A measure of relief: US amends ITAR export controls for dual nationals and third-country nationals

August 2011 Authors: R. Luc Beaulieu, Sébastien Beauregard, Richard A. Wagner

Contacts

The US Department of State has finalized and published amendments to the International Traffic in Arms Regulations (ITAR) regarding dual nationals and third-country nationals employed by recipients of controlled goods and technology. These amendments take effect on August 15, 2011, and will provide a measure of relief to companies using ITAR-controlled goods and technology. While the relief in new ITAR section 126.18 can apply in various countries, this update will focus on the effect of the amendments on Canadian end-users.

ITAR treats a transfer of defence articles to a national of a country as equivalent to a transfer to that country itself. Because there are “Canadian” exemption provisions to ITAR,1 a Canadian citizen may, under certain circumstances, access controlled material, but a Canadian employee who is also a national from a prohibited country on the ITAR restricted list may not.2

Prior to the new amendment coming into force, Canadian employers seeking to comply with ITAR may have been required to impose workplace measures that raised concerns under human rights legislation, such as denying employees of certain nationalities access to work-related materials based solely on their nationality.  This in turn may have limited the type of work dual-national and third-country national employees could perform. This nationality-based approach created administrative burdens and friction with existing human rights legislation.

The Dual Nationals and Third-Country Nationals Employed by End-Users3 amendments are designed to address these restrictions by providing for a separate process whereby companies employing dual nationals and third-country nationals of ITAR-prohibited countries may access ITAR-controlled goods and technology by screening employees against set criteria, thus focusing the test on the risk that an employee is “likely to divert” ITAR-controlled technology, as opposed to proceeding with a nationality test.  Guidelines were issued by the US Department of State on July 25, 2011.

This new exemption is subject to a number of administrative hurdles and conditions, chief among these being  companies that use ITAR-controlled goods and technology are required to have in place “effective procedures” to prevent diversion. For these procedures to be considered effective, employers must either obtain a Government of Canada security clearance or screen employees for “substantive contacts” with prohibited countries and maintain a comprehensive technology/security plan, and share this plan and the screening reports with US authorities upon request.

The Controlled Goods Directorate (CGD) at the Department of Public Works and Government Services Canada  is of the view that companies registered in the Controlled Goods Program (CGP) can meet the "effective procedures" requirement through registration and compliance with CGP requirements.

To date the United States government has yet to officially acknowledge that CGP registration and compliance is sufficient to satisfy these new requirements. However, an agreement between Canadian and US officials has reportedly been reached and will become public in mid-August. As it remains a US responsibility to determine whether the CGP may constitute “effective procedures” for ITAR purposes, companies may wish to take interim steps to independently ensure compliance with the US rules until an official acknowledgment of Canada’s position is made by the US.

Application of the new exemption

The new exemption brought about by the amendments5 has two main requirements.

First, the transfer of unclassified defence articles and technical data by a foreign business entity (e.g., a Canadian company) that is an approved end-user or consignee for those items can only be “to dual nationals or third-country nationals who are bona fide, regular employees, directly employed by the foreign business entity…” The terms “bona fide, regular employees” and “directly employed” are not defined, except to the extent that the final rules expressly include workers who have long-term contractual relationships with the approved foreign end-user. However, only contract employees who work full-time and exclusively for the company, at the company’s facilities, under their direction and control, and execute non-disclosure certifications will meet the definition. Further, where a staffing agency has seconded the individual, the agency must not have a role in the work the individual performs and must not have access to any controlled technology. Persons not falling under the bona fide, regular employee category are not provided for under the exemption, and will continue to be treated according to nationality/citizenship.

Second, for the exemption to apply, the transferor must have “effective procedures” in place to prevent diversion. These procedures are the most contentious aspect of the new rules. The rules stipulate that the end-user company or consignee must:

  • Either obtain the appropriate security clearance for employees from the Canadian government, or;
  • a) Have in place a process to screen employees and have executed a non-disclosure agreement that provides assurances that the employee will not transfer any information to unauthorized parties; and

b) Maintain a technology/security plan that details the procedures for screening employees for such substantive contacts and maintain records which must be made available to US authorities on request.

Canada’s CGD has been developing an Enhanced Security Strategy (ESS) and announced in May 2011 that it was developing a set of standards and procedures to be followed when assessing security risk. The new CGD Security Assessment Standards are specifically designed by CGD to meet the new requirements outlined in ITAR section 126.18 regarding dual nationals and third-party nationals exemptions.

The ESS will come into force on October 1, 2011. As part of its implementation, the CGD is developing a series of revised standards and procedures for examining, possessing or transferring controlled goods that meet the standards under the new ITAR exemptions. The CGD will issue notices and communiqués to all program registrants in the coming weeks, detailing the parameters of the ESS along with its implementation plan.

Most importantly, the ESS will be phased in over three years. Until companies are contacted and receive instructions over the next three years, CGD requests that they proceed under the status quo. CGD's main priority is to avoid undue burdens and hardships in this implementation.

CGD is of the view that registration in the CGP and compliance with its requirements is sufficient to satisfy the "effective procedures" requirement in ITAR 126.18. Clearance of employees in accordance with CGP requirements may therefore be sufficient to qualify for the exemption without the need for additional screening processes, signing of non-disclosure agreements, or technology/security plans.

Canadian and US government officials have reportedly reached an agreement whereby the US government will acknowledge that Canada’s CGP constitutes “effective procedures.” Until such an agreement is official, companies receiving ITAR-controlled goods and technologies may wish to ensure that they meet the effective procedures criteria listed above independently of the CGP process, by having in place a screening process with non-disclosure agreements and technology security plans.

In determining if an employee has had “substantive contacts” which would render him or her ineligible for the exemption, the amendment establishes seven criteria:

  • Regular travel to a prohibited country;
  • Recent or continuing contact with “agents, brokers and nationals of such countries”;
  • Continued “demonstrated allegiance” to such countries;
  • Maintaining a residence in such countries;
  • Maintaining business relationships with persons from such countries;
  • Receiving salary or compensation from such countries; and
  • Acts that otherwise indicate a risk of diversion.

Although the rules stipulate that nationality may not, in and of itself, prohibit access to defence articles, an employee who has substantive contacts with persons from prohibited countries is presumed to raise a risk of diversion, unless the US Department of State’s Directorate of Defense Trade Controls (DDTC) determines otherwise. Furthermore, contacts with government officials and agents of governments of prohibited countries, whether family or not, will trigger increased scrutiny.

DDTC has clarified that an affinity, loyalty, or allegiance to interests of a third country or its government may cause an individual to breach rules or release proprietary or controlled articles or technology without authorization. As per the stated purpose of the new amendment, citizenship, particularly one that cannot be renounced, will not necessarily lead to disqualification.

With respect to the newly required technology security/clearance plan, procedures for screening employees must be established and all records maintained for five years. The plan and records must be made available to the DDTC upon request for civil and criminal law enforcement purposes. These provisions may lead to friction with existing domestic privacy and anti-discrimination frameworks.

Finally, the exemption does not apply to classified technical data, nor does it apply to academic institutions. The transfer of defence articles must also take place completely within the physical territory of the country where the end-user is located or the consignee operates, and must be within the scope of an approved export licence, other export authorization or licence exemption.

Privacy and human rights risks

The new amendments have the benefit of removing the express ITAR distinctions based on nationality or place of origin, and further implement a neutral “substantive contacts” test. Nonetheless, ITAR-compliant employers may still face claims that substantive contacts screening, although seemingly neutral, has a discriminatory effect on dual nationals or third-country nationals from proscribed countries.

Depending on how the substantive contacts criteria are implemented, many dual nationals or third-country nationals who maintain routine contacts with family and friends in proscribed countries could be ineligible for the exemption, giving rise to claims of de facto discrimination on the basis of nationality or place of origin. While the final rules clarify that contacts with family members will not automatically disqualify a person when it is not likely to lead to a diversion of controlled materials, family contacts and personal travel in proscribed countries must nonetheless be identified in the screening process.

Consequently, the amendments will inevitably raise concerns about compliance with Canadian federal and provincial privacy legislation. While legislation protecting privacy generally allows collecting personal information only for specifically defined purposes, in this case collected information may potentially be found to be overly broad.

Because a Canadian company may choose to exercise the multiple options for meeting ITAR under a single technical assistance agreement or manufacturing license agreement, it is the responsibility of the applicant end-user to coordinate which option will be applicable and include the appropriate language in its agreement.

Employers who choose to forego the new exemption and proceed under the pre-existing framework may continue to be exposed to claims before provincial human rights tribunals, as happened in the past to Canadian employers. Despite previous cases brought before human rights tribunals, however, employers who continue to rely upon the pre-existing framework are not without defences. For example, under provincial human rights legislation, employers may have a valid defence based on the constitutional principle of interjurisdictional immunity. In other words, provincial human rights legislation would be inapplicable in relation to employers’ efforts to comply with ITAR, as this is an exclusively federal matter.

It is also noteworthy that Canada and the US Department of State negotiated agreements whereby the State Department revised its export authorizations for the public sector. Under the agreements, access to defence articles and services exported under ITAR would only be granted to Department of National Defence, Communications Security Establishment Canada, Canadian Space Agency and National Research Council personnel who are Canadian citizens, including dual nationals, on a need-to-know basis and then only to individuals who had obtained a minimum secret-level security clearance. These agreements now ensure that sensitive areas of intergovernmental military cooperation are insulated from a legal challenge under the Canadian Charter of Rights and Freedoms or the Canadian Human Rights Act. However, these agreements do not mitigate the challenges faced by private sector employers who must reconcile competing human rights and ITAR compliance obligations, and particularly employers who choose to bypass the new framework brought about by the new amendment.

Integration with Canadian requirements

Understanding that the integration of Canada-US defence production activities requires co-ordinated laws and policies concerning security of information, Canada amended its laws in 2001 to create the Controlled Goods Regulations (CGR), which met US demands that Canada have laws that strictly regulate the release of ITAR-controlled goods and technical data. Both CGR and ITAR requirements are designed to ensure goods and technical data that have potential military or strategic applications are not made available to countries, groups or persons that pose a security threat.

The CGD continues discussions with the DDTC to ensure that Canada’s CGP will meet the requirements of the new ITAR exemption, and written confirmation of an agreement with DDTC is expected to be released in mid-August.6 The new US rules do not yet expressly recognize an exemption for CGP registrants, nor for any other national domestic frameworks, such as industrial security clearances; however, it is likely that some accommodation will be reached.

DDTC’s licensing guidelines note that the current Canada-specific standard agreement clause is predicated on the issuance of a security clearance by the Canadian government. (Such security clearance need not be a secret or top secret clearance.) Furthermore, where companies are implementing the new ITAR rule, these clauses are no longer necessary for unclassified transfers as the requirements are met by the security clearance. Where classified transfers are concerned, the agreement clause is still relevant.

Conclusion and future challenges

Canadian companies will continue to face challenges complying with overlapping Canadian and US legal requirements, including Canadian privacy and human rights law. While the amended regulations provide a course of action for dual nationals or third-country nationals, significant compliance challenges remain for employers, particularly around the presumptive ineligibility of employers with dual nationals and third-country nationals revealing “substantive contacts.” The practical implementation of a screening process may well also generate many legal issues for employers.  Employees who are negatively affected may challenge the reliability of the process on various grounds, such as abuse of rights, unfair distinctions, mistakes in application, etc. If employees are removed or disqualified from projects because of ITAR ineligibility, they may claim they have been constructively dismissed by their employers.

Footnotes

1 CFR, s.126.5.

2 The list of ITAR-restricted countries includes: Afghanistan, Burma, Belarus, China, Côte d’Ivoire, Cuba, Cyprus, Democratic Republic of Congo, Eritrea, Haiti, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Sierra Leone, Somalia, Sri Lanka, Sudan, Syria, Venezuela, Vietnam, Yemen and Zimbabwe.

3 CFR Parts 120, 124, and 126.

4 The proposed amendment does not apply to “defence services.”  We understand that the regulations applicable to defence services may be addressed in a separate proposed amendment.

5 CFR, s.126.18.

6 Public Works and Government Services Canada, “Notice to Controlled Goods Program Registrants Regarding International Traffic in Arms Regulations Amendment,” May 17, 2011; Norton Rose has also confirmed that negotiations are ongoing—a potential agreement could be signed by early August 2011.

PDF Version

Download A measure of relief US amends ITAR export controls for dual nationals and third-country nationals (pdf 101kb)