LexSage

Canada’s Export Controls: 
Think Before You Export

January/February 2003

Published in the January/February 2003 issue of the Canada China Business Council’s publication “The Forum” pp. 22-24

The newspaper headlines are full of warnings of weapons of mass destruction, nuclear weapons, chemical weapons, and potential wars.  In this environment, the Export and Import Controls Bureau (EICB) of the Department of Foreign Affairs and International Trade is likely to exercise renewed caution as it does not want the headlines to state that Canadian technology and goods have been used for improper purposes.  For this reason, it is more important than ever that Canadian businesses know about Canada’s export controls even when your instinct is that exports of your businesses’ goods cannot possibly be controlled.

Canada’s export controls apply to exports to China and other countries.  They are not intended to create an obstacle to business:  however, they are intended to protect Canadian national security and political interests.  This important goal is satisfied only by casting a broad net.  The truth is that a broad net of protections is cast by Canada’s export control in order to force Canadian businesses to provide EICB with information about their proposed sales to businesses located in and governments of foreign countries.  Based on the information provided and other information available to the EICB, they will decide whether or not to issue an export permit. The reality is that the EICB does not approve every proposed export.

Before exporting a good from Canada to China, a Canadian business must determine whether or not Canada imposes export controls on the proposed export, and, if so, obtain the necessary export permits.  The Canadian business should ask the following ten questions:

1. What is there to lose if Canada’s export controls are ignored?

There is a lot to lose.  If you ignore a legal obligation to obtain an export permit, the penalties can be severe.  You and your business may be prosecuted and, if convicted, you may have to go to jail for up to ten years and/or your business may be ordered to pay a significant fine.  In addition, you may find your mistake becoming front page news, which would not be viewed favourably by corporate shareholders, partners, members, directors, superiors, employees, customers, suppliers and/or lenders.  In the worst case scenario your business could go out of business.

2. Can the good be exported under a General Export Permit (GEP)?

Certain goods may be exported under the authority of a GEP.  Where a GEP is available, an exporter may reference the GEP authority in its export documentation and does not have to apply for a specific export permit.  The following is a list of the most frequently used GEPs:

GEP3:  Consumable Stores Supplied to Vessels and Aircraft
GEP5:  Logs
GEP12: United States Origin Goods
GEP18: Portable Personal Computers and Associated Software
GEP 26: Industrial Chemicals
GEP 27: Certain Nuclear-related Dual-use Goods
GEP 28: Exports to Angola
GEP 29: Eligible Industrial Goods
GEP 38: CWC Toxic Chemicals and Precursor Mixtures
GEP39 : Mass Market Cryptographic Software
GEP100: Eligible Agriculture Goods 

It is, however, important to note that general export permits can be changed without notice.

3. Is it to be exported on Canada’s Export Control List and therefore controlled?

All exports of goods on Canada’s Export Control List are controlled and a specific export permit is required (unless the good can be exported under a GEP).  You are required to apply to the EICB for a specific or individual export permit before you export a good that is on Canada’s Export Control List and permits must be applied for on a shipment-by-shipment basis.  Just because you received an export permit the last time you applied does not guarantee that an export permit will be issued for this shipment.  The Export Control List is created by federal regulation and may change without notice.

You will have to “classify” your good according to the Export Control List (not the Harmonized Commodity Description and Coding System).  In order to “classify” your good, you may have to clearly understand the technical specifications of the good and may need the assistance of the engineers and designers.  The Export Control List comprises goods which fall within the eight groups of goods.  The eight groups are as follows:

Group 1: Dual Purpose List:  This group contains goods and technologies that have dual purposes in that they could have both civilian and military applications.  Many of the goods in the dual purpose list appear to be benign.  Think about it – a laser can be used to make a weapon.  The dual purpose list is broken down into the following categories:  (1) Advanced Materials; (2) Materials Processing; (3) Electronics; (4) Computers; (5) Telecommunications; (6) Information Security; (7) Sensors and Lasers; (8) Navigation and Avionics; (9) Marine; and (10) Propulsion.  The EICB may decline applications in respect of goods in Group 1 if there are any concerns that one of the above applies or if the goods may be used for a military purpose or where there is a risk of diversion of the goods to an unacceptable use or destination.

Group 2: Munitions List:  This group includes goods and technologies that are specifically designed or modified for military purposes.  Canada restrictively controls the export of military goods and technology to:  (i) countries which pose a threat to Canada and its allies; (ii) countries involved in or under imminent threat of hostilities; (iii) countries under United Security Council Sanctions; or (iv) countries whose governments have a persistent record of serious violations of the human rights of their citizens, unless it can be demonstrated that there is no reasonable risk that the goods will be used against the civilian population.

Group 3:   Nuclear Non-Proliferation List:  This group includes goods that are nuclear-related and dual use (that is, goods that can be used for both nuclear and non-nuclear application) and that can be used in the proliferation of nuclear weapons or nuclear devices.  With respect to exports to be shipped to an end-user in China, Canada has a long-standing nuclear non-proliferation policy, which is designed to ensure that Canada’s nuclear exports are not used for any nuclear explosive purpose.  The EICB may decline applications in respect of goods in Groups 3 and 4 if the goods are being shipped to an end-user in China or where there is a risk of diversion of these goods to an unacceptable use or destination.

Group 4: Nuclear-Related Dual Use List:  Same as Group 3.

Group 5:   Miscellaneous Goods:  The goods include a variety of nonstrategic goods (that is, the goods do not pose national security risks).  The most important item in this group is Category 5400 U.S. origin goods.  This group also includes other miscellaneous goods.

Group 6:   Missile Technology Control Regime List:  This group includes goods and technologies that are used or could be used in the proliferation of systems capable of delivering chemical, biological and nuclear weapons.  The EICB will not issue an export permit for such goods, unless acceptable assurances are provided.

Group 7: Chemical and Biological Weapons and Nonproliferation List:  This group includes chemical and other substances and biological agents and related equipment (specific or dual use) that could be used in the production of chemical and biological weapons.  The EICB will not issue an export permit for such goods, unless acceptable assurances are provided.

Group 8: Chemicals for the Production of Illicit Drugs:  This group includes chemicals and other substances that could be used to produce illicit drugs.  The EICB will not issue an export permit for such goods, unless acceptable assurances are provided.
If you are required to obtain an export permit, it can take 4 to 6 weeks, or more in complex cases.  If the good is not on the Export Control List, you do not have to apply for an export permit, unless another type of export control applies. 

4. Did my proposed export originate in the United States?

As a general rule, if the good that you propose to export originated in the United States, you will have to apply for an export permit before you can export the goods from Canada to an end user in China.  Category 5400 of Group 5 of the Export Control List, restricts the export of all goods that originate in the United States.  There is one exception:  Category 5400 excludes goods that have been further processed or manufactured outside the United States (e.g., in Canada) so as to result in a substantial change in value, form or used in the production of new goods.  Whether the exception applies must be determined on a case-by-case basis.

The reason for this export restriction is based on Canada’s obligations in a bilateral agreement and Canada’s proximity to the United States and Canada’s desire to prevent U.S. made goods from being transshipped through Canada.  For example, if a U.S. company cannot obtain a U.S. export permit due to its strict requirements, the U.S. company should not be able to circumvent U.S. law by shipping the goods to Canada to get around their problems.  Unfortunately for Canadian companies, the Canadian export restriction on U.S. made goods is not limited to situations of intentional wrongdoing and could potentially catch many exports in the widely cast net.

Even though Category 5400 of Group 5 of the Export Control List applies to all goods that originate in the United States, exporters may be able to re-export certain non-strategic U.S. made goods under GEP 12.   However, GEP 12 would not apply if the goods are ultimately destined to go to Iran, Cuba, Syria, or North Korea, or any country on Canada’s Area Control List.

To complicate matters further, with respect to U.S. made goods, you may have to apply for an export permit from the U.S. authorities under U.S. laws before you can re-export the goods from Canada.  It is understood that the application process in the U.S. can be time consuming and expensive.  Whether you are required to obtain a U.S. export permit will depend on U.S. law and/or a request by the EICB for proof of authorization from the US authorities for the proposed export.  It is possible that you will have discussions with the Canadian authorities about the application of the U.S. law.  If this should happen, you will need the assistance of professionals.  It is important to note that if a Canadian company ships a U.S. made good that is controlled under Category 5400 of the Export Control List and controlled under U.S. law, both the Canadian and U.S. authorities may prosecute the Canadian company.

5. Is the end user in a country that is listed in Canada’s Area Control List?

This is a trick question because China is not on Canada’s Area Control List, which identifies countries to which exports of any goods (including goods that are not controlled by Canada’s Export Control List) from Canada are controlled.  The Area Control List affects exports of basic items, even paperclips.  An export permit is required (and may not be granted) before a shipment can be sent to an end user or importer in a country on the Area Control List.  The Area Control List is created by federal regulation and may change without notice.  The countries currently on the Area Control List include Belarus and Myanmar.

6. Are the goods that you propose to export subject to other export restrictions?

Exporters should be familiar with the laws affecting their industry as many statutes and regulations (other than the Export Control List) restrict exports.  Depending on the type of good, other restrictions may apply.  For example, the export of automatic firearms to China are restricted as China is not on Canada’s Automatic Firearms Country Control List and, therefore, an export permit would be required.  Exports of a variety of other goods (including, but not limited to, cultural property, animals, nuclear/atomic energy devices, hazardous waste, etc.) may also be subject to restrictions.

7. Is the customer or a middleman on the U.S. blacklist?

If a person identified on the Canadian export permit application is blacklisted in the United States (or any other country), it is possible that the EICB will not issue an export permit.  The U.S. Bureau of Industry and Security’s Entity List, Denied Persons List and Unverified Persons List and the U.S. Federal Register Notices issued by the U.S. Department of State are publicly available.  The Entity List is a list of foreign persons involved in proliferation activities which pose concern.  The Denied Person List is a list of persons who have had their export privileges suspended either for violating export controls or posing a risk of violation.  The Unverified Persons List is a list of persons that may be involved in proliferation activities.  The Federal Register Notices identify companies that have committed export offences, such as diversion of the goods to Iran or some other nation hostile to the United States.  Chinese companies, some state-owned, have committed export offences under U.S. export laws.  For example, on May 16, 2002, the U.S. Department of State published a Federal Register Notice that it would deny all export applications in respect of controlled goods being sold to China National Aero-Technology Import and Export Corporation (CATIC), The China Precision Machinery Import/Export Corporation, China Shipbuilding Trading Company, and a number of other Chinese companies because it has been determined that the entities committed an offence under U.S. law.  It is only natural that the EICB would be concerned that such end users would reoffend, and may for that reason alone deny an application for an export permit.

8. Will the customer provide an End-Use Statement?

All applications for an export permit must be accompanied by an End-Use Statement on the importer’s letterhead and must (i) identify the end user as well as a purpose and use of the products to be imported; (ii) correspond to the commodity description; (iii) identify whether the goods are being used for civilian or military applications; and (iv) declare the goods will not be diverted or re-exported.  Other documentation, such as an International Import Certificate from the government of the importing country stating that the government is aware of the proposed shipment of goods and/or an Import Licence.  The EICB may also require a Delivery Verification Certificate from the government of the importing country certifying that the goods have arrived in the importing country.  If you are not able to obtain these documents, your application for an export permit will be denied. 

9. Can you provide a declaration?

All applications for an export permit must be accompanied by a declaration that (1) to the best of the applicant’s knowledge, the goods will enter the economy of the identified country of import and will not be diverted or transshipped from that country and (2) all information provided in the application is true and correct.  In order to make this declaration, you must know your customer.  More importantly, you must trust the information provided by your employees, foreign representatives, agents, etc.  Are they withholding information in order to get a sales commission?  It is important that you receive accurate information about customers and their proposed uses of and destinations for the goods.  You and your business may encounter difficulties getting future export permits if it turns out the goods were diverted or transshiped to or used for an improper purpose.

10. Are there other “red flag indicators”?

The U.S. Bureau of Industry and Security have identified the following as some of the many “red flag indicators” that should cause you to ask additional questions about your customer or feel that something is not quite right: 

• The product’s capabilities do not fit the buyer’s line of business, such as an order for sophisticated computers for a small bakery;
• The item ordered is incompatible with the technical level of the country to which it is being shipped;
• The customer is willing to pay cash for a very expensive item when the terms of sale would normally call for financing;
• The customer has little or no business background;
• The customer is not familiar with the product’s performance characteristics but still wants the product;
• Routine installation, training, or maintenance services are declined by the customer;
• Delivery dates are vague or deliveries are planned for out of the way destinations;
• A freight forwarding firm is listed as the product’s final destination;
• The shipping route is abnormal for the product and destination;
• When questioned, the buyer is evasive and especially unclear about whether the purchased product is for domestic use, for export or for reexport.

In the current environment, Canadian companies should not turn a blind eye to these “red flag indicators” because all Canadian companies have a moral duty in the present unstable environment.  Ask yourself one question:  If the unthinkable should occur, would you regret making the sale? 

If you have any questions, please contact Cyndee Todgham Cherniak at 416-307-4168 or cyndee@lexsage.com.

This article was originally published on www.Canada-USBlog.com. Republished with permission.