Trade Management: Deidre Hayes discusses when and how to manage export controls compliance at your company

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Episode 28: Trade Management: Deidre Hayes discusses when and how to manage export controls compliance at your company

Release date: Aug 31, 2010
Guest: Deirdre Hayes
Running time: 16:34 minutes

Canada’s export controls affect the movement of some goods and technologies, depending on their nature and their destination. Goods of US origin require an export permit. Compliance can be subject to government audit, and failure to comply with regulations can lead to significant penalties – even shut-down. It is essential for management and employees in all areas – but especially risk management, logistics and general counsel – to be familiar with the rules and make sure they are followed.

Learn about the requirements of both the Canada Border Service Agency and the Department of Foreign Affairs and International Trade, and how to avoid running afoul of them.
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Trade Management: Deidre Hayes discusses when and how to manage export controls compliance at your company

You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.

Gerry Lewandowski: Here with us today is Deirdre Hayes, a senior member of PwC’s trade management practice based in Toronto. Deirdre has been with PwC for ten years and specializes in advising companies on the implementation of export controls processes under multi-jurisdictional export control regulations that involve Canadian, US, EU and Asia requirements.

She joins us today to discuss when and why to consider export controls regulations and some of the issues in implementing an export controls process.

Thanks for joining us, Deidre.

Deirdre: You’re welcome, Gerry.

Gerry: So let’s start with the basics…what export controls are in place in Canada and when should we be concerned about these impacting a company?

Deirdre: Export controls exist in Canada as Canada, like other countries including the United States, has obligations under its treaties with other countries to regulate and prevent the movement of certain goods and technologies. In Canada, we have two types of export controls: we control items for export because of their destination, and we control items for export because of their use or potential use.

Our export controls apply to both goods and technology – goods being physical goods and technology being technical data and technical assistance. In terms of control destinations, there are currently three countries in Canada’s area control list: North Korea, Myanmar, Burma and Belarus. There are also a number of sanctioned countries, I think somewhere in the range of 12 to 15, including countries like Iran, Zimbabwe and Syria. And for these types of countries, an exporter should contact the Department of Foreign Affairs before accepting any order to export there.

In terms of controlling products because of their use or potential use, Canada has a very comprehensive export control list which contains a list of seven different categories of items – both goods and technology – that are controlled when exported from Canada. And, unless an exception or de-control is stipulated, an export permit will be required for these types of goods and technologies when they’re exported from Canada.

In addition to controlling goods by destination and by their use, an exporter should also be aware of the fact that any good of US origin that’s re-exported from Canada will also require an export permit. And, in addition to requiring a permit, the Department of Foreign Affairs and International Trade may also request that, as an exporter, you might have to obtain a re-export authorization from the US authorities before they would even issue an export permit to you. And so, in that case, I think a Canadian exporter should be aware that US export controls regulations are extra-territorial and will apply to any US-originating good and technology, even after the goods and technology has been exported from the US.

Gerry: Deirdre, what are the implications to a company of not complying with these regulations? Is it easy to become compliant?

Deirdre: Well, I do think firstly we should say as far as becoming compliant, it’s easy enough to become compliant. But if you want to be compliant you need to first understand the processes and the procedures that you need to implement to be able to do so. And, in understanding those processes and procedures, you need to understand that all of those procedures will affect the day-to-day running of your organization, but in a positive way.

In terms of, I guess, the implications…there are a number of different penalties that can be enforced. So, when we speak about monetary penalties, exporters can end up paying, at a a minimum fine of $25,000. In certain circumstances they may also spend 12 months in jail and up to 10 years in jail for an indictable offense. And it’s worth noting that company officers and directors will be held liable.

In addition to those penalties that would be administered by the Department of Foreign Affairs and International Trade, the Canada Border Services Agency – or CBSA – can also assess additional penalties through its Administrative Monetary Penalties System, or AMPS.

Aside from monetary penalties, non-compliance can often mean closer scrutiny from the Canada Border Services Agency, which could result in possible delivery delays. And, if you cannot deliver to your customer as an exporter, you may face penalties under contract law for possible breach of contract. Non-compliance could also result in an exporter’s name ending up on, for example, the front page of the Wall Street Journal. And nobody wants its name publicized in any publication for non-compliance of export controls.

And, I guess, finally what’s worse than maybe any of the penalties we’d talked about is that non-compliance can force you to cease operations indefinitely until the Department of Foreign Affairs and International Trade, through CBSA, and even the RCMP can close down your operations if there is a severe breach of export controls legislation. And that’s a devastating blow to your company’s financial future and reputation.

Gerry: Should companies become more proactive in assessing whether they are subject to these regulations or can they just “wait and see”?  Are there export controls audits by the government?

Deirdre: Yes, there are export controlled audits. They’re usually administrated by the Canada Border Services Agency or maybe, perhaps, even the Department of Foreign Affairs and International Trade. I think the thing to remember is that these regulations have always been in place. It’s just that, maybe, in the past the Department of Foreign Affairs has not made companies as aware of them, or they may not have been enforcing them as strict as, perhaps, they would like to have.

What we see recently is that the Department of Foreign Affairs and International Trade have developed these new enforcement and management resources. And we can see new efforts to actively, I’ll say, work with companies and trying to make them compliant. But there’s also increased scrutiny.

And, in addition to increased scrutiny from the Department of Foreign Affairs and the Canada Border Services Agency, we see increased scrutiny from the US enforcement. In particular, we see a lot of closer collaboration between the US Immigration and Customs Enforcement, or ICE, and the Canada Border Services Agency.

In the long run, I think it’s better to be more proactive because if you discover an issue in advance of the Department of Foreign Affairs or the CBSA or the RCMP coming knocking on your door, then you can avail of Foreign Affairs voluntary disclosure policy which usually does not make you subject to the more severe penalties. If the Department of Foreign Affairs finds your exposure, then you can probably assure yourself that you’ll get more severe penalties.

Gerry: Deidre, let’s talk about policies and procedures around export controls. What are some of the issues and considerations around putting a structure in place to manage compliance with export control regulations? Who at the company should be in charge of export controls compliance?

Deirdre: So firstly, as far as responsibility goes, every employee in the company should be responsible for ensuring that the company is compliant with its export controls requirements. And I think every employee has that responsibility to ensure that in area that they’re working in, that compliance requirements are met. But, in general, the departments most commonly responsible for overseeing the compliance requirements include the risk management, general counsel and logistics departments.

In terms of creating maybe an effective export controls policy and procedures program, I think the secret to implementing a successful compliance program is to develop, at the outset, a clear set of work instructions for each stage of any transaction that’s going to happen in your company – from the time that the product is first entered into your order entry system to the time that it leaves the warehouse.

In general, I think the types of issues and considerations that you should address when you’re putting a compliance procedure in place should include having a clear management policy. You should also look at who you’re going to designate responsibility to – so, address the responsible party section. Make sure that your products are classified correctly, and by classified I mean classified in accordance with the export control list, to see if your product is indeed controlled and requiring an export permit.

Look at your order processing. Look at the screening of your customers. Are you looking at sub-contractors? Do you have foreign employees that might, perhaps, cause problems later on down the line. Look at your technical data transfers because, remember, export controls affects both goods and technology. So, are you transferring technical data that should be controlled with a permit? Are there other forms of exports? So, for example, is there somebody emailing technical data on a regular basis or are they exporting demonstration models? Do you have a notification process in place for escalating potential export violations to management and are employees comfortable with using that notification process? Do you have training? Do you have record keeping? And you should also have a process for internal audit. Maybe twice to maybe three times a year, maybe somebody should audit those procedures that you have in place to ensure that everybody’s following them correctly.

Gerry: Now, many companies in Canada either export to or import from the United States. What are the export control issues that need to be contended with when dealing with the US?

Deirdre: So, the integration of Canadian and US industry results in particular issues for Canadian exporters. As we touched on earlier, any product of US origin exported to any country other than to the United States will require an export permit.

You have to also bear in mind that as we spoke about, too, the Department of Foreign Affairs might also request that additional re-export authorization from the US authorities. And they may not issue any export permit to you until you receive that re-export authorization. In some cases, it’s not very easy or perhaps impossible to get that re-export authorization from the relevant US authorities.

I think it’s also imperative that Canadian exporters are aware that the US considers that its export controls laws are extra-territorial and they will continue to apply even after the goods are exported from the US. So, for example, if a Canadian exporter exports goods of US origin from Canada – now, it might be in compliance with Canadian law and apply for a Canadian export permit – in certain circumstances it may find that it’s run afoul of US export controls and, if that happens, there are possible penalties such as they may be placed on the Denied Parties list and unable to obtain US goods or technology in the future.

Canadian companies should also pay close attention to the US requirements when dealing with defense-related products or ITAR-controlled products.

Access to ITAR-controlled products in Canada is limited to persons registered with the Controlled Goods Directorate. And, in order for you to register with the Controlled Goods Directorate, any company has to, in advance, appoint a designated official who is responsible for, among other things, performing security screenings of employees. Applicants also have to submit a security plan describing how they will ensure that only registered persons have access to controlled goods.

I think it’s also worth noting that from our experience we have seen that any Canadian company who wishes to enter into a defense contract with the US should really be registered for the Controlled Goods program before even entering or even considering entering that defense contract because most US companies will look to see that Controlled Goods Program registration in advance and they often like to see security plans and a company’s compliance program also.

Gerry: And finally, Deirdre, let’s discuss how you and your team can assist a company in assessing their compliance with export control regulations in Canada. Is this something we should get lawyers involved with?

Deirdre: With regards to getting lawyers involved, I think you really only need to get lawyers involved when you have identified an actual breach in Canadian export controls regulations. So if, as an exporter, you’re coming to look for our services with regards to export controls, unless you’ve identified an actual breach in your current export controls compliance, then I do not see a need to get any lawyer involved at that time. Although, lawyers also do a great job with regards to exports controls services, what they tend to do best is interpret the regulations and tell you what you should be doing. The difference between, I guess, the lawyers and our services is that although we also interpret the regulations, we will help you to implement them and make those regulations work operationally at your company, and we can also show companies how to remain compliant.

We have, what we would call, a ‘belt-and-braces' export compliance service. So, we would do everything from starting to carry out a detailed business review, identifying exactly what your current export controls compliance requirements are and what the current state of affairs are, to classifying your products and reviewing any product classifications that you have already carried out yourself. We have our own team of engineers in various different fields who have classified products in the past for other companies ranging from software to defense to the chemical industry to the nuclear industry. So, we have vast experience in that area. We also write compliance programs for some clients including fairly detailed work instructions and we also provide training and backup services, helpdesk facilities, and one-off questions.

And also, we also offer the voluntary disclosure services that law firms do. So, where you have identified an actual breach in legislation we can help prepare your voluntary disclosure and submit to the Department of Foreign Affairs and International Trade. With regards to experience on a multi-jurisdictional level, we have an export controls team across the globe with offices in the EU, Asia, the US and Canada. So, we have quite a lot of experience in dealing with the regulations as well as interaction of these regulations with other jurisdictions.

Gerry: We’d like to thank Deirdre Hayes for sharing her perspective on managing export controls compliance at your company. For additional information on PwC’s tax services, please go to pwc.com/ca/indirecttax.

Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.

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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.