Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

420….in 3….2….1……….

Posted in Border Security, cannabis, Customs Law, Imports Restrictions, Intellectual Property, Legal Developments

Written by David Rugendorf and Su Ross

Breaking out the bubbly is a hallowed part of New Year’s Eve tradition, but this year, as the clock strikes 12 and we look to usher in 2018, what you see and hear bubbling may be coming from a bong, and not from a champagne flute.  This is because on January 1, 2018, California’s adult-use cannabis regulations will come into effect.  Although the voters approved Proposition 64 (and pretty handily, too) at the November 2016 election, it took the powers that be time to craft the applicable regulations.  While medicinal marijuana has existed for two decades in California (Proposition 215, 1996), the new year will bring major changes, as cannabis will be for sale in so-called “recreational” markets.

Here are some “high”lights:

  • Individuals over age 21 without a medical recommendation may possess up to one ounce of cannabis, eight grams of cannabis concentrates and six plants. With a medical recommendation, the limits may be larger.  As for the plants, they must be grown outside of public view.
  • In addition to retail stores and dispensaries, delivery services will be allowed, again subject to local, as well as, state regulations. No late night weed and munchies runs – the legal hours for retail use will be limited to between 6 a.m. (wake and bake!) and 10 p.m.
  • Smoking in public is not still not legal, nor is underage consumption or driving while consuming. Like alcohol, it will be illegal to possess “open” cannabis in a vehicle, or use it while driving.  For the time being, there will not be “420 bars” where one can enjoy one’s favorite cannabis strain in a public setting, although this is may eventually evolve, and LA will be able to claim the title “Amsterdam-by-the-Pacific”.  Of course, even then no use will be allowed wherever cigarette smoking is currently prohibited.
  • The California Bureau of Cannabis Control is the newly named regulatory authority and will issue licenses to retailers, who in addition to complying with state law, must adhere to local ordinances and regulations. While the issuing process takes place, medicinal dispensaries that are in compliance may apply for retail licenses.  Medicinal licenses will remain, and establishments may be classified in either, or both, categories.  Medicinal licenses allow an establishment to sell to patients over the age of 18, with a medical recommendation.
  • Licenses are now also obtainable if one cultivates, manufactures, distributes or tests cannabis. At the same time, jurisdiction is further divided at the state level. If you cultivate, you may end up dealing with the Department of Food and Agriculture, whereas the Department of Public Health will oversee for manufacturing, packaging and labeling.
  • Of course, there are taxes – the state is imposing a 15 percent excise tax. Los Angeles County alone is assessing a 9.5 percent sales tax, which will not be charged for medicinal purchases.
  • Local licensing policies may vary. Los Angeles will likely follow the lead of Oakland and other localities who have introduced a “social equity” component into the licensing process.  Low income and minority communities disparately impacted by marijuana prohibition will likely receive preferences for licenses, as well as access to training and support services.
  • Retail adult-use products must be sold in tamper resistant packaging. This means one will not be able to ask the budtender for a whiff of the product before purchasing.  Free samples of products, including edibles, will be prohibited.
  • The state is setting up a strict testing regimen for cultivators and manufacturers. Products will be tested for cannabinoid content (THC and CBD), as well as mold, pesticides and other substances.
  • Cannabis is still a Schedule I substance under federal law, and no change to that status appears imminent. This means that despite being permitted under state law, cannabis remains illegal under federal law.  For the time being, federal authorities have largely stayed out of cannabis enforcement in places where it is legal under state law, but given the comments coming out of the Dept. of Justice and the long-held DEA distain for cannabis, that could change at any time.  Importantly, because banking is controlled by federal law, most banks remain concerned about getting involved in the cannabis sector due primarily to existing “know your customer” standards, so it remains largely (but not entirely) a cash-based business.
  • California’s laws and regulations are very fluid and subject to change, as the laws continue to develop, at the state and local level. So, it is well recommended to keep an eye on the latest developments.

Given the obvious split between the states which have legalized cannabis and the federal government which still considers it ilegal to use or possession, those seeking to enter this business would be wise to obtain top-shelf legal services, whether they are  producers, distributors, investors or retailers in such areas of corporate law, licensing and compliance, labor and employment, tax, immigration, trademark, money processing/handling, physical security of product and facilities, real estate and other areas.

He Said What ?????

Posted in Aerospace & Defence, Agriculture, Antidumping, Controlled Goods Program, Corporate Counsel, Criminal Law, Cross-border deals, Cross-border trade, Currency Reporting, Customs Law, Export Controls & Economic Sanctions, Exports, FCPA/Anti-Corruption, Government Procurement, Harmonization, Imports Restrictions, Intellectual Property, Legal Developments, Proceeds of Crime/Money Laundering, Trade Remedies

Originally published by the Journal of Commerce in December 2017

While Special Counsel Robert Mueller continues his investigation, the recent guilty plea entered by Trump former National Security Advisor Lt. Gen. Michael Flynn (Ret.) serves as a reminder that when you are interviewed by a law enforcement agent, you better be sure what you say is accurate!

In Lt. Gen. Flynn’s case, he was interviewed by the Federal Bureau of Investigation (FBI) and the FBI was able to establish some of this statements were materially false. Those statements are listed on the Information as:

(i) On or about December 29, 2016, FLYNN did not ask the Government of Russia’s Ambassador to the United States (“Russian Ambassador”) to refrain from escalating the situation in response to sanctions that the United States had imposed against Russia that same day; and FLYNN did not recall the Russian Ambassador subsequently telling him that Russia had chosen to moderate its response to those sanctions as a result of his request; and

(ii) On or about December 22, 2016, FLYNN did not ask the Russian Ambassador to delay the vote on or defeat a pending United Nations Security Council resolution; and that the Russian Ambassador subsequently never described to FLYNN Russia’s response to his request.

Flynn’s plea is to a violation of 18 U.S.C. § 1001. Some version of this provision has been in the law since 1909. The statute currently reads:

(a) Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully-

(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;

(2) makes any materially false, fictitious, or fraudulent statement or representation; or

(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;

shall be fined under this title, imprisoned not more than 5 years or, if the offense involves international or domestic terrorism (as defined in section 2331), imprisoned not more than 8 years, or both. If the matter relates to an offense under chapter 109A, 109B, 110, or 117, or section 1591, then the term of imprisonment imposed under this section shall be not more than 8 years.

The Statement of the Offense filed in the case (1:17-cr-00232-RC) makes clear that Lt. Gen. Flynn was in contact with the Russian Ambassador to the United States, along with officials in the Trump campaign and later the Transition Team, and the substance of those contacts belied his statements.  For those interested, the Statement of the Offense can be found here: https://www.justice.gov/file/1015126/download, and the Information can be found at: https://www.politico.com/story/2017/12/01/michael-flynn-federal-charges-full-text-274421.

While Lt. Gen. Flynn’s dilemma arises in the context of a high profile and politically charged situation,  his troubles are worth talking about in the context of international trade because they serve as a serious reminder that lying is stupid, but guessing isn’t much better.  True, in the trade context, one is typically interviewed by other than the FBI. Equally true, not all members of the public are more guarded when an investigator/agent is in the room. However, even talking with representatives of Customs and Border Protection should be cause for concern. You do not have to be a criminal defense lawyer to have it be obvious there were more Flynn misstatements than are recited in the filings. However, the easy case for the government to make is a 1001 violation.  If there is documentation that says one thing, the witness lies about what it says, and that lie is material, the case is made.

It works similarly in the trade context.  The criminal cases one typically sees are those involving antidumping or countervailing duty evasion. Why? Because it is usually very complicated to explain how international trade really works. U.S. Attorneys generally don’t understand it and so can’t clearly explain it, plus juries generally don’t get it! However, it is easy for a jury to understand that goods were not correctly described and the net result is lots of money was due, was not paid and the government was defrauded.  Due to the complexities of international trade, one often sees the government filing mail fraud and wire fraud charges. Why? Again, because they are much easier to explain to a jury.  For exa

mple, the phony documents were sent via email.

The Flynn situation serves as a reminder for companies to have a robust policy in place that defines how one deals with inquiries from any level of government, and the steps to have in place so that witnesses do not end up in trouble. Obviously, not every inquiry warrants full blown legal team involvement, but who makes that call?

It is hopefully the rare exception where someone outright lies to an investigator. There is a natural tendency to want to engage when someone is being nice, but beware, even a slip of the tongue when trying to be helpful can cause problems later, especially when clarifying details do not 100% match what was originally stated. The better course of action is to evaluate the context of the inquiry, review the relevant paperwork and interview any witnesses first, and then decide who talks to the investigators.  This column is not intended to make the pitch to always call your attorney before talking with the government, although never a bad idea when the inquiry is beyond routine. Rather, the point is make sure you have a process in place that gets any inquiry from a government official to the right level within the company, a full set of paperwork is retrieved/witnesses interviewed, the overall situation is evaluated by the proper personnel before any answers/documents are provided to any investigator, and there is a process in place that dictates whether company personnel, outside experts or some combination of the two are the ones to provide responses to the investigators.  This is definitely one of those situations where – better safe than sorry!

Money, Money, Who Owes the Money?

Posted in Corporate Counsel, Cross-border trade, Trade Agreeements, Trade Remedies

Originally published by the Journal of Commerce in November 2017

You receive an invoice from Customs and Border Protection (CBP) for additional duty assessed on an entry. When do you have to pay it?  Presumably the answer is within thirty (30) days, but maybe not!

One of the members of the trade bar was recently advised by a CBP employee that CBP is now taking the position that once the duty bill is issued, it is due, and if the importer does not timely pay it, that importer will be put on the sanctions list and be penalized accordingly (more about this sanction later). At first blush, this makes perfect sense, except for the fact a protest had been filed and was still pending.

By way of background, an importer may, of course, file a protest against any of the actions taken by CBP in finalizing or liquidating an entry.  Any but routine issues are typically the subject of an Application for Further Review (AFR), meaning the importer wants the protest decided by the attorneys at Regulations & Rulings (R&R).  If an AFR is filed, the port is limited in its options.

1)         It may grant the protest;

2)         It may determine the requirements for an AFR have not been met, articulate its reasoning in the AFR denial issued to the importer, and thereafter decide the protest; or

3)         It may review and grant the AFR, and then the Protest/AFR is forwarded to R&R for final determination.

The particulars about protests can be found at 19 U.S.C. 1514 and 19 C.F.R. 174.12 – 174.13 and  regarding further review at 19 U.S.C. 1515 and 19 C.F.R. 174.23.

The challenge for CBP is the workload at R&R is so great that it can take literally years to get many claims decided.  During that period, interest accrues.  When a bill is issued for increased duties, pursuant to 19 U.S.C. 1505(c) and 19 C.F.R. 24.3a(b)(2), interest is charged from when the money should have been paid.  Given the length of time it generally takes for AFR/Protests to be decided, that is typically many months.  During that period, much can change.  As such, CBP remains concerned about getting paid.  Yes, an importer is required to have a bond, and the surety is liable to pay to the extent of the bond face amount, but the numbers can become staggering and so exceed the bond amount.  The duty could also be due as the result of a penalty (which is also subject to an interest assessment). Either way, you have CBP concerned about getting paid, and the surety concerned about whether the importer will go out of business thereby forcing it to pay.

In a recent conversation with a surety official, the story was shared that one of the surety’s staff spoke with a customs broker who explained to an importer he had no choice, he had to get a bond. That importer called CBP and was told by a CBP official, so long as you pay the duty on time, you don’t need a bond!  Obviously, that CBP official forgot about a whole section in the regulations dealing with bonds – 19 C.F.R. part 113.  While experienced hands will chuckle that such a boneheaded comment was made, the reality is, with lots of new people at CBP, the same sort of uninformed comment about sanctions may be at play here, but if so, that still leaves the sureties’ position to consider.

The CBP official said he was relying on CSMS 17-000489 issued August 14, 2017 which reads:

This is a reminder that CBP bills for supplemental duties, taxes and fees, or vessel repair duties are due thirty (30) days from the date of the bill.  Any bill not paid during this timeframe is delinquent.  Please ensure that CBP has the correct address on file in order for you to receive your bill in a timely manner to prevent any delay in the payment of your bill.

If a bill remains unpaid, any balance will be considered delinquent and accrues interest until payment is made in full.  All supplemental bills will reference the entry number used to import your goods.

Also, please note that CBP is changing its dunning letter timeframe from 181 days from the date of the bill to 61 days starting September 5, 2017.  In addition, if you are scheduled to receive a refund and have a delinquent bill older than 60 days, CBP will divert your refund and apply it to the delinquent bill.

There is nothing in this message which is legally binding, nor for that matter does it address entries under protest. That law remains on the books, and so do the enabling regulations. Equally important, so does case law.  In particular, this very issue about when duty increases under protest had to be paid was decided in 1981, see Heraeus-Amersil, Inc. V U.S., 1 C.I.T. 249, 515 F. Supp. 7th, 1981 Ct. Intl. Trade LEXIS 1606 (April 24, 1981). In that case, the importer was presented with six (6) bills and told they had to be paid right away.  The company reviewed the entries and determined CBP was correct in regards to the change in value, but not classification. The importer then deposited $61,333.17 for the value change, leaving a balance of $12,250.58 owing. CBP applied the funds to cover the increases on all but one entry and when the importer failed to pay the remaining amount, sanctions action was taken. The importer then brought suit seeking an injunction.  The court held:

[While the protest was on file], the increased duties resulting from the [classification change] were not required to be paid, since liquidation, which is the finalization of the entry process, could not be accomplished until the [classification] issue was determined.

Ibid, at 252.

The court went on to grant the injunction request because:

… [the increased] duties are not now due and owing and the importer is not in default. Hence, the application of this regulation is improper and should not be utilized insofar as any sums not paid when a protest has been filed.

Ibid, at 254. The referenced regulations were 19 C.F.R. 142.13(b)(now 142.13(a) and 142.14.

This remains the law today. Until the protest is decided, the liquidation is not final, so there is no legal basis for CBP to demand payment!

As noted, this should be the end of any future demands by CBP, especially given the sanction which can be imposed. 19 C.F.R. 142.26 provides that when amounts due to CBP are delinquent, the importer’s immediate delivery privileges are revoked.  Without this sanction, the entry is filed, the goods are released and the entry summary and duty payment are made later. With this sanction, the entry paperwork and duty must be paid in advance and only then is the entry processed. In short, in this day and age of just in time inventory, a sanctioned importer is dead in the water, due to the length of time it takes CBP to process these types of entries and issue release authorization!  So, the consequence is quite serious.

Nonetheless, sureties have their own concerns. All too often, once a protest is filed, the surety gets nervous as time passes if the importer will be able to pay when the bill comes due. Obviously it is possible the importer’s protest will be granted,  in which case the bill is cancelled and nothing is due.  It is also possible the protest is granted but the amount due is reduced, due to a different interpretation by R&R. Regardless,  for risk management purposes,  the surety only thinks in terms of if the protest is denied. Then the principal plus interest becomes due, and CBP does not generally negotiate when it comes to paying duty.

It is also worth mentioning that sometimes sureties demand collateral at time of bond renewal under a collateral agreement that allows them to apply the collateral to any amounts the surety must pay CBP. Great fun when you are in the middle of a legal dispute with CBP and trying to renew your bond.

What sureties often do when they are nervous about a company’s financial wherewithal is demand payment from the importer under threat of cancelling the bond.  The importer is then left in an impossible position. On the one hand, he can pay the surety, but why do that? If you decide to pay, it makes more sense to pay CBP and cut off the interest being assessed.  However, do you have to pay at all?  The importer does have the option of pointing out to the surety that until the protest is decided, CBP has not exhausted the administration process so as to have finalized the amount due. Plus, thereafter the importer has the option to continue his challenge before the Court of International Trade, but that option does require payment of all sums due prior to filing. The sureties are typically not receptive to such reminders and so, the sad fact is, you could end up in litigation with your surety before a judge that knows nothing about import/export laws or procedures, unless some other resolution is found.  Anyone have a suggestion as to what that might be?

What should a taxpayer under audit do if the CRA auditor proposes an assessment?

Posted in Canada's Federal Government, GST/HST

The Canada Revenue Agency (“CRA”) conducts audits to ensure that taxpayers are paying or remitting the correct amount of taxes.  In Canada, the CRA enforces Canada’s income tax, Goods and Services Tax (“GST”), Harmonized Sales Tax (“HST”) and federal payroll taxes laws.  These tax systems all have an element of self-reporting.

If the CRA auditor is correct, then the taxpayer would accept the proposed reassessment and make arrangements to pay the reassessment. If the CRA auditor had made calculation errors, the taxpayer would like to bring the errors to the attention of the CRA auditor and ask that the errors be corrected.  However, sometimes a large assessment (in the eyes of the taxpayer) may be proposed and the taxpayer does not agree with the auditor.  The rest of this article addresses the situation where there is a major disagreement.

CRA auditors are supposed to fairly apply and interpret Canada’s tax laws.  Sometimes, a disagreement can arise between an auditor and a taxpayer – and the CRA auditor is not always right.  The CRA auditor is an administrator and not a judge.  The CRA auditor cannot make up new laws or enforce laws they wish existed.  The must apply the law as written and fulfill the intention of Parliament (as they passed the laws).  The CRA should not read into a law words that are not there. The disagreement between the taxpayer and the CRA often comes to a critical point when the CRA auditor issues a proposed assessment or proposed reassessment and gives the taxpayer 30 days to respond.

First, if you have 30 days to respond to the proposed reassessment, use the time wisely to prepare your response and provide evidence that contradicts the position taken by the CRA auditor.  Often the proposed reassessment is sent by mail and can eat into your 30 day response time.  If you do not respond, the CRA auditor may push the button of the reassessment.  He/she is not likely to call you up to offer you more time to respond.

Usually (but not always), the proposed assessment or proposed reassessment sets out the CRA’s position.  Sometimes the position is stated in the briefest of terms and sometimes in great detail.  You cannot adequately respond without knowing the CRA’s position. If what has been provided to you is unclear, ask for a meeting with the CRA auditor and their supervisor to obtain the clarification required. If you ask for a meeting with the CRA auditor and his/her supervisor and the CRA auditor tries to talk you out of it, that is a good sign that the supervisor has not been involved in the file and does not know much about the proposed reassessment.  If you ask for a meeting with a supervisor, the auditor is obligated under internal protocols to set up that meeting.  Do not take “no” for an answer.

The additional steps (in addition to preparing a response to the auditor) you can take are as follows:

  1. Submit an ATIP (Access to Information) request to access the auditor’s files, any previous audit, any ruling, or anything else you believe may be of assistance to you (do this as soon as the dispute is evident – even before a proposed reassessment).  If you do not know what to ask for (e.g., you do not know what is a T2020 form – it is the auditor’s notes of the discussions he/she has had regarding your file), hire a tax lawyer to help you ask for the right documents. The information received from an ATIP request can be just what you need to respond to the proposed reassessment.  It is difficult for an auditor to argue with you when you know something important is being ignored. See also “How to Find Out What Is In The Canada Revenue Agency’s Files About You?
  2. Submit a complaint to the CRA Ombudsman if you believe that the auditor has not followed the proper process or is ignoring CRA policy.  Any filed CRA Ombudsman complaint is sent to the manager in the auditor’s office and the auditor’s file and their supervisor’s file will be reviewed.  Be cautious about what you write in a complaint because the auditor will see a copy.  Be factual and fair. Do not let your emotions get the better of you.
  3. Go to your Member of Parliament and ask them to request information using the MP CRA hotline.  There is a telephone number that MPs have to call the CRA to make inquiries on behalf of their constituents.  MPs cannot stop an audit and cannot interfere with an audit.  But, they can ask questions to help constituents maneuver the CRA bureaucracy. When the CRA receives an MP call, they must prepare an answer for the MP.  The auditor, his/her supervisor and person above the supervisor all must participate in the preparation of the response.
  4. Submit a service complaint with the CRA if your complaint relates to your treatment. There are many legitimate reasons why a taxpayer may file a service complaint against an employee of the CRA.  The first place to start is the “Taxpayer Bill of Rights” and RC17 “Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer”.  The next document to consider when completing a service complaint is the CRA’s “Service Standards 2016-2017“. The CRA has also prepared a publication on “Complaints and Disputes”.  You may also wish to consult your accountant, lawyer or bookkeeper to assist you with the drafting of the service complaint.  Also see How to File A Service Complaint with the Canada Revenue Agency. Be cautious about what you write in a complaint because the auditor will see a copy.  Be factual and fair. Do not let your emotions get the better of you.

If you wish to limit the Reassessment to what you really owe, then you must do everything you can before the Reassessment is issued.  Once the Reassessment is issued, the auditor closes his/her file and you must file a notice of objection. Once a Reassessment is issued, the CRA Collections Department starts to call and take collections actions because the amount is now a “debt due to Her Majesty”. So, if you wish to prevent an unfair or incorrect Reassessment, devote time and resources to stopping the Reassessment.

That being said, sometimes there may be strategic reasons to stop dealing with an unreasonable auditor and their audit manager.  You still want to know the reasons for the proposed reassessment so that you can adequately address the issues in your Notice of Objection. If the reassessed taxpayer would like to get to the Tax Court of Canada before the CRA makes a decision after receiving the Notice of Objection, it may be possible to file a Notice of Appeal to the Tax Court of Canada 180 days after the filing of the Notice of Objection.

If the issue relates to the discretion exercised by the CRA auditor, you may even pursue a judicial review (however a judicial review must be filed within 30 days of the decision at issue).

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or email cyndee@lexsage.com.

How will the U.S. Government shutdown affect Canadians?

Posted in Agriculture, Border Security, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Exports, Immigration law, Imports Restrictions, NAFTA, NEXUS, U.S. Federal Government

The U.S. federal government was shut down at midnight this morning after a funding bill did not get 60 votes in the United States Senate. While the politicians work to find a solution before Monday, Canadians are reminded that the last U.S. federal government shut down lasted 16 days and a previous shutdown lasted 27 days.  The political climate in the United States today is much different.  Whether a bi-partisan deal can be reached is uncertain at best and unlikely at worst.

Approximately 700,000 U.S. federal government employees,who are deemed “non-essential”, will be furloughed.  This means they will be put on leave until a funding bill has passed.  Workers who are considered to be essential (military, law enforcement, border enforcement, national security, hospitals, federal courts, etc.) will still work, but many without any pay.

As a result, Canadians should consider how the U.S. federal government shutdown will affect Canadians.  While we cannot list every possible effect, we can point out a few:

  1. Expect delays at pre-clearance areas at Canadian airports.  U.S. Customs and Border Protection (“USCBP”) officers process travelers heading to the United States at many Canadian airports.  They are not getting paid during the shutdown.  What this means is that a full contingent of USCBP officers might not be on the front lines and those who are working may take longer to process each traveler.  I recall having a conversion with a USCBP officer before a previous shutdown deadline and he informed me that “while I will have to work [as an essential service provider], if the border slows, that will incentivize the politicians to fund the government.”  With this in mind, if you are traveling to the United States, build in extra time in your schedule to clear customs (in Canada or in the United States).  You would not want to miss your flight if you must go through pre-clearance in Canada.
  2. Expect delays if a USCBP officer confiscates your electronic device during a secondary examination.  If the USCBP officer confiscates your mobile device or computer because you will not give a password or if they want to review the contents, you are unlikely to get your electronic device beck before the end of the shutdown.  Expect a delay after the end of the shutdown as they will have a number of inspections to undertake.  As a result, travel using a non-essential device.  If you cannot work without that device, do not take it.  Take one that you a leave for a while.
  3. Expect delays when shipping goods to the United States.  USCBP officers screen and inspect goods entering the United States.  A full contingent of USCBP officers may not be assigned to the mail/courier/transport shipment departments.  Expect clearance of goods to get backed up.  Inform your customers to expect delays.  It is not your fault, but the shipper may be blamed.
  4. Expect delays if shipped goods must be inspected by the United States Department of Agriculture (“USDA”). While the USDA performs an essential service relating to food safety, there were delays experienced by Canadian exporters during previous shutdowns.
  5. Expect delays when applying for or renewing NEXUS membership.  USCBP officers and other U.S. government departments review each NEXUS application to vet the applicant.  It is unlikely that USCBP officers will process many NEXUS applications or renewals during the shutdown because it is a non-essential service.
  6. Expect delays when applying for an immigration visa of any kind. USCBP officers and other U.S. government departments review the applications and issued the visas.  While there will be some USCBP officers performing this task, most employees who perform this service will be deemed to be “non-essential”.  All non-essential requests will be put aside for later.
  7. Expect delays when applying for a U.S. federal tax refund.  Giving tax refunds is a non-essential service – you can wait for your money.  If the U.S. federal government employees cannot get paid, you will not get paid either.
  8. Expect delays if you have requested a tax ruling.  If you have applied for a U.S federal tax ruling, the person assigned to your file has likely been furloughed.
  9. Expect delays in obtaining an export permit from the U.S. federal government.  If a Canadian company wants to export U.S.-origin goods from Canada (whether in the same condition or incorporated into a Canadian manufactured goods), if the goods are subject to export controls, you may need to obtain a Canadian export permit.  Often, Global Affairs Canada requires a copy of a U.S. export permit or re-export permit from the United States Commerce Department, Bureau of Industry and Security (BIS) (and in some cases OFAC).  The provision of export permits to a Canadian company would be a non-essential service. It is likely that the requests will be put in the pile for after the shutdown has ended.
  10. Expect delays in obtaining an OFAC (Office of Foreign Asset Controls) advisory opinion on whether a potential transaction is subject to U.S. economic sanctions.  While the Department of Treasury will still be open, most of the persons giving OFAC advisory opinions will likely be furloughed.
  11. Expect disruption if you are involved in a case before a U.S. Federal Court (including the Supreme Court).  U.S Federal Courts will continue to function, but at reduced staffing levels.  Non-essential staff will not be working.  Federal tribunals, such as the International Trade Commission (who are working on the Boeing AD/CVD injury proceeding), will be open for business, but Canadian respondents should expect added frustration.
  12. Your vacation to a U.S. tourist destination may not be all that you expected.  Many national parks and federally-operated museums/tourist sites will be closed.

If you would like to know more about the possible effects of the U.S. shutdown, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.

The CBSA targets “supply managed” goods as a trade compliance verification priority

Posted in Canada's Federal Government, Customs Law, Imports Restrictions, tariff classification

In early January 2018, the Canada Border Services Agency (“CBSA”) issued its January 2018 Trade Compliance Verification Priorities.  Twice a year, the CBSA posts trade compliance verification priorities for tariff classification, origin and valuation.  In the January 2018 Trade Compliance Verification priorities, the CBSA has hidden on page 44 a new target – “Import Permit Numbers”.  This verification was released in October 2017.

The Import Permit Numbers priority appears to related supply managed goods, such as meat and poultry (Chapter 2) and dairy products and eggs (Chapter 4).  If the importer has an import permit for a shipment of “supply managed goods” issued by Global Affairs Canada, the “supply managed goods” may enter Canada under the “within access commitment” tariff code, which has a lower duty rate or is duty free.  Only importers who have been allocated import quota or who have entered into an arrangement to use a quota holder’s quota may import “supply managed goods” under an import permit (they are the only ones who will receive an import permit from Global Affairs Canada).  Import permits are issued on a shipment-by-shipment basis for a specific product and a specific quantity of that product (e.g., 1000 kgs of chicken wings).  If the importer does not have an import permit for “supply managed goods”, the goods enter Canada under the “over access commitment” tariff code and are subject to significant duties (often over 300%).

The CBSA will be targeting quota holders and persons without quota who imported using a “within access” tariff code or another tariff code that is not covered by the supply management program (such as spent fowl).  The CBSA is looking for errors in classification of “supply managed goods”. Even if a person received an import permit, the CBSA may find non-compliance if the good imported does not match the permit issued or if the quantities imported do not match the quantities on the permit.  There is the potential for significant assessments given the duty rates applicable if the imports are re-classified under an “over access” tariff rate.  For example, if an importer imported whole frozen chicken, the duty rate might increase from 5% to 238%

Consider whether you are at risk of a verification letter from the CBSA and whether you may benefit from making a voluntary correction or voluntary disclosure.  All import permit holders should review their records and correct any discrepancies before the CBSA contacts them for a verification.  In addition, persons who import “supply managed goods” using an incorrect tariff code should make corrections before the CBSA calls them for a verification.  Any importers who import under chapter 2 or chapter 4 should at a minimum conduct their own internal review of their records.

For more information or if you would like assistance with an import permit diagnostic, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.

Compliance Incentive: Canada to appoint a Canadian Ombudsman for Responsible Enterprise

Posted in Aerospace & Defence, Anti-Trust/Competition Law, Canada's Federal Government, Corporate Counsel, Cross-border deals, Cross-border trade, Cryptocurrencies, Environment, Export Controls & Economic Sanctions, FCPA/Anti-Corruption, Legal Developments

On January 17, 2018, the Government of Canada furthered its “progressive trade agenda” and responded to calls from human rights groups by announcing that it is going to watch the activities of Canadian businesses operating in overseas markets more seriously.  The Government of Canada will create an Office of the Canadian Ombudsman for Responsible Enterprise (CORE).  This will be a different type of Ombudsman.  The person appointed to this office will be charged with investigating Canadian companies operating in foreign markets rather than investigating the activities of Canadian government officials.  The Canadian Ombudsman for Responsible Enterprise will receive complaints about Canadian companies from Canadians, competitors, foreign governments, foreign citizens, not-for-profit organizations, activists and others. These complaints will be investigated.  This may be the first Corporate Responsibility Ombudsman anywhere in the world.

The initial scope of the Corporate Responsibility Ombudsman will be on the mining, oil and gas, and garment sectors. However, there is an expectation that the scope will expand within a year of the Corporate Responsibility Ombudsman taking office to other business sectors. This means that other business sectors should also get ready.

This new Corporate Responsibility Ombudsman will incentivize Canadian companies to implement compliance programs to ensure that they are complying with Canadian laws and the laws of foreign jurisdictions. In addition, the new Corporate Responsibility Ombudsman will incentivize compliance with human rights laws and Canadian values on human rights and corporate responsibility. Further, the new Ombudsman will incentivize Canadian companies operating overseas to implement policies to limit risk exposure for potential complaints to the Corporate Responsibility Ombudsman.  This would cover not only the strict wording of laws, but complying with the object and spirit of laws and value propositions and taking a wider interpretation of the laws than a court might.

The Corporate Responsibility Ombudsman will be empowered to independently investigate, report, recommend remedy and monitor its implementation. The Ombudsman will be given the powers to recommend a “punishment” for “bad behaviour”.  If a Canadian company has broken export controls, economic sanctions, anti-bribery or other laws, the Corporate Responsibility Ombudsman file should be handed to the Royal Canadian Mounted Police for prosecution so that a court can decide if an offence has been committed.  If the “bad behaviour” of the Canadian company falls short of the existing legal standards, the Corporate Responsibility Ombudsman will have the power to impose trade sanctions, such as recommending the withdrawal of consular services or cutting access to Export Development Canada trade financing or insurance products and services.  The Corporate Responsibility Ombudsman may also make non-binding recommendations concerning payment of compensation, which cannot be ordered by Canadian courts under Canada’s export controls, economic sanctions, anti-bribery and other international laws.

If you would like to know more about implementing a compliance program, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.

Should Canada add a books and records provision to export controls and economic sanctions laws?

Posted in Border Security, Canada's Federal Government, Corporate Counsel, Cross-border trade, Cryptocurrencies, Export Controls & Economic Sanctions, Exports, FCPA/Anti-Corruption

Countries, such as North Korea, Iran and Russia, may attempt to hide activities by using cryptocurrencies (such as Bitcoin). While the underlying activity of selling controlled goods or dealing with designated persons is illegal (under Canadian export laws) without an export permit/ministerial authorization, a secondary issue is enforcement.  Enforcement tools directed at “following the money” are rendered less effective by the availability and use of cryptocurrencies.

This begs the question, should there also be books and records provisions within the Export and Import Permits Act, the United Nations Act, the Special Economic Measures Act and the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law)?

Canada recently (2013) added books and records provisions in the Corruption of Foreign Public Officials Act (Canada’s anti-corruption law).  Subsection 4(1) of the CFPOA provides as follows:

“Every person commits an offence who, for the purpose of bribing a foreign public official in order to obtain or retain an advantage in the course of business or for the purpose of hiding that bribery,

(a) establishes or maintains accounts which do not appear in any of the books and records that they are required to keep in accordance with applicable accounting and auditing standards;

(b) makes transactions that are not recorded in those books and records or that are inadequately identified in them;

(c) records non-existent expenditures in those books and records;

(d) enters liabilities with incorrect identification of their object in those books and records;

(e) knowingly uses false documents; or

(f) intentionally destroys accounting books and records earlier than permitted by law.”

If a person offends the accounting rules, the penalty is imprisonment for a term up to 14 years.

Should there be a similar provision in the export controls and economic sanctions laws?  While Canada could prosecute a person in Canada or a Canadian outside Canada for the underlying infraction, would the additional charges of hiding the transaction in the books and records add a further disincentive?  Could the books and records provision be improved to cover the cryptocurrency providers and brokers or is the “aiding and abetting” provision sufficient?

If you would like to know more about Canada’s export controls and economic sanctions laws, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.

 

NAFTA Termination? What is your Strategy?

Posted in Canada's Federal Government, Canada-EU CETA, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Energy, NAFTA, NAFTA Renegotiations, Trade Agreeements, U.S. Federal Government

Will President Trump terminate NAFTA?  Unfortunately, we don’t know.  Some days, press reports suggest a growing possibility that he will take steps to terminate the agreement.  Other days, President Trump’s pronouncements hint that he may be prepared to further negotiations. This leaves organizations in a difficult position.  If President Trump does issue a notification of intent to terminate NAFTA, the notification will trigger a 6 months termination period after which the benefits of NAFTA will no longer be available to Canadian organizations and their suppliers who rely on NAFTA duty free movement of goods across the Canadian, Mexican and US borders.  This could have a significant financial and competitive impact on your organization.

The 1988 Canada-U.S. Free Trade Agreement (the “Canada-U.S. FTA”) was superseded, but not repealed, by NAFTA in 1994. If NAFTA is terminated, the Canada-U.S. FTA may be revived by default and thereby, be available to Canadian organizations for imports/exports as between Canada and the U.S.  However, it is far from a certain that the U.S. will retain and not formally terminate that agreement as well.

So, how should Canadian organizations prepare to respond to the increasingly possible (some may say likely) termination of NAFTA in the coming months.  Below is a non-exhaustive list of things you should consider when developing your organizational strategy to respond to a possible NAFTA termination:

1/  Plan for Uncertainty:   As noted, we don’t know if NAFTA will survive.  Further, it remains unclear whether President Trump has the U.S. constitutional authority to terminate without the approval of the US. Congress.  We also don’t know if the 1988 Canada-US Free Trade Agreement will be revived and available for Canadian and U.S. organizations.   For many organizations, NAFTA provides far reaching financial and competitive benefits for their North American business operations.  While in-house counsel can assess and help their organization navigate the termination process, provide guidance on and monitor the timing and triggers, your organization will need to develop a strategy that manages the uncertainty and can be implemented in a timely manner.  If a termination notice issues, your organization will need to respond to a short, 6-month termination timeline.  Your organization should consider taking certain steps now to ensure that you are ready to make required changes quickly (e.g. finding and validating alternative suppliers or finding ways to manage a higher tariff rate);

2/ Assess the NAFTA benefits you and your suppliers enjoy today: Your organization and your suppliers may rely on NAFTA to eliminate the tariffs on manufacturing materials and components and finished goods.  The concessions available to expedite the movement of certain classes of individuals (e.g. lawyers, engineers, etc.) across NAFTA borders also may be an important NAFTA benefit used by your organization and suppliers. Preparing a detailed inventory of the products, services and classes of individuals affected within your organization and that of key suppliers, is an important first step;

3/ Identify the impact of a NAFTA termination and alternative trading arrangements:  There are several different scenarios to consider:

  • President Trump announces his intent to terminate NAFTA: Although NAFTA provides that the agreement will terminate 6 months following the provision of notice, the following scenarios could arise and could affect the timing of its actual termination:
    1. A constitutional challenge may be brought before the U.S. courts to determine whether or not the President has the authority to terminate the agreement without Congressional approval; and/or
    2. Canada, Mexico and the U.S. could agree to postpone the termination date. For example, if the U.S. felt that the NAFTA negotiations gain positive momentum or in the face of upcoming mid-term elections, President Trump faces internal pressure from Congressional representatives whose constituents need NAFTA to export their products (e.g. farmers selling their crops to Mexico);
  • The Canada-U.S. FTA is revived (the U.S. does not terminate) and is available to provide duty elimination for certain materials, components, finished goods to the extent that they meet the applicable rule of origin content/tariff class shift requirements for U.S. and Canadian content and have the required certificates of origin. The rules of origin under the Canada-U.S. FTA are not the same as those under NAFTA and Mexican content will not be eligible as it was under NAFTA.  Consequently, you should re-visit the Canada-U.S. FTA rules of origin to ensure that your products, materials, etc. meet the rules of origin under that agreement and you have the required supporting documents;
  • Both NAFTA and the Canada-U.S. FTA are terminated by President Trump and Canadian organizations trading with the U.S. must utilize other agreements or find alternative trading partners and customers:
    1. NAFTA would continue as a free trade agreement between Canada and Mexico: Termination by the U.S. would not change the technical status of the NAFTA relationship between Canada and Mexico.  This is a three party agreement and the exit of the U.S. leaves Canada and Mexico as parties to the NAFTA.   Goods moving between Canada and Mexico would continue to enjoy duty free treatment as long as they continue to qualify and as long as neither party withdraws from the agreement.  Note that the rules of origin likely will be affected: originating content requirements are likely to change to include only Canadian and Mexican content;
    2. Ongoing trade with the U.S. at WTO MFN rates and likely without NAFTA immigration benefits: Ongoing trade would occur at the World Trade Organization’s (WTO) most favoured nation rates.  This means that the duty rate applied to goods moving into the U.S. from Canada or into Canada from the U.S. would be the same as the duties applied to similar goods flowing from other WTO countries that don’t have free trade agreements into those countries. You also need to consider if and how the elimination of NAFTA could affect the movement of key personnel and service providers that support your organization in Canada and the U.S.  Without a NAFTA trade relationship between Canada and the U.S. query the impact on the overall political relationship.  If the U.S. withdrawal from NAFTA escalates trade frictions, could this impact the overall movement of goods and people across the Canada-U.S. border (e.g. slowing movement of goods and people at the border or imposing regulatory impediments)? Your organization should weigh and plan for this possible outcome;
  • Other free trade agreements are available to reduce tariffs: Canada has a number of free trade agreements that may provide alternative sourcing and market options, including the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and the Canada-Korea Free Trade Agreement. Your organization should consider whether your production/service inputs could be more cost effectively imported from other countries with which Canada has a free trade agreement. Often re-sourcing options require significant lead time for contract transition and validation, so timing is important.  New market opportunities also may be available in countries with which new FTA’s have been negotiated (e.g. the EU) and may permit you to deliver finished goods to potential customers at a lower (duty free) cost.

The uncertainty surrounding the status of NAFTA negatively impacts both the equity markets and the Canadian and Mexican currencies.  It also causes uncertainty within your organization and could hamper the execution of global and domestic strategies.  Having a well thought out strategy to respond to this uncertainty, one that will position your organization to quickly adjust to a post NAFTA trading, environment, if needed, will drive confidence internally and with external stakeholders.  To react quickly you need to develop and possibly execute your strategy now, even if only partially by identifying/validating and establishing the footprint for required changes. If President Trump issues a NAFTA termination notice, you may have as little as 6 months to prepare.

Should you have any questions or would like assistance developing or executing a NAFTA transition plan, please do not hesitate to contact Heather Innes at heather@lexsage.com or 416 530 1234.

Canada’s Indirect Economic Sanctions: Where Export Development Canada is not pursuing business at this time

Posted in Canada's Federal Government, Export Controls & Economic Sanctions, Exports

Canada effectively imposes economic sanctions against certain countries via the Export Development Canada (“EDC”) positions on where they will and will not or business.  EDC is Canada’s export credit agency.  The EDC extends credit to Canadian businesses (big and small) to facilitate export sales. EDC financial products and services include trade credit insurance, export financing for Canadian companies and for their foreign customers, bonding products, and advice on doing business outside Canada.  If the EDC will not provide trade insurance, export financing or bonding products for exports to certain countries, many Canadian businesses are not able to pursue opportunities in those markets (unless the business is able to self-fund or obtain banks financing and insurance).  Canadian companies have been forced to retreat from the Russian market due to this hidden economic sanction.

Most companies understand that Canada imposes economic sanctions under the United Nations Act (“UN Act”) and/or the Special Economic Measures Act (“SEMA”) against 19 countries.  The list of UN Act and SEMA sanctioned countries as at December 31, 2017 are:

Country Sanctions Regimes
Burma/Myanmar SEMA
Central African Republic UN Act
Democratic Republic of Congo UN Act
Eritrea UN Act
Iran SEMA/UN Act
Iraq UN Act
Lebanon UN Act
Libya SEMA/UN Act
North Korea SEMA/UN Act/Area Control List
Russia SEMA/Magnitsky
Sierra Leone UN Act
Somalia UN Act
South Sudan SEMA/UN Act/Magnitsky
Sudan UN Act
Syria SEMA
Ukraine SEMA
Venezuela SEMA/Magnitsky
Yemen UN Act
Zimbabwe SEMA

 Let’s look at these countries from a different lens – the EDC lens.  Of these countries, the EDC states that it is not currently pursuing business in connection with the following countries:

The EDC takes a reactive, restrictive or responsive approach to doing business in the following countries:

Ukraine is a target market for the EDC.

The one country that stands out in the above lists is Russia.  Russia was put on the naughty list in 2014 under the Harper Government and the EDC will not pursue business relating to Russia.  This means that Canadian companies cannot get EDC financing or insurance to do business in Russia.  Some Canadian companies have raised the issue with Canada’s Minister of International Trade and are urging Canada to change the EDC policy on Russia.  But, there has been no change yet.

What this shows is that EDC business is also a foreign policy tool.

If you would like to know more about Canada’s economic sanctions laws, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.