have knowledge, suspicions, or reason to believe that technology, goods or services are ultimately destined for or may be accessed or used in or by any of the following countries or entities: Myanmar (formerly Burma) Belarus Syria Libya Sudan Iraq terrorists and terrorist organizations Al-Qaida and Taliban Zimbabwe Afghanistan Pakistan Cuba Guinea Iran Democratic Republic of the Congo Eritrea Côte d Ivorie Liberia Sierra Leone North Korea Lebanon Somalia Tunisia Egypt Russia Ukraine

61 60 Key Issues in Interaction With US and Other Regimes do you screen against Canadian lists? lists of over 2,000 designated persons individuals, companies, organizations Special Economic Measures Act regulations United Nations Act regulations Freezing Assets of Corrupt Foreign Officials Act regulations Criminal Code anti-terrorism provisions any involvement in the transaction purchaser, ultimate user, vendor, creditor, broker, service provider applies regardless of where Canadian company is doing business applies to non-canadians in Canada

62 61 Key Issues in Interaction With US and Other Regimes Canadian measures may be broader than those of the United States and other countries Russia / Ukraine 60 designated persons Belarus, Burma, Libya, North Korea Iran importance of home grown compliance policies

63 62 Key Issues in Interaction With US and Other Regimes Canadian measures can be in direct conflict with those of the United States Foreign Extraterritorial Measures Act blocking order in respect of US trade embargo of Cuba obligation to notify Canadian Attorney General of certain communications criminal penalty exposure: up to $1.5 million and/or 5 years imprisonment provincial business discriminatory practices legislation

64 Key Issues in Interaction With US and Other Regimes 63 Canadian measures can be in direct conflict with those of the United States Canadian human rights / employment laws and potential conflict with US controls under International Traffic in Arms Regulations Department of Defense Trade Controls (US State) US Export Administration Regulations (CCL) - Department of Commerce 63

65 64 Key Issues in Interaction With US and Other Regimes significant differences in administration and guidance on economic sanctions enforcement issues Lee Specialties Iran SEMA violations guilty plea (April 14, 2014)

66 John W. Boscariol McCarthy Tétrault LLP International Trade and Investment Law Direct Line: LinkedIn: Twitter: