What changed in 2019
For many years, Canadian trade controls focused on goods and technology physically leaving Canada. An intermediary in Canada who arranged a sale of military equipment from one foreign country to another, without the goods ever entering Canada, was largely outside the export permit system.
That changed in 2019, when amendments to the Export and Import Permits Act brought brokering controls into force. The amendments formed part of Canada's steps to join the Arms Trade Treaty, which asks states to regulate brokering of conventional arms under their jurisdiction. Since then, certain brokering activity requires a permit from Global Affairs Canada, in the same way that certain exports do.
The practical effect is that Canadian individuals and companies who act as agents, intermediaries, traders or deal makers in controlled items now need to check whether their activity is brokering, even if they never hold the goods.
What brokering means
In broad terms, brokering means arranging or negotiating a transaction that relates to the movement of controlled goods or technology from one foreign country to another. The key features are that the goods move between two countries other than Canada, and that the broker plays a role in bringing the transaction about.
Examples of activity that may count as brokering include:
- A Canadian trading company that buys military vehicle parts from a manufacturer in one European country and sells them to a ministry of defence in another, with the parts shipped directly between those countries.
- A consultant in Canada who introduces a foreign buyer to a foreign seller of controlled equipment and negotiates the terms on a commission basis.
- A Canadian citizen working abroad as an agent who arranges a sale of controlled items between two foreign parties.
The legislation treats certain supporting services differently from the core activity of arranging the deal. Where exactly the line falls for activities such as transport, insurance or finance is a technical question, and businesses that provide these services should take advice on their own position.
Who the controls apply to
The brokering controls reach two groups. The first is anyone in Canada who carries out brokering, whatever their nationality. The second is Canadians outside Canada, which broadly covers Canadian citizens and Canadian businesses and organisations, wherever they happen to be when they broker.
That second group matters for internationally mobile professionals and for Canadian companies with overseas offices. A Canadian national working for a defence trading business in another country, or a Canadian company's foreign branch, may need to consider Canadian brokering rules alongside the rules of the country where they are located.
Businesses with operations in several countries often find that a single transaction engages brokering or export rules in more than one jurisdiction. Each set of rules has to be satisfied independently. Holding a permit in one country does not remove the need for permission in another.
Which items are covered
Brokering controls do not apply to every item on the Export Control List. They apply to items on a separate Brokering Control List, which is centred on military goods and technology and certain other strategic items. Some dual-use items can also fall within the controls where the broker knows or suspects they are intended for weapons of mass destruction or their delivery systems.
Classification is therefore the starting point. A business that arranges deals in controlled items should establish, for each product line, whether it falls within the brokering controls. Where items are close to the boundary, or where the specifications are not fully known, take advice before agreeing to act.
It is also important to consider the end use. An item that would not normally be captured can come within the controls because of what it will be used for. Brokers who hear warning signs about end use, such as a customer who will not say who the final user is, should treat that as a reason to stop and assess.
Applying for a brokering permit
Brokering permits are applied for through Global Affairs Canada, in a similar way to export permits. The application usually needs to identify the broker, the goods or technology, their classification, the countries of origin and destination, the seller, the buyer, the consignee, the end user and the intended end use.
Supporting documents can include the contract or draft contract, end-user documentation and information about any export authorisation granted by the country from which the goods will be shipped. The government assesses applications against criteria similar to those used for exports, including the destination, the parties and the risk that the items could be used to commit or facilitate serious violations of human rights or international humanitarian law, or be diverted.
Because a brokering permit is needed before the brokering takes place, timing matters. Negotiating a deal and then applying for a permit afterwards may already be a breach. Brokers should plan to apply early and should make clear to counterparties that any agreement is conditional on the permit being granted.
Brokering permits and export permits compared
The two types of permit address different activities, and a single business may need both for different deals.
| Feature | Export permit | Brokering permit |
|---|---|---|
| Activity controlled | Goods or technology leaving Canada | Arranging a transaction between two foreign countries |
| Do goods pass through Canada | Yes, they leave from Canada | Typically no |
| Who applies | The exporter | The person in Canada or Canadian abroad who brokers |
| Items covered | Export Control List and Area Control List destinations | Brokering Control List, and some items for weapons of mass destruction |
| Foreign authorisation | May be needed for re-export by the buyer | Usually needed from the country of export |
A Canadian company that manufactures in Canada and sells abroad needs export permits. The same company, when it arranges for a foreign subsidiary or partner to ship controlled items directly to a third country, may also need a brokering permit.
How brokering deals are paid
Brokering transactions usually involve one of two payment structures. In the first, the broker takes title to the goods, buying from the seller and reselling to the buyer, with money flowing from the buyer to the broker and from the broker to the seller. In the second, the broker never takes title and earns a commission or fee, with the buyer paying the seller directly and one party paying the broker separately.
Both structures send money through countries that may differ from where the goods originate or end up. A Canadian broker might receive payment in US dollars from a buyer in one region and pay a seller in euros in another, while the goods travel by sea between two third countries. From a payment provider's perspective, that pattern only makes sense when the documents explain it.
Commission payments deserve particular care. Large or unusual commissions in defence transactions have historically been associated with corruption risk, so payment providers and banks look closely at the basis for any commission, the services provided and the recipient.
A well documented commission arrangement has a written agency or consultancy agreement signed before the work begins, a clear description of the services, a fee that can be justified against the work and the market, and payment to the agent's own business account in the country where it operates. Payments to personal accounts, to offshore companies with no connection to the agent's work or to accounts held in a third country raise immediate concerns. So do success fees that are very large relative to the contract or that are payable to people connected with the buyer. Brokers who earn commissions should expect their own payment partner to ask for the agreement and for evidence of the services provided, and should keep both on file for each deal.
What payment partners check
A payment provider handling brokering transactions will want to see the brokering permit, or a reasoned explanation from counsel of why one is not required. It will also want the underlying contract, details of the export authorisation in the country of origin, end-user documentation and evidence of screening for every party.
For each payment, the provider checks that the payer and payee match the parties in the permit and contract, that the amounts align with the contract value and milestones, and that the countries involved are consistent with the documented route. Any party or destination that is sanctioned or under an arms embargo will cause the payment to be declined.
Brokers should expect these checks on every transaction, not just at onboarding. Keeping a complete file for each deal, with documents named and dated consistently, makes the checks quick. Our article on arms embargoes and payments explains how destination screening works in practice.
Practical steps for brokers
- Map your activities and identify where you arrange or negotiate deals between foreign parties.
- Classify the items involved against the Brokering Control List, with advice where needed.
- Screen every party, including end users and intermediaries, before engaging in negotiations.
- Apply for brokering permits before brokering, and make contracts conditional on permits being granted.
- Confirm that the country of export has authorised the shipment.
- Keep commission arrangements written, proportionate to the services and paid only to the contracted party.
- Maintain a transaction file that links permits, contracts, end-user documents, shipping records and payments.
- Brief your payment provider before the first payment on a new deal.
General information only
This article is general information about Canadian brokering controls. It is not legal advice. Whether a particular activity counts as brokering, and whether a permit is required, depends on the facts and should be confirmed with qualified trade controls counsel.
CCYFX processes supplier payments and contract receipts for defence businesses that hold the export and brokering permits their trade requires. See our defence industry page for how we work.
