Navigating U.S. and
Canadian International
Trade Controls
Presented to the Association of Corporate Counsel,
Western Pennsylvania Chapter
September 10, 2015
Canadian Trade Controls
2
September 10, 2015
In this presentation:
1.
2.
3.
4.
5.
6.
7.
Overview of Canadian Trade Control Regimes
Export Controls – ACL & ECL
Sanctions – UN-based / Canadian Unilateral
Export Controls & Sanctions: Enforcement Considerations
Controlled Goods Program – Canada’s ITAR
Cuba – Canada’s Blocking Legislation
AD/CVD & customs update
3
September 10, 2015
Overview of Canadian Regimes
A. Export & Import
Controls
B. Sanctions
C. Customs
Legal Instruments:
- Export and Import Permits
Act
(Area Control List)
(Export Control List)
(Import Control List)
- United Nations Act
- Special Economic Measures
Act
(Country-specific regulations)
- Customs Act
Primary Administrating/Enforcement Agency:
- DFATD (TIE), CBSA
- DFATD (UNHREL), CBSA
- CBSA
- Sales, Transfers, Supply,
Facilitation, Export, Import,
various other defined
activities
- Exportation, Importation
Scope:
- Export, Import, “Aiding and
Abetting”
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September 10, 2015
Overview of Canadian Regimes, con’t
D. Controlled Goods
E. Blocking Legislation
Legal Instruments:
- Defence Production Act
(Controlled Goods Regulations)
- Foreign Extraterritorial Measures Act
- Cuba Order
Primary Admin/Enforcement:
- Controlled Goods Directorate
- Department of Justice
Scope:
- Possession, Examination and/or
Transfer of “Controlled Goods”
- Receipt and/or compliance with
certain directives, communications,
etc.
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September 10, 2015
In this presentation:
1.
2.
3.
4.
5.
6.
7.
Overview of Canadian Trade Control Regimes
Export Controls – ACL & ECL
Sanctions – UN-based / Canadian Unilateral
Export Controls & Sanctions: Enforcement Considerations
Controlled Goods Program – Canada’s ITAR
Cuba – Canada’s Blocking Legislation
AD/CVD & customs update
6
September 10, 2015
Canada’s Export Control List (ECL): A combined CCL and USML,
which identifies goods requiring permits for export regardless of
destination (big exception = exports to the US)
•
•
•
•
•
•
•
Group 1 – Dual Use List
Group 2 – Munitions List
Group 3 – Nuclear Non-Proliferation List
Group 4 – Nuclear-Related Dual Use List
Group 5 – Miscellaneous Control Regime List,
including all goods of U.S. origin and “strategic
goods”
Group 6 – Missile Technology Control Regime List
Group 7 – Chemical Biological Weapons NonProliferation List
TIE Updates the ECL typically once per year and provides 30 days
advance notification before changes
September 10, 2015
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Canada’s Area Control List (ACL): List establishing essentially a
total embargo
• Countries currently listed:
 Belarus
 North Korea
• Exports or transfers of any goods or technology (including
technical data, technical assistance and information necessary for
the development, production or use of a good) to ACL country
requires an export permit.
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September 10, 2015
In this presentation:
1.
2.
3.
4.
5.
6.
7.
Overview of Canadian Trade Control Regimes
Export Controls – ACL & ECL
Sanctions – UN-based / Canadian Unilateral
Export Controls & Sanctions: Enforcement Considerations
Controlled Goods Program – Canada’s ITAR
Cuba – Canada’s Blocking Legislation
AD/CVD & customs update
9
September 10, 2015
Canadian Sanctions Regimes
• United Nations Act (UN Sanctions Resolutions implemented into Canadian
law through Regulations under UN Act)
• Special Economic Measures Act (Canada-specific)
• Export and Import Permits Act (Area Control List)
• All Canada sanctions matters require specific examination of activity
contemplated and all parties involved in context of sanctions regime
Extremely Broad
Relatively Broad
Limited (no arms and related
material; no technical
assistance)
Iran (UN Act +
SEMA)
Zimbabwe
Somalia
Terrorism/Al Quaida/Taliban
Libya
Syria
Ukraine
Russia
Côte d’Ivoire
Congo
Iraq
Lebanon
Liberia
Sierra Leone
Sudan
Myanmar (Burma)
Central African Republic
Eritrea
Yemen
North Korea (UN Act
+ ACL)
Belarus (ACL)
September 10, 2015
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A Word about Russia and Iran…
• “Made in Canada” sanctions, notwithstanding Canadian
political messaging of being in lockstep with allies (US,
EU)
• Large historical voting base in Western Canada (Harper
Government – Conservatives + Ukrainian ethnic block)
• Harper Government’s strong rhetoric
• End of day: differences from US and EU in designated
entities and differences in scope of sanctions (less
extensive for Russia due to energy services supply into
CIS; historically less extensive for Iran but now possibly
more extensive post-Iran nuclear deal)
September 10, 2015
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In this presentation:
1.
2.
3.
4.
5.
6.
7.
Overview of Canadian Trade Control Regimes
Export Controls – ACL & ECL
Sanctions – UN-based / Canadian Unilateral
Export Controls & Sanctions: Enforcement Considerations
Controlled Goods Program – Canada’s ITAR
Cuba – Canada’s Blocking Legislation
AD/CVD & customs update
12
September 10, 2015
• Enforcement environment in Canada is driven by
US enforcement action:
• Due to US enforcement action, export controls now
regular part of due diligence work in Canada for M&A,
lending, and IPO
• Canada: largely “compliance-oriented”
• No one is going to jail
• But loss of export permits/controlled goods certification
can cripple export-oriented operations (common in
Canada)
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September 10, 2015
• Single prominent enforcement action in Canada R. v. Yadegari (2009):
• First-ever criminal prosecution under Iran Sanctions (UN)
Regulations; also violations of Export and Import Permits
Act; Customs Act; and Criminal Code
• Mahmoud Yadegari found guilty on 9 of 10 counts
relating to attempted export of pressure transducers
(export-controlled) to Iran
• Sentenced to 4 years, 3 months
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September 10, 2015
• R. v. Yadegari takeaways for Canada:
• Exporters expected to perform due diligence to
determine specific characteristics of goods under
Canada’s Export Control List (or other) to ensure
compliance with applicable permit requirements
• Export operations are presumed by Courts to be aware
of the existence of country-specific sanctions and export
controls generally
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September 10, 2015
• Justice Mocha in Yadegari on “…knowingly sell[ing],
supply[ing], or transfer[ring], directly or indirectly…” :
• “Anyone in this business would know there are restrictions on
exports – laws and regulations that must be complied with”…
“the defendant knew or, at the very least, was wilfully blind
that the [goods] had the characteristics that made them
restricted by the United Nations Act.”
• “[It] would be very easy [for the exporter] to perform due
diligence and ask for confirmation of the specific
characteristics of the [goods] that he attempted to export to
ensure compliance.”
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September 10, 2015
• Recent enforcement action in Canada –
Lee Specialties Ltd. (2014):
• Lee Specialties (Red Deer, AB) – Energy sector supplier
• Attempted export of “Viton O-Rings” to Iran (nuclear
dual-use)
• Charges laid under SEMA (Iran Regulations), UN Act (Iran
Regulations); and Customs Act
• Pleaded guilty to contravening the SEMA (Iran
Regulations)
• $90,000 fine paid
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September 10, 2015
Enforcement Risk Mitigation:
Permit Application Review Process
• When in doubt: Permit applications provide only clear answer
• 3 responses possible:
1.
2.
3.
“No permit required”
“Permit required + hereby issued”
“Permit required + hereby denied”
• EIPA – EXCOL online application to DFATD
• SEMA – DFATD Legal Bureau (UNHREL) and specific review by
Minister of Foreign Affairs
• Depending on item and destination, DFATD may consult with
other government departments (ex: Department of National
Defense, CSIS, RCMP) to align with regional security, nonproliferation, and geographic policy initiatives and missions
abroad
September 10, 2015
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Customs Act - Overlay
• Under the Customs Act and Reporting of Exported Goods
Regulations, exporters must generally present an export declaration
(except non-controlled goods exported to the United States or noncommercial shipments) and any applicable permits within certain
timeframes
• CBSA has power to seize goods at border, impose Administrative
Monetary Penalties and/or initiate criminal proceedings
• AMPS for failure to report export of goods on an export declaration
$500 to $1,500 per shipment; for goods subject to export control
AMPS are $2,000 to $8,000 per shipment
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September 10, 2015
Canada-US Export Controls/Sanctions:
Overlap Issues
1. Common Misconception: Multinational companies can
develop a “one size fits all” approach to export
controls/sanctions compliance
2. Common Misconception: If a Canadian exporter
receives an export permit to export from Canada to
another country, the exporter is “covered” for export
controls compliance purposes
•
•
•
Adherence to conditions in export permit
New products/destinations?
Extraterritorial application of other export controls/sanctions
laws (e.g. U.S.) and Canadian “blocking” legislation (i.e. FEMA)
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September 10, 2015
In this presentation:
1.
2.
3.
4.
5.
6.
7.
Overview of Canadian Trade Control Regimes
Export Controls – ACL & ECL
Sanctions – UN-based / Canadian Unilateral
Export Controls & Sanctions: Enforcement Considerations
Controlled Goods Program – Canada’s ITAR
Cuba – Canada’s Blocking Legislation
AD/CVD & customs update
21
September 10, 2015
Canada’s Controlled Goods Program
• Controlled Goods Program (“CGP”) is the “price of admission”
for Canada’s continued preferential status under US ITAR
• Registration and ongoing compliance required for anyone who
examines, possesses or transfers controlled goods/technology
within Canada
• Ownership of corporate entities and reporting structure
scrutinized during application (e.g. China, Russia)
• “Controlled goods” =
anything that is ITAR-controlled
most goods in ECL Group 2 (Munitions)
all goods in ECL Item 5504 (strategic goods)
all goods in ECL Group 6 (Missile Technology Control Regime List)
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September 10, 2015
Canada’s Controlled Goods Program
• Illegal possession, examination or transfer of controlled goods
is an offence under Canada’s Defence Production Act
• Maximum penalty = $2,000,000 per day and/or imprisonment
for up to 10 years
• Compliance-oriented approach taken: “Controlled Goods
Directorate” of Department of Public Works and Government
Services conducts compliance inspections to review security
plans, record keeping, company training programs for
employees, security breach reports, etc.
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September 10, 2015
In this presentation:
1.
2.
3.
4.
5.
6.
7.
Overview of Canadian Trade Control Regimes
Export Controls – ACL & ECL
Sanctions – UN-based / Canadian Unilateral
Export Controls & Sanctions: Enforcement Considerations
Controlled Goods Program – Canada’s ITAR
Cuba – Canada’s Blocking Legislation
AD/CVD & customs update
24
September 10, 2015
Canada’s Foreign Extraterritorial Measures Act
• Currently applies to US Cuba embargo alone
• FEMA designed to be perfect “Catch 22” for
Canadian companies (and senior officials and
senior employees thereof) wishing to comply
with US Cuba embargo
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September 10, 2015
Canada’s Foreign Extraterritorial Measures Act
• Notification Obligation: any “directive,
instruction, intimation of policy or other
communications relating to an extraterritorial
measure of the United States in respect of any
trade or commerce between Canada and Cuba”
• Prohibition: no “complying” (by act or omission)
with any such directive, instruction, intimation of
policy or other communication
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September 10, 2015
Canada’s Foreign Extraterritorial Measures Act
• Enforcement Environment = Unique.
• Department of Justice receives notice. Further
action unlikely.
• Potential for prosecution always exists: Canadian
subsidiary and personnel require separate trade
counsel regarding “notification” and “complying”
with directives, instructions, intimations of policy or
other communications from US parent/affiliate
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September 10, 2015
In this presentation:
1.
2.
3.
4.
5.
6.
7.
Overview of Canadian Trade Control Regimes
Export Controls – ACL & ECL
Sanctions – UN-based / Canadian Unilateral
Export Controls & Sanctions: Enforcement Considerations
Controlled Goods Program – Canada’s ITAR
Cuba – Canada’s Blocking Legislation
AD/CVD & customs update
28
September 10, 2015
Trade Remedies: Canada
• WTO Trade Policy Review for Canada in 2015 noted an uptick in the
initiation of trade remedy proceedings in Canada with 43 AD investigations
(15 cases) and 21 CVD investigations (13 cases) initiated between 2011 and
2014
• Unique / noteworthy aspects of the Canada trade remedy regime include:
 Extremely short period (90 – 135 days) between initiation of a case and
imposition of provisional duties
 Onerous/punitive “greater of” rule that applies to subject goods
originating in one country (e.g. China) and exported from another (e.g.
United States)
 Zero margin companies remain subject to AD/CVD order if country wide
rate is above de minimus
 Prospective enforcement of AD/CVD orders by CBSA
 Punitive practice by CBSA with respect to “Ministerial Specifications”
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September 10, 2015
Trade Remedies: Canada (cont’d).
• 2016 shaping to be critical year for trade remedies in Canada
 WTO challenge by Taiwan against Canada’s AD “sacred cows”
 China’s WTO accession protocol and Canada’s quiet removal of
expiration date relating to China’s status as a “prescribed country” (nonmarket economy)
 Trade Remedies Modernization (led by CSPA) and potential amendments
to Canada’s Special Import Measures Act (similar to those of the
Leveling the Playing Field Act enacted on June 29)
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September 10, 2015
Customs Update
2015 Trade Compliance Verification Priorities
Examples of HS classification verification priorities:
o
o
o
o
o
o
o
Disposable protective gloves (Round 2)
Batteries
Machinery for Public Works
Articles of Apparel and Clothing Accessories
Articles of Plastics (New)
Articles Of Iron or Steel (New)
Parts for Use with Machinery of Chapter 84 (New)
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September 10, 2015
Customs Update
2015 Valuation: TP Adjustments & Refunds
• CBSA Customs Notice 15-001 (January 19, 2015): downward TP
adjustments post-importation now enable refund
• Prior CBSA position: s. 48(5)(c) of Customs Act prevented change
in VFD resulting from post-import price adjustment (transaction value
methodology; related party)
• CITT in HBC v. CBSA ruled s. 48(5)(c) did not address post-import
downward price adjustments if pursuant to pre-import agreement
calling for post-import adjustment
• Bottom line: Duty refunds now possible for year-end TP
adjustments / however, corrections for same also now required if
TP adjustment yields revenue-neutral duty outcome
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September 10, 2015
U.S. Trade Controls
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September 10, 2015
Iran Sanctions
• On July 14, 2015, the P5+1 and Iran agreed to the Joint Comprehensive Plan of Action
(JCPOA). Lifts U.S., EU, UN sanctions in exchange for Iran scaling back nuclear program.
• U.S. sanctions relief will go into effect on “Implementation Day.” Until then, the current
U.S. sanctions regime largely remains unchanged – broad trade embargo.
• Easing of sanctions will be limited to seven sectors:
• financial and banking
• oil, gas and petrochemical
• shipping, shipbuilding, and port operations
• automotive
• trade in gold and other precious metals
• software and metals
• insurance services in connection with activities consistent with the JCPOA
• Relief in such sectors applies only to extraterritorial sanctions (non-U.S. persons)
• Licensing for U.S. persons limited to: export of commercial aircraft/parts; imports of
foods and carpets
• Open questions: General/specific licenses?; Process and timing?; Facilitation?
Snapback?
• EU/Int’l sanctions relief more complete than U.S. sanctions relief
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Cuba Sanctions
• Re-establishment of diplomatic relations and rescission of designation of Cuba as state
sponsor of terror has led to easing of Cuba sanctions, but embargo remains in place.
• OFAC now authorizes 12 categories of travel under a general license:
• Journalistic activity; professional research and professional meetings; educational
activities; support for the Cuban people; humanitarian projects
• Travelers may bring back $400 in goods for personal use, no more than $100 for
alcohol/tobacco
• Tourism is not permitted (even if traveling under a general license).
• Support for the Cuban People (SCP): Intended to improve living conditions and support
independent economic activity, strengthen civil society, and improve communications
•
•
•
•
•
Building materials, equipment, tools for private sector to construct privately owned buildings
Tools and equipment for private sector agricultural activity and private sector entrepreneurs
Donated items for use in scientific, archaeological, cultural, educational activities
Exports to human rights organizations, NGOs
Telecommunications items (internet access/services); items for use by news media
• Financial institutions may open correspondent accounts; increased remittances; credit
card use
• Other technical changes: de minimis threshold increased to 25%; AT controls no longer
apply
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Russia / Ukraine Sanctions
• Implementation and ratcheting of sanctions since March 2014 in response to Russian
invasion of Ukraine, annexation of Crimea
• SDN designations
• High tech export restrictions
• Sectoral Sanctions Identifications (SSI) – applies to financial and energy sectors
• Four key directives
• Restrict access to debt/equity for listed companies
• Exports relating to oil/gas exploration in deepwater, Arctic offshore, and
shale energy projects
• Dec. 2014: Broad trade embargo prohibits U.S. persons from entering into transactions
with persons/entities in Crimea
• Note OFAC advisory on circumvention of Crimea embargo
• Nine general licenses have been published by OFAC, authorizing certain activities that
would otherwise be prohibited (winding down; ag/med commodities)
• Compliance challenges:
• Evolving sanctions
• Overlapping jurisdiction/sanctions regimes
• Extensive business interests in Russia
• Nature of sanctions
• 50% ownership
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Export Control Reform
• The interagency Export Control Reform (ECR) Initiative was launched in August
2009 to strengthen national security and the competitiveness of key U.S.
manufacturing and technology sectors. Implementation in 3 phases:
• (1) revise, refine, and harmonize control list definitions and streamline licensing
process;
• (2) restructure USML and CCL, including “600” series for less sensitive military items;
and
• (3) creation of a single control list, single licensing agency, unified technology system,
and enforcement coordination center
• 15 of 21 USML Categories revised, transitioning less sensitive items to Commerce/EAR
• Recent ECR developments (ITAR/EAR)
• July 2, 2015 – Commerce deploys revamped consolidated screening list
• June 17, 2015 – State and Commerce propose rule to revise USML Categories XIV
(toxicological agents) and XVIII (directed energy weapons)
• June 3, 2015 – State and Commerce publish rules to harmonize definitions in the ITAR
and EAR: “Technical data,” “technology,” “public domain,” “fundamental research”
• May 5, 2015 – State and Commerce publish notice of proposed rulemaking on
Category XII (night vision, fire control)
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Recent Developments at CBP
• Centers of Excellence and Expertise
• Centralized operations (vs. multi-port) to enhance efficiency, uniformity of treatment,
predictability
• January 2015 – 3 CEEs (Electronics; Pharmaceuticals, Health & Chemicals; Petroleum,
Natural Gas & Minerals) assumed trade processing, regardless of trusted trader status
• Single Window – when fully implemented there will be one common set of data elements
used by the entire U.S. government for all import and export transactions
• 50 government agencies with stake in import/export regulation. Significant Dates:
• May 1, 2015 - Mandatory use of ACE for all electronic manifest filing
• Nov. 1, 2015 – Mandatory use of ACE for all electronic cargo release and related entry
summary and Partner Government Agency filings.
• October 1, 2016 – Mandatory use of ACE for all remaining electronic portions of the CBP
cargo process.
• E-Bond: January 2015 - CBP implemented electronic processing of single transaction and
continuous bonds
• Exports: Over 60% of core export processing capabilities in ACE have been deployed, and
ACE is now used to process all export commodity filings
• C-TPAT for Exporters: Allows export only businesses to enjoy C-TPAT benefits, and aligns
with Authorized Economic Operator programs worldwide (facilitates clearance by foreign
partners; reduced exams/times)
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Recent Developments at CBP
• Updated CBP Focused Assessment (Audit) Procedure
• Additional testing required to evaluate adequacy of internal controls
• Up or down determination of acceptable risk at PAS stage
• United States v. Trek Leather, Inc. and Harish Shadadpuri (“Trek Leather”) 767
F.3d 1288 (Fed. Cir. 2014)
•
•
•
•
Harish Shadadpuri v. United States, No.14-986 (S. Ct. Feb. 13, 2015)
President and sole shareholder held personally liable for customs violations (assists)
Courts determined that Shadadpuri was “person” and “introduced” merchandise
Is ordinary compliance staff now at risk of massive civil penalties?
• Other Compliance Areas of concern
•
•
•
•
Classification
Valuation: First sale/control; royalties
NAFTA
FTZ
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Trade Legislation / Agreements
• Legislation:
• GSP Reauthorized in June 2015 through Dec. 31, 2017
• December 2015 deadline for retroactive claims to July 2013
• Refunds automatic if claims made during lapse period
• AGOA Reauthorized through 2025
• Customs and enforcement bill pending
• Currency manipulation as CVD; AD/CVD duty evasion; MTB reform
• Trade remedy enhancements
• Profitability of petitioners; focus on commercial shipments; easier to use AFA
• Information Technology Agreement Expanded
• Tariffs on more than 200 IT products phased out by 54 WTO Members
• Value – $1.3 Trillion Annually
• TPP to be concluded?
• Outstanding issues include automotive ROO; dairy market access; protection for
biologics
• TTIP negotiations
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Questions? / Comments?
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September 10, 2015
Contact Information:
Myles S. Getlan
[email protected]
202.567.2304
Christopher J. Cochlin
[email protected]
613.368.4143
Christopher J. Kent
[email protected]
613.368.4142
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