ITAR & Controlled Goods
Jan 15, 2012

Despite a ‘Canadian Exemption’ that allows specified U.S. defence technology to enter and leave Canada with fewer International Traffic in Arms Regulations (ITAR) restrictions than other countries face, American regulations continued to bar Canadian dual nationals (or third-country nationals) from specified countries from working on U.S. defence technology on the controlled list. The inevitable result was lengthy and expensive human rights proceedings. That changed on 15 August 2011.

The “dual national” problem had been costing Canadian defence businesses millions of dollars in human rights settlements and blocking an important pool of employees at a time when billions of dollars worth of contracts are being awarded.

Under pressure from partner nations and American industries that were losing business to foreign competitors that were starting to market “non-ITAR-controlled” products, the U.S. State Department revised the dual national rules. Now, companies wishing to work with specified U.S. technology must ensure their employees have security clearances recognized by their domestic governments or assess them for “risk of diversion” and accept the responsibility if anything goes wrong. Key risk indicators might include the frequency, duration and destination of travel, ‘significant and meaningful associations’ and criminal and financial histories.

The big question is – has the Canadian government gone too far to satisfy U.S. defence export control requirements?

Enhanced Security Strategy
Changes to Canada’s Controlled Goods Program (CGP), announced on 1 October 2011, reflect that solution. To work with Canadian controlled goods and ITAR technology, Canadian firms must be registered with the Controlled Goods Directorate at Public Works and Government Services Canada (PWGSC). To receive and maintain that registration, Canadian companies with employees who handle controlled goods must eventually face the Enhanced Security Strategy (ESS).

Under the ESS, companies must assign “Designated Officials” (DO) to assess their employees for “risk of diversion.” For instance, in addition to his duties as Director of Engineering and Regulatory Affairs at Cesaroni Technology Inc. in Gormley, Ontario, Gordon Clarke serves as the DO for employees dealing with controlled goods.

He is pessimistic about the new controls regime. “The Controlled Goods Program is going to be like Gun Registry 2,” he says bluntly. Clarke says the CGP mandate and scope, like the gun registry, have become immense. There has been a large increase in government infrastructure – such as fingerprint processing and background checking to handle the new requirements – and yet it was introduced with the promise that the administrative burden would be small.

 “We renewed our registration shortly before these changes were implemented so we aren’t caught up in the rush to comply like those who are renewing now,” he says, relieved. “I have until 2014 to get it done.” If his company had been six months later in its renewal cycle, he would have missed his company’s most important trade show. As it is, Clarke says he will still probably have to spend a month doing the verification and follow up work for the ESS.

Duties associated with being the DO have increased from a small amount of his time to becoming a significant time and paperwork burden. “That’s time I’m not designing new products, troubleshooting manufacturing lines and supporting our customers. When the CGP was originally introduced, PWGSC claimed it was not going to become an administrative burden,” he says. “We laughed at them then and have been proven right with this.”

StrataFLEX Corp. in Toronto is a printed circuit and assembly company. Engineering director Peter Pialis believes “it’s going to double or triple my work as a DO, or quadruple it. It’s going to be roughly three or four assessments every month, in perpetuity, with costs of about $100 a time.” Pialis has until September 2014 to complete the assessments. “I had to go on a training course. I took the day off to do it, and now we’re reassessing everybody. I’ve already put my four reassessments in for January and I have to do four a month from here on in.”

Thomas Jones is an expert on Canadian export controls and co-founder of Canadian Export Consulting Services (CESC). He helped to draft the Act and Regulations that established the Controlled Goods Program. “This is empire-building,” he says. “I have been around government a long time, and I have never seen it this bad, where someone trumps up a reason for a department or a division or a directorate, and goes forward with it.”

Jones’ colleague at CESC, and spokes­person for the Southern Ontario Defence Association, Chris Fauquier, has decades of experience in the defence industry and with government. He believes the changes to the Controlled Goods Program have been overdone and oversold. Without submitting to fingerprinting and other checks “that are more robust than for ‘NATO Secret’ or ‘Secret’ classifications,” the DO would not be eligible for CGP registration and therefore the company registration would be in jeopardy,” he says.

Politically Correct
“Part of the problem,” says Fauquier, “is that they have sold this to the Parliamentarians and to the minister. They characterize it as another tick mark in the security box to keep Canada secure.” It is not politically correct to take a stand against this intrusion, he says, “so they’ve all signed up.”

At the heart of the Enhanced Security Strategy is the Security Assessment Application, a questionnaire administered to employees and prospective hires by the Designated Official. The questions are highly detailed and based on State Department guidance (which Canada was not required to follow, by the way) – demanding specific information about travel, relatives and contacts in other countries, except the United States. A glance at the UK equivalent to the Security Assessment Application – the Baseline Personnel Security Standard – is much less detailed and intrusive.

Gordon Clarke believes the ESS questionnaire “absolutely” puts his company at risk of legal action on privacy or human rights grounds. “Any employee’s life history for the past five years or more can now be shared with foreign governments. Let the lawsuits begin, particularly when one comes back with concerns from a foreign government and the DO uses that to deny access.” Clarke says placing the decision to give or deny access to U.S. technology with the DO effectively makes that person an export permit officer, without the resources or background information. “Any denial will most likely result in dismissal of the applicant as they are less employable in the company. The practical result is that fewer first-generation Canadians will be hired as they will be more complicated and more time consuming assessments to do. Making the Designated Officer and company responsible for any errors or omissions is an HR nightmare,” he concludes.

Officials at Public Works and Government Services Canada held a consultation with industry representatives in early January about the ESS. Many concerns were brought to light.

Michael Woods is a Partner at Heenan Blaikie LLP, with broad experience in international business and special expertise in international trade litigation. He has followed the development of the Enhanced Security Strategy closely.

“The current iteration of the Enhanced Security Strategy form raises some concerns that we hope the new dialogue will help address. We know there has been some concern about the length and depth of the current ESS form, and criticism that it appears to be reaching beyond the information actually required to comply with the new ITAR dual-national provisions. A completed form will contain personal information, and some of that information could be quite sensitive,” he notes. “Under Canada’s privacy laws, when a government body requests personal information, it must establish a demonstrable need for the information sought as it relates to its operation and the administration of its programs. In our view, the issue of ‘demonstrable need’ needs further review and discussion in the context of Canadian privacy legislation.”

Woods thinks there should be a clear and explicit indication that no disclosure of information will take place unless it is done in compliance with Canada’s’ privacy laws. “The industry should have a clear understanding of parameters according to which any disclosure would take place, and the basis for that disclosure. The ESS form does include consent, but it is important to note that in order for ‘consent to disclosure’ to be valid, the form or document in which information is requested must set out the circumstances under which disclosure would take place. This must be done in a clear and reasonably detailed manner. In our view, this is a matter that requires further review,” he emphasizes.

Carmen Francis, an articling student who works with Michael Woods at Heenan Blaikie told FrontLine: “We understand that the privacy law aspects are being examined by the Government at this time. Given the importance of the issues involved, it would be helpful to take steps to ensure that industry is engaged and able to participate in the process.”

The Canadian defence industry needed a solution to the dual national problem and it got the Enhanced Security Strategy. The Enhanced Security Strategy is apparently heavily influenced by a security audit done by the Canadian Security Intelligence Service (CSIS) at the request of PWGSC. (As one observer noted, asking CSIS if security is tight enough is like asking a bank manager if loan rates are high enough.)

PWGSC notes that it consulted on the development of the ESS five times with five industry associations representing 25 companies. At Strataflex, Peter Pialis says he was never consulted about the changes. “I wish I was,” he responds, “as opposed to just open up and take it. It’s like my mother with medicine when I was a kid. No consultations. It just came out of the blue.”

In a written reply to FrontLine, the Controlled Good Directorate states that ESS has support from several businesses, but other Canadian defence companies are pushing back. In response to that pressure, the Controlled Goods Directorate has instituted an internal working group to provide recommendations for improvement. It anticipates what it called a process of “fine tuning” and “improvement” in close consultation with industry.  In other words, it will work to make the system easier to operate, but it will not change the system.

That may not be good enough for the Canadian defence companies that believe the ESS is too risky and expensive a solution to the dual national problem.

A Moving Target
In late November 2011, the U.S. State Department announced changes to the ‘Canadian Exemption’ under its International Traffic in Arms Regulations (ITAR). Removing the ‘defence service exemption’ would force Canadian bidders for U.S. defence contracts to take out licenses for the necessary documentation, which their U.S. competitors do not have to do. In many cases, there simply would not be enough time for Canadian companies to complete their bids. Trade consultant Thomas Jones says “the proposed changes essentially ‘gut’ the Canadian Exemptions by removing the defence services exemption.”

Canada negotiated these ITAR exemptions by agreeing to control the goods and services that appear on the United States Munitions List (USML). In effect, the USML is the Canadian Controlled Goods Programs list. However, the United States has been taking many items off the USML and moving them to other export control mechanisms. The problem is, Canada is lagging way behind with similar changes. Canadian companies must continue to register with the Controlled Goods Directorate to comply with Canadian controls on a wider range of items than their ­competitors elsewhere in the world. That added burden of overhead time and cost hits small and medium enterprises most heavily and many choose not to enter ­certain lines of business under that competitive disadvantage.

The department of Foreign Affairs and International Trade is the authority that determines what is considered a Controlled Good and/or Controlled Technology.

Richard Bray Senior Writer FrontLine.
© FrontLine Defence 2012