FEDERAL REG

SOR/2016-201: Regulations Amending the Controlled Goods Regulations

REGISTRATION OF FEDERAL REGULATION - VIA OIC DATABASE, PRIOR TO PART II OF THE GAZETTE

Registered
June 22, 2016


REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the Regulations.) Background Controlled goods are items specifically designed or modified for military use, including components or technologies (e.g. technical documentation and data, blueprints, etc.); they include, among other things, items such as anti-tank weapons, bombs, torpedoes, mines, missiles, military vehicles (tanks)... (Click for more)


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Published on June 22, 2016

Bill Summary

SOR/2016-201: Regulations Amending the Controlled Goods Regulations

REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the Regulations.) Background Controlled goods are items specifically designed or modified for military use, including components or technologies (e.g. technical documentation and data, blueprints, etc.); they include, among other things, items such as anti-tank weapons, bombs, torpedoes, mines, missiles, military vehicles (tanks), vessels (submarines), combat aircraft, and chemical, biological and radioactive material used for military purposes. The Controlled Goods Program (the Program), created in April 2001, is a domestic industrial security program administered by the Department of Public Works and Government Services (PWGSC or the Department). The objective of the Program is to safeguard controlled goods within Canada, prevent controlled goods from being accessed by unauthorized persons, and strengthen Canada’s defence trade controls. The Program supports Canada’s national security framework by preventing the domestic proliferation of tactical and strategic goods (including technologies). It regulates the possession, examination, or transfer of controlled goods, including the defence articles contained in the United States Munitions List (USML) to the International Traffic in Arms Regulations (ITAR). The Controlled Goods Regulations (the Regulations), made pursuant to the Defence Production Act, were registered on January 9, 2001, and came into force on April 30, 2001. The Regulations require individuals and companies that possess, examine or transfer controlled goods in Canada to register with the Program. The Program conducts security assessments of the applicant’s designated official (i.e. the company-appointed official who is responsible for performing the security assessment of employees), conducts inspections to ensure compliance with the Regulations, and grants exemptions to visitors, temporary workers and international students. In 1954, the United States (the U.S.) instituted the ITAR to implement provisions of the U.S. Arms Export Control Act to control the export and import of defence-related articles and services specified on the USML. For practical purposes, the ITAR prohibits the sharing of information and materials on the USML with non-U.S. persons without authorization from the U.S. Department of State or without an exemption. From the inception of the ITAR, Canada was the only country to benefit from exemptions allowing for the licence-free transfer of certain defence articles between the countries. Canadian defence industries benefited from the Canadian exemptions, as these exemptions placed them on a quasi-equal footing with their U.S. counterparts and resulted in significant economic benefits from reduced export paperwork and approval timelines. In 1999, the U.S. unilaterally revoked the Canadian exemptions due to increased security concerns regarding the risk of diversion of defence articles for criminal or terrorist aims. Although the U.S. reinstated most of the pre-1999 ITAR exemptions with the implementation of the Program, they maintained the access restriction by certain individuals with dual nationality and nationals from developing countries. Under this restriction, an end-user was prohibited from access to an ITAR-controlled good if he or she maintained citizenship of a proscribed country listed under the ITAR (e.g. North Korea, Iran, Sudan, Venezuela, etc.). The application of the “dual national rule” caused various human rights complaints to be brought against employers in Canada who were denying access to ITAR-controlled articles based on an individual’s nationality, as the Canadian Charter of Rights and Freedoms protects individuals from discrimination based on nationality. In 2007, the Minister of PWGSC (the Minister) was given the lead to address this issue and began discussions with U.S. counterparts to identify solutions. In August 2011, an “Exchange of Letters” between PWGSC and the U.S. Directorate of Defense Trade Controls was signed. As described below, the Exchange of Letters served, in part, to resolve the dual national issue. The pre-9/11 security environment in which the Program was created has also evolved. There is now increased security awareness of the risks posed by the diversion of military and strategic technology to support criminal and terrorist threats. In 2009, a threat and risk assessment identified potential security gaps in the Program. Concurrently with the exchanges with the U.S. Directorate of Defense Trade Controls on resolving the dual national issue, PWGSC developed the Enhanced Security Strategy (ESS). The purpose of the ESS was to address the security gaps identified through the risk assessment while fulfilling the commitments made through the Exchange of Letters. In signing the Exchange of Letters, the Directorate of Defense Trade Controls acknowledged that the enhancements to the Program made as part of the ESS satisfied the ITAR requirements for the screening of significant and meaningful associations and travel [i.e. under section 126.18(c)(2) of the ITAR rule]. This in effect resolved the issue of individuals with dual nationality and nationals from developing countries. Enhanced Security Strategy — Phase I The implementation of the ESS was divided into two phases, the first of which was initiated in October 2011. Security and business enhancements brought to the Program through Phase I of the ESS were implemented under existing authorities and did not require immediate amendments to the Defence Production Act or to the Regulations. ESS — Phase I improvements included the following: Increased efficacy of the Program registration process. This was achieved by increasing the assessment of ownership, including foreign ownership, by requiring owners with 20% or more of voting shares to submit a completed Security Assessment Application Form as part of the registration application process; and requiring authorized individuals (i.e. the individual authorized by the applicant who signs to confirm that the application for registration of a person is accurate and complete) to submit a completed Security Assessment Application Form as part of the registration application process. Tightened security assessment procedures for both government and industry. This was achieved by standardizing the security assessment procedures, such as developing a new Security Assessment Application Form and mandating that it be used by designated officials as part of the security assessment of employees; applying a standardized risk matrix assessment tool across the board for all Program registrants; creating a certification program for industry officials who are responsible for security assessments within their organization (i.e. designated officials); requiring that designated officials submit fingerprint results as part of the application process; increasing support provided to designated officials in the security assessments of moderate- and high-risk employees; ensuring that students who access controlled goods undergo security assessments; increasing the checks on temporary worker exemption applications by referring tombstone information (e.g. name, address, telephone number, etc.) to security and intelligence partners; and acquiring an analytical tool to evaluate additional security assessment-related information, to analyze information received from security and intelligence partners, and to exchange information with these partners. Augmented compliance-related activities. This was achieved by increasing Program capacity and outreach efforts to promote compliance, including telephone pre-inspection coaching and conducting a complete internal review of the compliance inspections processes; and adding the requirement for the security plans of registrants to include transportation and cyber security considerations. Implemented structural and operational elements in support of the strategy. These included creating three new divisions: Program Management and Learning Division (responsible for the certification program and external communications), Strategic Initiatives Division (responsible for liaising with the U.S. on export control and ITAR issues, drafting policy guidance, and amending the Regulations), and Intelligence and Analysis Unit (which liaises with security and intelligence partners and analyzes high-risk files); and increasing capacity in the Operations Division to process additional security assessments (i.e. assessments of the authorized individuals and owners). In addition to the steps taken under the ESS — Phase I, it was determined that three additional elements of the ESS required regulatory amendments for the Program to be implemented as intended. These amendments were deferred to ESS — Phase II. More specifically, ESS — Phase II amendments enable the Minister to make a recommendation to the designated official for high-risk employees submitted for further verifications and require that the designated official consider this recommendation; enable the security assessment of a visitor and obtain the consent of the individual subject to that assessment; and require registrants to submit a list, to the Minister, of individuals who have undergone a security assessment for access to controlled goods. Issues Although the Defence Production Act and the Regulations provided the initial statutory and legal authority for ESS — Phase I, PWGSC determined that it would be beneficial to further clarify certain elements in regulations. More specifically, the Regulations did not specify that the authorized individual (i.e. the individual who is responsible for signing and submitting the application for registration and renewal) and the owner(s) must undergo a security assessment, nor did they specify who is responsible for conducting that assessment. Furthermore, the information requested as part of a security assessment was not fully described under section 15 of the Regulations. Although subsection 15(6) provided that the Minister may take into consideration other information provided by a person, it did not state what this information could be. This lack of clarity under the Regulations was problematic for industry in some instances, particularly in regard to industry’s ability to demonstrate compliance with Program requirements. Further, the operational requirement that the designated official undergo certification was not included in the Regulations. Moreover, the Regulations did not include the requirement for the designated official to refer high-risk employees to the Program for further assessment. These fundamental elements of the ESS merited inclusion and clarification in the Regulations. As described below, three ESS — Phase II activities required regulatory authority in order to be implemented. Two of these activities represented a minor change to existing practices, while the third built on existing record-keeping requirements. (1) Enable the Minister to provide a recommendation to the designated official for high-risk employees Although designated officials submit high-risk employee security assessments to the Program for further checks with security and intelligence partners, the Minister did not have the authority to make a recommendation to the designated official based on the findings of the additional security checks, nor did the Minister have the authority to require the designated official to consider the recommendation when deciding whether or not to grant the high-risk employee access to controlled goods. The Program communicated that the security assessment conducted by the designated official was either supported (i.e. confirmed) or not supported (i.e. could not be substantiated). Program stakeholders communicated that responses by the Program were not clear and that a recommendation would be more appropriate in supporting the designated official’s final determination. (2) Obtain the consent of the individual in the visitor exemption process Under the Regulations, an application to exempt a visitor from registering in the Program is submitted by the registered person on behalf of the visitor, but the Regulations did not specify that a security assessment is to be conducted, nor did they specify that the consent of the visitor is required for a security assessment. Consent is required for the Program to be able to consult security and intelligence partners regarding the security assessment, and the requirement for consent had to be specified in regulations. (3) Require registrants to submit a list of all individuals who have undergone a security assessment Another commitment made as part of the ESS was to collect information with regard to individuals who have access to controlled goods. The intent is to create a repository of information to facilitate exchanges with security and intelligence partners and, if necessary, to assist the Royal Canadian Mounted Police during the investigation of security breaches relating to controlled goods. Under the Regulations [paragraph 10(b)], registrants must maintain records of security-assessed individuals authorized to access controlled goods. Paragraph 10(i) further stipulates that these records must be made available to the Minister at any reasonable time. However, the Program could not request registrants to submit this information in a list format on a (routine) biannual basis. In addition to these three ESS — Phase II elements, regulatory amendments also address recommendations made by the Standing Joint Committee for the Scrutiny of Regulations, which had expressed concerns regarding the powers of the Minister under section 27, and the use of the phrase “without delay.” The Department had agreed to address these issues by clarifying the circumstances under which the Minister could suspend, revoke, or re-instate a registration or exemption, and by prescribing time frames. Objectives The Regulations Amending the Controlled Goods Regulations were made pursuant to the Defence Production Act. This initiative consolidates existing requirements in the Regulations to add clarity and addresses remaining security gaps that have been identified. The amendments address the issues identified above, complete the implementation of the ESS and respond to the concerns raised by the Standing Joint Committee for the Scrutiny of Regulations. Specifically, the amendments achieve the following objectives: Reflect and clarify in the Regulations the Program practices implemented in Phase I of the ESS. Address the three ESS — Phase II activities that required regulatory authority in order to be implemented. Address the concerns raised by the Standing Joint Committee for the Scrutiny of Regulations. The amendments to the Regulations strike a balance between supporting Canada’s national security objectives, fulfilling the commitments made to the U.S. Department of State by PWGSC in the 2011 Exchange of Letters, maintaining the competitiveness of Canadian industry, and addressing framework gaps. Description A brief summary of the key elements contained in the amendments to the Regulations follows: (1) Reflect and clarify in the Regulations Program practices implemented in Phase I of the ESS In order to prevent the unauthorized diversion of controlled goods domestically and to effectively support the national security framework, persons who require access to controlled goods must be (i) registered with the Program, (ii) exempt from registration, or (iii) excluded. The information required in applying for registration or renewal is stipulated in section 3 of the Regulations. This section was amended and a new section (3.1) was added to reflect the following additional information required from businesses or individuals filing an application for registration or renewal: (1) The consent to a security assessment of persons who own 20% or more of the outstanding voting shares or interests, and an indication of the percentage that each person owns. (2) The designated official. (3) The consent to a security assessment of the authorized individual. The above-mentioned security assessments are conducted by the Minister. These practices were implemented in October 2011. Since individual applicants are security-assessed by the Minister, the Regulations now clarify that there is no requirement for an individual applicant to appoint a designated official, or for the individual applicant to undergo certification. Security assessments evaluate the risk that an individual may pose in terms of the unauthorized transfer of controlled goods. The Regulations now further clarify processes that were implemented in October 2011 as part of Phase I of the ESS. More specifically, there are two “types” of security assessments described in the Regulations under sections 15 and 19; both sections have been expanded to include additional security-related risk factors. Section 15 concerns the assessments conducted by both the Minister and the designated official (i.e. the assessments of the authorized individual, owners with 20% or more of the voting shares, and the designated officials are conducted by the Minister, while the assessments of officers, directors, and employees are conducted by the designated official). Section 19 applies to assessments conducted by the Minister only in the context of applications for exemptions from registration. A. Security assessments conducted as per section 15 of the Regulations now include the assessment of (a) History of travel outside of Canada and the U.S.; and (b) Significant personal and professional associations and relationships. The amendments clarify that individuals who are the subject of the above-mentioned security assessment are required to provide to the designated official or the Minister, as the case may be, for the purposes of establishing their identity, a copy of the following: (a) Evidence of the information requested in subsection 15(4). For example, the information provided with regard to the items listed below should be capable of being verified by the Minister or the designated official: (i) the individual’s full name and any previous names; (ii) his or her date and place of birth; (iii) all citizenships and, if applicable, permanent resident status of the individual; and (iv) any security clearance held, denied, suspended or revoked. The Regulations now include the conditions when security assessments could be referred to security and intelligence partners for further verifications. The Regulations specify that high-risk security assessments of individuals conducted by the designated official are to be referred to the Minister for additional security checks with security and intelligence partners. Assessing risk is performed on a case-by-case basis, following an assessment of the following parameters: personal information, criminal history, travel history, financial risk, significant and meaningful associations, and specific charges or convictions. Security assessments conducted under section 15 are valid for a period of up to five years. Given this, the Regulations now specify that the record retention requirement is to keep and maintain only the most recent security assessment. This measure is intended to relieve some of the burden on registrants vis-à-vis the regulatory requirement to maintain records of security assessments during the period of an individual’s employment. B. Assessment conducted under section 18 of the Regulations — Temporary workers, international students, and visitors A registered person can apply to the Minister to exempt a temporary worker or a visitor. Regulations now include a distinct provision for international students. An international student is now defined as a person who is authorized by a study permit or by the Immigration and Refugee Protection Regulations to engage in studies in Canada and is not a director, officer or employee of a registered person. Further to the information requested in section 18, the Regulations now stipulate the requirement for consent to the security assessment by the international student and visitor, and, in the case of an international student, the following documents are to be requested by the designated official: a copy of the student’s valid study permit, a letter from the academic institution at which they are authorized to study indicating that the work they are doing for the registered person is integral to those studies (if applicable), copies of all identity documents issued to them by the Government of Canada or any of its provinces, and the original results of a country-wide criminal record check from each country other than Canada that they have resided in during the five-year period immediately before the date of their consent to the security assessment. The last two of these elements apply to temporary workers as well. A record-keeping requirement for visitor exemptions is also included in the Regulations to align them with operational procedures. These records have to be maintained by the registered person until two years after the day on which the visitor ceases to carry out their duties. Designated officials are responsible for the security assessment of officers, directors and employees within the registered entities and are the primary point of contact between Government and industry. In light of the importance of the designated official’s role in this partnership, the Regulations now include the requirement for them to obtain and maintain any certification required by the Minister. (2) Address the three ESS — Phase II activities that required regulatory authority in order to be implemented The Regulations now require registered persons to submit to the Minister the following information for all individuals who have been security-assessed by a designated official over the last six months: full name, date of birth, and whether the individual was authorized to access controlled goods. Although registered persons had to make this information available to the Minister during compliance inspections or upon request, this systematic reporting requirement facilitates the Department’s responsiveness during investigations or when addressing reported security breaches. This requirement also supports the registrant by ensuring that any new or previously unknown risks concerning an unauthorized diversion of controlled goods are mitigated through increased information sharing between the Government and industry. Similarly, the amendment was necessary to require that consent be obtained from any visitor to have their name referred to security and intelligence partners as part of the exemption process, which allows for a more thorough assessment of an individual in a position to access a registrant’s controlled goods. The amendments to the Regulations now enable the Minister to make a recommendation to the designated official in instances where a security assessment of a high-risk individual is referred by the designated official for further verifications. The designated official is now required to consider this recommendation in his or her assessment. The final decision of whether or not to grant access to an employee, director, or officer remains with the designated official. This amendment is intended to better support the designated official in his or her functions by providing access to additional information (through the Minister), which facilitates and substantiates a thorough decision. (3) Concerns of the Standing Joint Committee for the Scrutiny of Regulations Clarifying the decisional criteria for the revocation and suspension of registrations and exemptions The Regulations detail the provisions for suspensions and revocations of registrations and exemptions from registrations, as well as define the circumstances under which the Minister would consider a suspension or revocation. The Regulations were amended to clarify the criteria for suspensions and revocations (section 27) as follows: (a) Suspension: the Minister has reasonable grounds to believe there is an undue risk of unauthorized transfer of controlled goods. (b) Revocation [subsection 27(4)]: the Minister is not satisfied with the actions taken following a suspension; the Minister determines that there is an undue risk and the actions or omissions were deliberate; or the company is bankrupt. Clarifying the decisional criteria for the reinstatement of a suspended registration or exemption The Regulations were amended to better articulate how the decision is made to reinstate a suspended or revoked registration or exemption. In addition, the discretionary power of the Minister was removed as it pertains to reinstatement of a suspension or revocation in circumstances where there are no longer grounds for the suspension or the revocation was unfounded [i.e. the replacement of “may” with “shall” in subsection 27(3)]. The amendments reflect current practice with respect to suspensions and revocations. Specifying a time period to replace the phrase “without delay” Section 40 of the Defence Production Act requires information to be provided to the Minister “in the manner and time prescribed by regulation.” Amendments have prescribed a time frame for all relevant sections of the Regulations: Section 9: Registrants are required to inform the Minister of any changes in any of the information contained in the application for registration within 10 business days. This section also includes the requirement to inform the Minister of the name and address of any person that will, as a result of an acquisition, own 20% or more of the outstanding voting shares or interests of the business by the later of 32 business days before the date of an acquisition or one business day after the day on which they become aware of an acquisition. Paragraph 10(h): Registrants are required to inform the Minister within three days upon discovery of a potential security breach. Subsection 15(5): A person subject to a security assessment is required to inform the Minister or the designated official, as the case may be, of any changes concerning criminal history within five business days. Subsection 19(3): Registrants are required to inform the Minister within five business days of any changes in an application for exemption. While other sections containing “without delay” were not identified by the Standing Joint Committee for the Scrutiny of Regulations, amendments to the following subsection have been made, and specific time frames provided, for clarification and consistency: Subsection 27(6): Registrants are required to provide a temporary worker, international student or visitor whose registration or exemption is subject to revocation or suspension with a copy of the notice from subsection 27(1), (2), (3) or (4) within one business day from the time that it is received from the Minister. Regulatory and non-regulatory options considered The options outlined below provide an overview of the alternatives that were considered. Option 1: Leave the Regulations in place (i.e. maintain the status quo) The status quo was not considered to be a viable option. The previous regulatory requirements did not fully address certain activities required to address potential security gaps. Furthermore, the Standing Joint Committee for the Scrutiny of Regulations recommendations could only be addressed through regulatory amendments. Option 2: Address the identified issues in policy Phase I of the ESS was implemented through policy and operational changes. However, following an assessment of the various elements and possible gaps that were identified, it was determined that a clear regulatory framework for registrants that incorporates all regulatory obligations was necessary in order to administer the Program as intended. Additionally, elements from ESS — Phase II and the recommendations of the Standing Joint Committee for the Scrutiny of Regulations could not be addressed in policy. This option would not have permitted the completion of the strategy. Option 3: Amend the Regulations to include enhanced requirements (chosen option) Amending the Regulations has allowed the Department to meet the objectives stated above while enabling the Program to deliver on its mandate to safeguard controlled goods against unauthorized transfer. Benefits and costs Stakeholders of the Program include firms or associations involved in the aerospace, defence, satellite and security sectors; sole proprietors; consultants; academic institutions; and museums. While the list of Program stakeholders is extensive, the Canadian aerospace, defence and security industries constitute the “principal” stakeholder group. The companies from these industries represent the largest percentage of registrants and are considered to be the Program’s main clients. There are also a number of government departments who either use controlled goods (for example the Department of National Defence) or are impacted by national security considerations. PWGSC is aware of the need to weigh the consequences of any change on industry while ensuring national security concerns are fully met. Below is a short analysis of the estimated costs and qualitative impacts (positive and negative) by stakeholder group. It should be noted that no new costs are anticipated for the Canadian public or government as a result of the regulatory amendments. Any costs associated with new activities are strictly limited to the registrant’s time in obtaining a signature (in the case of visitor exemptions), considering the Minister’s response (in the case of referrals of high-risk individuals), and emailing the list of records (in the case of submitting a list of security-assessed people). The Program does not require additional capacity or tools to sustain these activities. Overview of estimated costs This table shows the overview of estimated costs. Administrative costs Administrative costs Administrative costs Administrative costs Administrative costs Administrative costs Cost-benefit statement Cost-benefit statement Base Year (2014) Final Year (2023) Total (Present Value) [10 Years] Average Annual (Present Value) A. Quantified impacts ($) A. Quantified impacts ($) A. Quantified impacts ($) A. Quantified impacts ($) A. Quantified impacts ($) A. Quantified impacts ($) Benefits Large / medium businesses $0 $0 Benefits Small businesses $0 $0 Benefits Sole proprietors $0 $0 Total $0 $0 $0 $0 Costs Large / medium businesses $58,448 $19,260 $289,147 $41,168 Costs Small businesses $158,298 $34,403 $570,810 $81,270 Costs Sole proprietors $0 $0 $0 $0 Costs Total $216,746 $53,664 $859,957 $122,439 Net administrative costs Net administrative costs Net administrative costs Net administrative costs $859,957 $122,439 B. Qualitative impacts B. Qualitative impacts B. Qualitative impacts B. Qualitative impacts B. Qualitative impacts B. Qualitative impacts Short list of qualitative impacts by stakeholder Short list of qualitative impacts by stakeholder Short list of qualitative impacts by stakeholder Short list of qualitative impacts by stakeholder Short list of qualitative impacts by stakeholder Short list of qualitative impacts by stakeholder Canadians and the Canadian economy Canadians and the Canadian economy Supports Canada’s security needs and international obligations. Addresses security gaps to lower risk of unauthorized transfer and possible espionage. Enhances ability to maintain Canada’s U.S. ITAR exemptions. Ensures that Canada continues to benefit from its privileged defence trade relationship with the U.S. and access to the important U.S. market. Supports Canada’s security needs and international obligations. Addresses security gaps to lower risk of unauthorized transfer and possible espionage. Enhances ability to maintain Canada’s U.S. ITAR exemptions. Ensures that Canada continues to benefit from its privileged defence trade relationship with the U.S. and access to the important U.S. market. Supports Canada’s security needs and international obligations. Addresses security gaps to lower risk of unauthorized transfer and possible espionage. Enhances ability to maintain Canada’s U.S. ITAR exemptions. Ensures that Canada continues to benefit from its privileged defence trade relationship with the U.S. and access to the important U.S. market. Supports Canada’s security needs and international obligations. Addresses security gaps to lower risk of unauthorized transfer and possible espionage. Enhances ability to maintain Canada’s U.S. ITAR exemptions. Ensures that Canada continues to benefit from its privileged defence trade relationship with the U.S. and access to the important U.S. market. Canadian government Canadian government Ensures regulatory alignment with the U.S. Strengthens the Program’s effectiveness through additional clarity. Strengthens national security by completing the implementation of the ESS. Ensures regulatory alignment with the U.S. Strengthens the Program’s effectiveness through additional clarity. Strengthens national security by completing the implementation of the ESS. Ensures regulatory alignment with the U.S. Strengthens the Program’s effectiveness through additional clarity. Strengthens national security by completing the implementation of the ESS. Ensures regulatory alignment with the U.S. Strengthens the Program’s effectiveness through additional clarity. Strengthens national security by completing the implementation of the ESS. Canada–U.S. relations Canada–U.S. relations Supports Canada’s agreement with the U.S. under section 126.18(c)(2) for the safeguarding of all ITAR-controlled articles. Enhances confidence-building measures to mitigate U.S. security concerns. Supports broader North American defences through initiatives such as the Beyond the Border Action Plan. Supports Canada’s agreement with the U.S. under section 126.18(c)(2) for the safeguarding of all ITAR-controlled articles. Enhances confidence-building measures to mitigate U.S. security concerns. Supports broader North American defences through initiatives such as the Beyond the Border Action Plan. Supports Canada’s agreement with the U.S. under section 126.18(c)(2) for the safeguarding of all ITAR-controlled articles. Enhances confidence-building measures to mitigate U.S. security concerns. Supports broader North American defences through initiatives such as the Beyond the Border Action Plan. Supports Canada’s agreement with the U.S. under section 126.18(c)(2) for the safeguarding of all ITAR-controlled articles. Enhances confidence-building measures to mitigate U.S. security concerns. Supports broader North American defences through initiatives such as the Beyond the Border Action Plan. Industry and other stakeholders Industry and other stakeholders Maintains the global competitiveness of Canadian aerospace, defence and satellite sectors vis-à-vis other jurisdictions. Provides registered persons with a better understanding of Program requirements and their regulatory obligations. Increases compliance with Program requirements. Maintains the global competitiveness of Canadian aerospace, defence and satellite sectors vis-à-vis other jurisdictions. Provides registered persons with a better understanding of Program requirements and their regulatory obligations. Increases compliance with Program requirements. Maintains the global competitiveness of Canadian aerospace, defence and satellite sectors vis-à-vis other jurisdictions. Provides registered persons with a better understanding of Program requirements and their regulatory obligations. Increases compliance with Program requirements. Maintains the global competitiveness of Canadian aerospace, defence and satellite sectors vis-à-vis other jurisdictions. Provides registered persons with a better understanding of Program requirements and their regulatory obligations. Increases compliance with Program requirements. Canadians and the Canadian economy Amendments are intended to ensure that Canada, particularly the Canadian defence, aerospace, satellite and security industries, continues to benefit from its privileged defence trade relationship with the U.S. and access to this important market. This is primarily accomplished in this context by supporting the maintenance of Canada’s U.S. ITAR exemptions. The Regulations increase the efficiency of the Program in protecting against “intangible technology transfer” and industrial espionage. No new costs for Canadians are foreseen, except those identified for industry. Canadian government The amendments add clarity and transparency with respect to the ESS — Phase I, but have not resulted in a change of direction operationally either for the Program or for Program registrants. The changes related to the amendments that were required to implement the ESS —Phase II activities have been made using existing resources. These amendments have been incorporated into processes already in place (i.e. the existing processes surrounding the security assessment referrals of high-risk individuals, visitor exemptions, and the record keeping of security-assessed individuals). Consequently, no new costs are foreseen for the Canadian government. Canada–U.S. relations Amendments codify in regulation the existing practice of assessing the following key risk indicators: Travel frequency, duration, and location; and Significant and meaningful associations (foreign and domestic). These practices were implemented in the ESS — Phase I to strengthen the security around controlled goods. Specifically, stipulating these enhancements in regulation helps maintain the high confidence that the U.S. has in Canada’s controlled goods regulatory regime and continues to support the ITAR exemptions [section 126.18(c)(2)]. No costs are foreseen. Industry and other stakeholders (registrants) One of the main objectives of these regulatory changes is to bring clarity to the framework to provide registered persons with a better understanding of the Program’s requirements and their regulatory obligations. Consequently, only elements which would result in new incremental practices and/or requirements were evaluated. The calculations included herein focus on the following three activities: Consideration of a recommendation provided by the Minister to a designated official for referrals of high-risk employees; Obtaining the consent of the individual in the visitor exemption process; and Submitting twice annually the list of security-assessed individuals to the Minister. As detailed below, it is anticipated that the first two regulatory amendments only affect a small portion of current registrants, with an average of 15% (76 of 498) of the medium and large registrants and 15% (311 of 2 055) of small registrants. The anticipated costs of the third element were applied to large, medium and small registrants. Given that 52% of the Program participants are small businesses (versus only 12% for medium/large businesses), this is the most affected class of registrants. However, the cost to each small business is anticipated to be less than the anticipated cost to each medium/large business. The overall cost for small business is greater since there are more small registrants in the Program compared to the number of medium/large businesses. The total cost of the new administrative burden to industry is estimated to be a present value (PV) of $122,439 annually ($859,957 PV over 10 years). There are no new compliance costs as a result of these Regulations. None of the above amendments are expected to affect, in any significant way, individual registrants or sole proprietors. In the three years preceding the regulatory amendment, there have been no instances of individual registrants or sole proprietors submitting a visitor exemption request or a security assessment referral for a high-risk employee. This trend is not expected to change. Furthermore, this group is not expected to have, or to submit, a list of employees. “One-for-One” Rule The amendments to the Regulations are considered to be an “IN” under the “One-for-One” Rule. These amendments are expected to marginally increase the administrative costs for some Program registrants, particularly those who process a high number of high-risk security assessments. These registrants fall mostly in the medium to large business category, which is less than 12% of the total number of program registrants. The net present value (NPV) is $859,957 over a 10-year period using a discount rate of 7% and the annualized present value is $122,439. This table shows the net present value (NPV) over a 10-year period. Cost-benefit statement Cost-benefit statement Base Year (2014) Final Year (2023) Total (Present Value) [10 Years] Average Annual (Present Value) A. Quantified impacts $ A. Quantified impacts $ A. Quantified impacts $ A. Quantified impacts $ A. Quantified impacts $ A. Quantified impacts $ Familiarization with new obligations related to the amendments. Large / medium businesses $23,039 $0 $23,039 $3,280 Familiarization with new obligations related to the amendments. Small businesses $95,069 $0 $95,069 $13,536 Familiarization with new obligations related to the amendments. Sole proprietors $0 $0 $0 $0 Familiarization with new obligations related to the amendments. Total $118,108 $0 $118,108 $16,816 Consider the recommendation of the Minister with regard to the risk level of employees submitted to the Program for further verifications. Large / medium businesses $6,807 $3,703 $51,158 $7,284 Consider the recommendation of the Minister with regard to the risk level of employees submitted to the Program for further verifications. Small businesses $475 $259 $4,998 $712 Consider the recommendation of the Minister with regard to the risk level of employees submitted to the Program for further verifications. Sole proprietors $0 $0 $0 $0 Consider the recommendation of the Minister with regard to the risk level of employees submitted to the Program for further verifications. Total $7,282 $3,962 $56,156 $7,995 Obtain consent form from visitor for exemption requests. Large / medium businesses $17,734 $9,646 $133,272 $18,975 Obtain consent form from visitor for exemption requests. Small businesses $612 $344 $3,735 $532 Obtain consent form from visitor for exemption requests. Sole proprietors $0 $0 $0 $0 Obtain consent form from visitor for exemption requests. Total $18,346 $9,989 $137,007 $19,507 Submit list of security-assessed individuals to the Program every six months. Large / medium businesses $10,868 $5,912 $81,678 $11,629 Submit list of security-assessed individuals to the Program every six months. Small businesses $62,141 $33,801 $467,008 $66,491 Submit list of security-assessed individuals to the Program every six months. Sole proprietors $0 $0 $0 $0 Submit list of security-assessed individuals to the Program every six months. Total $73,010 $39,713 $548,686 $78,121 Net administrative costs — discounted to 2014 Net administrative costs — discounted to 2014 Net administrative costs — discounted to 2014 Net administrative costs — discounted to 2014 $859,957 $122,439 Net administrative costs — discounted to 2012 Net administrative costs — discounted to 2012 Net administrative costs — discounted to 2012 Net administrative costs — discounted to 2012 $751,120 $106,943 Note: The value counted under the "One-for-One" Rule is $106,943. Note: The value counted under the "One-for-One" Rule is $106,943. Note: The value counted under the "One-for-One" Rule is $106,943. Note: The value counted under the "One-for-One" Rule is $106,943. Note: The value counted under the "One-for-One" Rule is $106,943. Note: The value counted under the "One-for-One" Rule is $106,943. Cost per small business The anticipated increase in administrative costs per small business is $278 (NPV) over a 10-year period. This new cost is only expected to apply to approximately 15% of small businesses registered in the Program. Not all small businesses are affected by the amendments to the Regulations under Phase II of the ESS. Statistical analysis from fiscal year 2012–2013 showed that 0.1% of small businesses (2) submitted a request for further verification in regard to high-risk employees; 1.2% of small businesses (24) requested visitor exemptions through the Program; and 34.9% of small businesses (716) would have been required to submit a list of security-assessed individuals every six months to the Program. These figures exclude individual registrants and sole proprietors. When the percentage of small businesses affected in the calculations is factored in, the annual average NPV administrative cost increase is estimated to be $40 per affected small business. Small business lens The costs associated with the regulatory amendments are less than $1 million annually; consequently, the small business lens does not apply. Any potential increases in administrative costs that may arise from the three amendments relating to Phase II of the ESS are estimated to be low overall (see table above). Small businesses do not submit a large number of referrals of high-risk employees or visitor exemptions (two of the three activities). These Program activities are primarily undertaken by medium and large businesses. Anticipated costs were validated with stakeholders via a survey administered electronically in February and March 2014 and again with members of the Program’s Industry Engagement Committee in October 2014. Consultation Since 2010, the Program’s largest stakeholders were given the opportunity to provide input on proposed regulatory amendments through a series of consultation and communications activities. General public Status updates with regard to the rollout of the ESS were made through the regular posting of information bulletins on the Program’s Web site. The Program continued its involvement in various outreach activities, including trade shows and conferences. Regulatory amendments have been communicated, specifically how they pertain to aligning the Regulations with ESS changes implemented by the Program in October 2011. Industry stakeholders (registrants) The regulatory amendments contribute to the improved global competitiveness of the Canadian aerospace, defence and satellite sectors. As a result of the increase in clarity, registrants should have a better understanding of policy and regulatory requirements. Registrants have been supportive of efforts to standardize the application of the registration and security assessment process across the industry, and are expected to benefit from the increase in guidance from the Minister in terms of training and high-risk employee situations. Industry and stakeholder departments and agencies were consulted in the development of the ESS — Phase I through the Program Industry Advisory Board. Concerns were raised by stakeholders in the months following the implementation of the ESS — Phase I. These included the level of information required for security assessments, the increase in demands placed on designated officials (including the cost of certification), and the sharing of personal information with foreign governments. In the months following the October 2011 launch of the ESS, PWGSC met with stakeholders to address their concerns. In January 2012, the Industry Engagement Committee was established (replacing the Program Industry Advisory Board) in order to engage industry on an ongoing basis regarding the impacts on industry of any Program changes, including legislative and regulatory changes, while ensuring national security concerns are fully addressed. The Industry Engagement Committee is comprised of five aerospace and defence companies, four industry associations, one educational association, and one consulting firm. Together, these industry members represent a broad cross-section of the aerospace and defence industries. Since its inception, the Industry Engagement Committee has met monthly and has provided advice to PWGSC regarding the Program. These efforts have served to inform the development of the regulatory amendments and increase the level of stakeholder support and comprehension. Workshops were offered by PWGSC to designated officials between September 2011 and April 2012 to provide training on new Program requirements for security assessments. Expanded educational and certification measures, combined with standardized assessment procedures, helped to ensure that Canadian companies remain aware of their obligations under the new rules and increased compliance with Program requirements, all of which serve to facilitate the safeguarding of controlled goods. Lastly, amendments that were proposed were presented to the Industry Engagement Committee for feedback in November 2014. Industry Engagement Committee member feedback was positive and integrated into the proposal, where appropriate. This included the recommendation to add a provision or new section regarding change in ownership that would require 32 days’ advance notice. The members also recommended that assumptions used to develop the estimated costs be explicitly stated to help mitigate any confusion on the part of stakeholders regarding the anticipated level of effort associated with the new requirements. A document detailing the assumptions was prepared and is available upon request. Other federal departments Government departments that could have been affected by the changes were consulted. There were no outstanding concerns. U.S. government It is expected that the U.S. government will continue to be supportive of the amendments to the Regulations. The most recent bilateral meeting served, among other things, to update the U.S. government on the continued implementation of the ESS Strategy in the Program. No concerns were raised by the U.S. government regarding the regulatory amendments. Canada Gazette consultation process PWGSC received feedback from stakeholders and the public on the proposed amendments to the Regulations in the context of the Canada Gazette, Part I, consultation process, which took place between May 2 and June 1, 2015. The Canada Gazette, Part I, serves as a vehicle for general public feedback on proposed regulations. Canadians can actively contribute to the regulatory process by sending their comments or concerns on the subject under consultation to the appropriate department or agency. The objective of the public consultations was to seek input, from Program registrants and non-registrants alike, on the proposed amendments to the Regulations. Participants were able to provide their feedback by email or telephone. The Program directly emailed a notice of PWGSC’s intent to amend the Regulations to more than 4 000 organizations from the Program database. The email contained a link to the posting of the Regulatory Impact Analysis Statement in the Canada Gazette in addition to links to the Program Web site to provide additional information on the proposal (e.g. Consultation Web page and Frequently Asked Questions on Amendments to the Controlled Goods Regulations). Program registrants were also advised of the Canada Gazette posting and its associated consultation period through “Ask the Expert” sessions that were held by the Program in May 2015. In total, PWGSC received seven submissions from various stakeholders during this process, including one from an industry association. Of the seven submissions received, two were beyond the scope of the consultations as they were unrelated to the regulatory proposal. The following summarizes the feedback received and PWGSC’s response. (1) Notification time frames One respondent expressed concerns with the different notification periods that were proposed throughout the regulations and suggested greater consistency to avoid confusion. Response: Specific notification time frames were established to provide more clarity for stakeholders and to ensure that the Minister has enough time to assess and respond to the risks that could result from the various conditions that are addressed by the regulations, such as the discovery of a potential security breach, a change in registration status or a change in company ownership. (Section 9.1) One respondent expressed concerns with the 5-day period for advising the Minister of any change to the information contained in the registration application and suggested extending the notification period to 30 calendar days. Response: A 30-day notification period is too long to ensure that the Minister remains adequately informed and able to evaluate any risk related to changes to application information. (Note: Notification period has been adjusted to 10 business days instead of 5.) (Section 9.2) One respondent indicated that there should not be any mandated time frame to advise the Minister of any potential sale or acquisition prior to the transaction occurring, as it could adversely affect negotiations and the ability of a company to raise capital. The respondent suggested the Minister should only be made aware of changes in ownership as they occur. Response: Section 9.2 refers to acquisitions, not “potential acquisitions” that are being negotiated. In order to prevent unauthorized access to controlled goods, persons who acquire 20% or more of the outstanding voting shares of a business must undergo a security assessment. The rationale for the 32-day notification period is to ensure that the Minister is provided sufficient time to assess if a change in ownership poses any risk of unauthorized access to controlled goods. Section 9.2 reflects the input received from the Industry Engagement Committee that recommended adding a provision for advance notice of change in ownership. One respondent recommended that paragraph 10(h) allow for a “two-level structure” for notifying the Minister about any actual or potential security breach: (1) the designated official would be required to advise the Minister of a potential breach within 15 calendar days, and (2) the registrant would report the findings of its investigation within 60 calendar days. This would ensure registrants have sufficient time to investigate a breach and to determine whether it actually occurred. Response: PWGSC recognizes that a sufficient amount of time is needed to conduct a full investigation within a given organization after a potential breach has been discovered. The regulations do not impose a set time period for completing an investigation. The Minister is to be advised within three days of any potential security breach and/or within three days of confirming that an actual security breach has occurred, a conclusion that is usually reached after a potential breach has been fully investigated. (2) Administrative burden One respondent commented that cost impacts of the regulatory amendments should include the cost of requirements implemented by the Controlled Goods Program in 2011, as a result of a policy decision. The respondent suggested that 2011 should have been used as the base year instead of 2014. Response: The majority of security and business enhancements brought to the Controlled Goods Program since 2011 were implemented under existing regulatory authority and were already in place when regulatory amendments were proposed. The cost-benefit analysis only accounts for the new activities that result from the regulatory amendments: Enabling the Minister to provide a recommendation to the designated official for high-risk employees; Enabling the security assessment of a visitor and obtaining the consent of the individual subject to that assessment; and Requiring registrants to submit a list to the Minister of all individuals who have undergone a security assessment. The number of registrants impacted by each one of the new activities was extrapolated based on a statistical analysis of the Controlled Goods Program’s activity in fiscal year 2012–2013. This analysis demonstrated that the first two new activities would only impact a small proportion of program registrants. The increase in administrative costs that may arise from these three activities is expected to be low overall, particularly for small businesses. Sole proprietors/individuals were excluded from the calculations since they are not impacted by these new activities. (3) Potential trade implications Two respondents were concerned that changes to the exemption application process for temporary workers, visitors and international students (section 18) could have a detrimental impact on businesses’ ability to market Canadian products internationally because of the added administrative burden imposed on businesses and foreign nationals wishing to examine, possess or transfer controlled goods. One respondent also indicated that additional analysis should have been performed to determine the impact of regulatory amendments on Canadian trade. Response: Requirements reflect the commitments made by Canada in the 2011 Exchange of Letters with the U.S. to augment security assessment procedures for certain categories of individuals by assessing key risk indicators including travel history, significant and meaningful associations and criminal history. PWGSC has carefully considered the impacts of regulatory amendments on industry. The regulations continue to support Canada’s trade interests by helping to maintain the Canadian Exemptions provided under the U.S. International Traffic in Arms Regulations (ITAR) for the license-free transfer of many ITAR-controlled defence articles between the U.S. and Canada and among registrants of the Controlled Goods Program. (4) Privacy concerns Two respondents expressed concerns with the requirement to consent to the disclosure of personal information to — and its use by — Canadian government entities and credit reporting agencies for the purpose of conducting security assessments (sections 3.1 and 12.2). Response: PWGSC is bound by the Privacy Act, which imposes obligations to respect privacy rights by limiting the collection, use and disclosure of personal information. The information to be collected and shared with other federal government agencies is limited to what is required for conducting the security assessment. The personal information (e.g. name, date of birth or address) shared by the Government with credit rating agencies only serves to identify the person that is subject to a credit check. This involves the same process as in any regular credit analysis. (5) Security assessment procedures One respondent enquired about how the regulatory amendments affect company shareholders and owners who are neither Canadian citizens nor residents in Canada. Response: All owners, including foreign owners, with 20% or more of voting shares are to submit a completed Security Assessment Application Form as part of the registration application process. This requirement applies in the renewal process as well for both foreign nationals and Canadian citizens, regardless of country of residence. One respondent suggested clarifying the notion of residency under paragraph 18.2(e), which requires that an application for exemption of a temporary worker or international student be accompanied by original results of a country-wide criminal record check for all countries — other than Canada — in which applicants have resided. Response: The criminal record check applies only to countries where the person has resided. This requirement is not applicable for temporary visits to other counties for business or leisure travel. The length of stay in a country may be a factor in determining residency status but is not decisive. Under Canadian law, the determination of residency status in Canada is done on a case-by-case basis and considers several criteria such as the existence of social ties (spouse or partner, dependent children, etc.) and/or economic ties (workplace and payment of taxes). The assessment of these factors is combined to identify an individual’s elected domicile or, in other words, where their daily life takes place. Since the notion of residence is a pre-established concept in Canadian law and depends on an assessment of factors, no further clarification is required in the Regulations. After taking into consideration all the feedback received, PWGSC made only one adjustment to the regulatory amendment proposal: the time frame for advising the Minister about changes to registration information was extended from 5 to 10 business days. This change balances the needs of registrants for greater flexibility while ensuring that the Minister remains adequately informed and able to evaluate any risk related to the new information. Implementation, enforcement and service standards Implementation The Regulations came into force on the day they were registered. Enforcement These Regulations do not alter existing compliance provisions under the Defence Production Act. Compliance and enforcement measures for all registered persons continue to include compliance inspections that monitor, but are not limited to, the following conditions of registration: Appointing a designated official; Establishing and maintaining a security plan; Maintaining records; Providing training to officers, directors, employees and temporary workers; Providing security briefings to visitors; Reporting security breaches; and Making available all records to the Minister and reporting any change in the application submission. Service standards In line with the Government of Canada’s Red Tape Reduction Action Plan initiative “Improving Service Performance for Regulatory Authorizations,” service standards and performance targets for all regulatory authorizations were established for the Program, as follows: This table shows the Government of Canadas Red Tape Reduction Action Plan initiative Improving Service Performance for Regulatory Authorizations, service standards and performance targets. Program Activity Service Standard Service Standard Target Registration (new and renewal) 32 business days 80% processed within standard Security assessments 32 business days 80% processed within standard Temporary worker exemptions 30 business days 80% processed within standard Visitor exemptions 10 business days 80% processed within standard It should be noted that a number of activities carried out by the Program require input from other departments or agencies (e.g. the Royal Canadian Mounted Police and the Canadian Security and Intelligence Service), subject to their own service standards and timelines. The response time may consequently be extended in cases where one or more of the following conditions exist: Adverse findings or external file referral; Inability to make contact with references provided or the authorized individual; and The designated official has not successfully completed the required training or has failed the certification exam. Processing delays may result where additional verifications and collaboration with other departments or agencies are required. Applicants will receive a notice of extension within the service delivery window (i.e. 32 days) should service standard delays be anticipated. In addition, Program registrants are expected to benefit from the precise time lines that replaced the numerous references to “without delay” throughout the Regulations. These measures should improve the client service experience and service delivery. Program stakeholders and clients were consulted on service standards from November 2013 to May 2014 and were supportive of the regulatory amendments. Performance reporting A report on the performance of the Program relative to its service standard will be provided annually to Parliament through two tables of PWGSC’s Departmental Performance Report found in the Supplementary Information section. Performance will also be reported on the Program’s main Web page. The Program will also report on performance against targets on an annual basis on PWGSC’s Acts and Regulations Web page, which can be found at http://www.tpsgc-pwgsc.gc.ca/lr-ar/index-eng.html. Performance measurement and evaluation This initiative is largely intended to clarify the requirements in the Regulations that apply to persons accessing controlled goods in Canada. To evaluate whether the Regulations are adequately understood, inquiry, inspection and compliance data will be assessed following the implementation period to determine whether there are any trends associated with non-compliance that might suggest that sections of the Regulations are not understood by all or particular groups of regulated parties. Ongoing environmental scans will be used to identify any issues or situations concerning the domestic regulation of controlled goods that could have unintended consequences as a result of this initiative. Contact Louis LePage Senior Director Controlled Goods Program Industrial Security Sector Department of Public Works and Government Services 2745 Iris Street Ottawa, Ontario K1A 0S5 Telephone: 613-948-1767 Email: [email protected] Footnote a S.C. 2015, c. 3, s. 74 Footnote b R.S., c. D-1 Footnote 1 SOR/2001-32

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