Changes to export controls catch some off guard

Changes to export controls catch some off guard
As of Dec. 16, there are products that now require export permits that did not a month ago. Photo: Shutterstock
Changes to Canada’s Export Control List have left some companies scrambling over the holidays to figure out whether they now need permits to get their products to market in time.
On Dec. 19, Foreign Affairs and International Trade’s Export Controls Division announced a number of changes to the Export Control List that became effective Dec. 16.

The Export Controls Division is both removing and adding controls on various goods and technologies and in some cases it means a product not previously requiring a permit for export may now need one. For example, equipment produced for the disruption or destruction of improvised explosive devices and electronic equipment to detect explosive residue are two examples of items added to the list. They are now considered “dual use” for commercial as well as military use and will require a permit.

“All of a sudden companies who make and sell those products are now in a position to need a permit,” says John Boscariol, head of the trade and investment law group with McCarthy Tétrault LLP. “This can be a pretty complicated area particularly for in-house counsel who are dealing with labour or trademark and IP issues. Even if you’re in the compliance side and watching this stuff all the time, the way the government implements this stuff you can be caught off guard. It becomes a complex area to keep track of if they haven’t been engaged in the permit process with the Canadian government.”

Boscariol says with so many companies operating under specified delivery times, the new permit requirements could mean some find themselves unable to fulfil contractual requirements because customs will detain the product until the permit is obtained.

“If you have to get a permit and the permit takes two weeks, you could end up being sued,” he says. “Companies are now having to deal with violating their existing contracts because they have to get a permit now. It’s not so much an issue that the permit will be denied, it’s more an issue of the timing and how long it takes to apply, get the information, and get someone at the Export Control[s] Division to help you so you aren’t thrown off your delivery commitments.”

The amendments also include the removal of various items from control as well as clarifications regarding existing controlled items.

These changes will not be published in the Canada Gazette or on ECD’s web site until early 2012. Also, exporters should be aware that the Guide to Canada’s Export Controls (2007) is no longer in force.

In some cases, the removal of an item from the control list means some Canadian companies will have greater competitive advantage.

“Up until Dec. 16, you needed a permit for some things such as information security items — equipment and software that has encryption and decryption ability. This is a really controversial area in Canada right now because we’ve had fairly strict controls — stricter than the United States,” says Boscariol. “So Canadian high-tech companies have been concerned their competitors in other countries don’t have to face these same controls.”

The area of information security products hasn’t been entirely decontrolled, but the ECD did remove ancillary cryptography from the list of controlled items.

“Before now it had caught a lot of products within this regime,” says Boscariol. “It wasn’t a situation where you were prohibited from exporting, but you had to get a permit, and with everyone demanding just-in-time delivery, the permit process can take weeks, sometimes months.”

Boscariol says the changes have caused concern with clients suddenly faced with the logistics challenges of requiring a permit.

“We’ve been speaking with the Export Controls Division about this all week,” Boscariol said Dec. 22. “They are essentially catching up to their international obligations. All of these controls are driven to one extent or another by obligations Canada has to, in this case, the Wassenaar Arrangement.”

The Wassenaar Arrangement is one made among a group of about 40 like-minded countries that have agreed to control the transfer of technology and export of products that are dual use, and have specific military applications.

“Unfortunately Canada’s regulatory processes can be somewhat cumbersome and there have been delays in Canada actually implementing this stuff, so what we have now is a catch-up,” says Boscariol. “They’ve actually only caught up to June 2010.”

There will be another update like this at the end of 2012 to bring Canada up to April 2011. Those in the military sector will more likely be familiar with compliance requirements, but those who are not may be surprised by the requirements.

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