We often receive calls from small and medium sized businesses who receive word from the Canada Border Services Agency (“CBSA”) that their to-be exported goods have been detained and that the file has been referred to Global Affairs Canada, Export Controls Division for review against Canada’s export controls and economic sanctions laws. This happens most commonly when the goods are being shipped to Iran, Syria or Russia (or a known intermediary point), but Canada’s export controls laws could also apply to shipments to China and other destinations that are not subject to United Nations or unilateral sanctions.
The issue is not always the finished good that is being shipped, but rather the nature and sources of the inputs/components. Iran, Russia, North Korea and others have become very savvy. They know that certain goods are subject to export controls and targeted United Nations and unilateral sanctions. So, they purchase a finished good that contains the prohibited goods as inputs in order to get the prohibited components. They attempt to get indirectly what they cannot purchase directly. For this reason, Canadian exporters must know what are the component parts of the goods being shipped and whether the components are subject to export controls and/or economic sanctions when being shipped to the purchaser’s destination. This will depend not only on what is the component, but also on the manner in which the component has been incorporated into the finished good.
Here is a common example: An SME is exporting a high end motor boat to Iran. The SME would have to know the components of the motor boat. If the motor boat has high end circuitry, it may be that the circuit boards are subject to Canada’s export controls laws and that an export permit would be required. The motor boat may also contain aluminum or aluminum alloy tubing or piping, which is listed as item 3 of Schedule 2 to the Special Economic Measures (Iran) Regulations. The motor boat may be made from fibrous materials, which may be prohibited as item 13 of Schedule 2 to the Special Economic Measures (Iran) Regulations.
When Global Affairs Canada, Export Controls Division contacts the exporter to obtain further information for the technical analysis, the officer often seeks information about (a) the manufacturer of the to-be exported goods; (b) the manufacturer of specific components; (c) certificates of origin; and (d) technical information of certain items (such as marketing brochures/technical specifications, etc) that adequately describes what the items are, how they are manufactured,(e.g., could the restricted component be removed), where they are used and the technical characteristics/capabilities of the items). Often this technical information is used to determine whether Export Control List (ECL) Item 5400 (U.S. origin goods and technology) applies or another ECL item (most often a dual-use good). This technical information is also used to determine if the goods are listed on a prohibited goods schedule of a sanctions regulation. It is best to consider these issues before export arrangements or commitments are made or the goods are exported (so that the goods are not detained and you do not have to pay storage fees while the Export Controls Division conducts its analysis).
It is important to review the finished good as a whole and the component parts against the ECL and prohibited goods schedules. A component part that is a potential problem can be removed from the finished good when the finished good is being prepared for shipping. For example, a restricted circuit board can be removed from the finished good or destroyed in such a fashion that it cannot be used. Evidence of the removal of the component or the destruction of the component should be kept in case the Export Controls Division seeks information. Sometimes it will be enough to afix/attach the component in such a way that removal is not possible without destroying the component.
Someone within your organization familiar with the technical specifications of the product should carefully review Canada’s economic sanctions laws or Guide to Canada’s Export Controls to ensure that none of the component parts are subject to export prohibitions or restrictions. This job can be very difficult for in-house counsel or outside counsel to carry out unless they have technical expertise. It is not good enough to perform the assessment once and put the assessment in a drawer. The relevant lists of prohibited/restricted goods change periodically. The to-be-exported goods must comply with the most current requirements. Your compliance procedures must ensure periodic updates to your bills of materials/specifications for goods that are to be exported.
For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee @LexSage.com. Or, contact Heather Innes at 416-350-1234 or at Heather@LexSage.com. We have more articles about Canada’s export controls and economic sanctions laws posted on the LexSage website.