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ACI’s 5th Canadian Forum on Export & Re-Export Compliance

Domenico Andrea Marcone

Manager, Export Controls

Rolls-Royce Canada Limited

Export Control Reform Implementation on the Ground:

The Top 10 Biggest Business and Compliance Challenges Still Confronting Canadian Industry – and

How to Address Them

Elliot Burger

Director, International Trade Compliance

ATS Automation Tooling Systems Inc.

Barbara D. Linney

Member

Miller & Chevalier Chartered

January 26-27, 2016

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Topics will include:

• Differences between working with the U.S. Department of State (DoS) vs the U.S. Department of Commerce (DoC)

• Interpreting “specially designed”• Reconciling conflicting BIS and DDTC definitions,

including “prior restraint”• New challenges to complying with the ITARWhen and

when not to rely on old CJs vs self-classification• Method of license applications for transfer of ITAR vs

EAR items• When TAAs are still valid after two years• Managing the broader impact of export control reform

on your business 2

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Differences between working with DoS vs DoC

• Re-export/re-transfer of ITAR items by Canadian Industry requires a General Correspondence (GC) letter with supporting documentation filed with DDTC• Process is paper intensive and can be somewhat long and tedious

• After ECR, some previously USML items are now on the CCL• Re-export application process much quicker and simpler

• Applications can be submitted directly online through the BIS SNAP-R system

• Response time for issuing licenses through SNAP-R is much shorter than that DDTC response time for a GC submission 3

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Interpreting “specially designed”• “Catch” provisions are very broad

• Most “release” provisions can only be applied by OEMs due to need for production and design intent information

• Some U.S. suppliers still hesitant to reclassify their items as 600 series items

• If ITAR-controlled, an item must be managed as a Controlled Good under the CGP

• So – important for Canadian Industry to challenge supplier’s classifications if they do not seem accurate or aligned with ECR changes

• But – final classification must come from supplier 4

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Reconciling conflicting BIS and DDTC definitions• Proposed rules still pending

• Key difference between DDTC vs BIS position on “prior restraint”

• ITAR-controlled technical data cannot be released to public without prior consent of DDTC or cognizant government agency

• Technology subject to the EAR becomes “public domain” when released – no need for prior approval 5

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New challenges to ITAR compliance

• ECR has resulted in need for industry to revamp compliance policies and procedures in which significant time and effort had been invested• Rethinking compliance best practices

extends beyond day-to-day to other activities as well (e.g., M&A)• Movement of hardware and technology

to the CCL will not eliminate need for TAAs if defense services are involved

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When to rely on old CJs vs self-classification• Has the USML category (or ECCN) in the old CJ been revised?

• If so, review classification of the item• In general, no intent to move EAR 99 items

• Starting point is review of USML• Review all potentially applicable categories• If your product is not enumerated or described or does not meet the

“specially designed” test in one potentially applicable USML category, continue to review potentially applicable USML categories until you are sure that none apply

• Then review all potentially applicable CCL categories, including 600 series ECCNs• Alphabetical index may point to potentially applicable categories but be

mindful that this index is not updated as frequently as the ECCNs• BIS recommends reviewing 9x515 and 600 series ECCNs first• If no ECCN applies, item is “EAR 99”

• Both DDTC and BIS have provided various decision tools on their websites to assist in this process 7

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Method of license applications for transfer of ITAR items•Re-export/re-transfer of ITAR items by

Canadian Industry requires a General Correspondence (GC) letter with supporting documentation filed with DDTC

•Process is paper intensive and can be somewhat long and tedious

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When TAAs & other authorizations are still valid after two years

Contains only items transitioning to CCL

Contains both transitioning and non-transitioning items

DSP 5

May use for up to 2 years after effective date of transition unless license expires, is otherwise invalidated, or is returned. May amend (through a DSP-6) after effective date on case-by-case basis.

Valid for all items until expiration. May amend (through a DSP-6) after effective date on case-by-case basis.

DSP61 DSP73

Valid until expiration. May amend (through a DSP 62 or 74) after effective date on case-by-case basis.

Valid until expiration. May amend (through a DSP 62 or 74) after effective date on case-by-case basis.

TAA MLA WDA

May use for up to 2 years after effective date of transition unless agreement expires. May amend after effective date if defense services are being provided and an agreement is necessary.

May use for up to 2 years after effective date of transition unless agreement expires. Agreement may be kept valid beyond the 2 year period by submitting amendment to authorize transitioning items under §120.5(b).

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Managing the broader impact of ECR –Licensing to Canada

• Previously, USML items were sent to Canada under the §126.5 Canadian exemptions or a DDTC license (e.g., DSP-5)

• As a result of ECR, some of these previously USML items are now on the CCL and can now come to Canada without the need to exercise the Canadian exemption or seek an export license

• Great benefit to Canadian industry• Items can come more quickly to Canada, cutting down on lead times

• Lighter licensing workload on US suppliers

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Managing the broader impact of ECR –General Misunderstanding of Fate of “See-through” Rule• Process of re-educating supply chain staff

on rules in post-ECR era not complete• Some believe see-through rule still takes

precedence; some believe rule has been abolished • No regulations!• Important distinction between ITAR items

(see-through rule applies) vs EAR items (de minimis rules may apply depending upon item and destination) 11

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Managing the broader impact of ECR –ECR & CGP

• With U.S. items, Canadian Industry must comply not only with US export controls but also with Canadian export controls and controlled goods regulations

• Canadian regulations can lag behind changes to US regulations• For a time items no longer ITAR-controlled and now on the CCL

were still subject to the CGP, which greatly diminished the benefit of ECR for Canadian industry

• ECR spurred the urgent need to update the Schedule of Controlled Goods

• Canada’s Controlled Goods Directorate and Export Controls Division, working with industry input, updated the Schedule to reduce this gap

• Important to ensure U.S. and Canadian governments work together to ensure alignment and avoid circumstances in which a U.S. item is more severely controlled in Canada than in the United States

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Managing the broader impact of ECR –ECR & License Exceptions• Canadian industry benefits from the ECR as BIS License

Exceptions can be used for 600 Series items, provided all conditions of the applicable License Exception are met

• Reduces US licensing burden on Canadian industry

• However, there are still Canadian licensing requirements:

• 600 series items generally fall under Canada’s ECL Group 2 Munitions List

• Although Canadian industry may be able to exercise a US License Exception for a re-export, there is still a requirement to seek a Canadian export permit, as there is no Canadian General Export Permit that can be used for Group 2 items 13

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Managing the broader impact of ECR –600 Series and the Layperson

• Movement of items from the USML to the CCL is beneficial to Canadian industry, as it means fewer CGP items to manage

• However, these items are still subject to export licensing requirements

• Export controls can very much be like different shades of

gray – for the layperson, difficult to grasp

• Important for Canadian Industry to ensure training to employees on how to manage 600 series items:

• they may no longer be CGP controlled but are still export controlled, an important distinction 14

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Managing the broader impact of ECR –Human Rights Issues and Security Clearances in Canada• ITAR 126.18 – new rule

• No approval needed from State Department • Significant limitations on the exemption

• Effective procedures to prevent diversion• Implement screening procedures

• Security clearance of individuals conducted by CGP ORimplementing internal screening• “substantive contacts” with proscribed countries• Execute a Non-Disclosure Agreement • Maintaining security/clearance plan

• Unclear if the modifications will stand up to human rights/ Charter challenge

• Ongoing debate in the legal community• Employees acutely aware of their rights during hiring or

advancement opportunities 15

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Managing the broader impact of ECR –Dealing with Conflicts in Economic Sanctions law• Economic Sanctions are Domestic Law

• Why is it important?• Criminal legislation• Reputational risk• Impact on your business license• Significant fines• Political issue• Delays in delivery or product seizure

• …..but…..

• Your exports may affect your operations in other parts of the world

• Just because it is legal in your country, doesn’t mean it is a place where your corporate office wants to do business

• Case Study - Iran/Syria and Europe 16

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Questions?Elliot J. BurgerDirector, Global Compliance, Legal CounselATS Automation Tooling Systems Inc.Cambridge, Ontario519-653-4483; Ext 85124eburger@atsautomation.com

Barbara D. Linney, Esq.MemberMiller & Chevalier CharteredWashington, DC202-626-5806blinney@milchev.com

Domenico Andrea MarconeChef de service, Contrôles à l’exportation / Manager, Export ControlsRolls-Royce Canada Limitée / LimitedLachine, Québec1-514-636-0964 x2950DomenicoAndrea.Marcone@rolls-royce.com

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