Skip to main content
This website uses cookies. By continuing to use this website you are agreeing to our use of cookies as described in our privacy policy.
Newsletter | Covid-19

National Security - The Elephant in the Room for Investors and Industry

Fasken
Reading Time 10 minute read

Capital Perspectives - Newsletter

As a leading law firm respected by the international business community, Fasken makes every effort to be more responsive to our clients' needs. In Canada, this extends to national security.

While national security is usually thought of as a matter related to issues such as terrorism and cyber threats, it encompasses far more that the obvious considerations, ranging from basic requirements such as food security and access to necessary medical supplies, to control of foreign ownership of Canadian business. It is these less obvious aspects of national security that were cast in sharp relief this past spring as COVID-19 left no one untouched.

In this Spotlight, we explore how Canada's international relationships, the disruption of those relationships and the impact of COVID-19 has put national security front and centre on the agenda for Canadian business like never before.

The co-leaders of Fasken's National Security Group practice with the Fasken Ottawa office. Andrew House is a national security lawyer who also specializes in government relations and political law. Marcia Mills advises clients on procurement, government contracts, trade and information technology. They share their thoughts on how and why national security has taken the spotlight and how this relates to foreign direct investment and government procurement.

Q: What does the concept of "national security" mean in government contracts?

Marcia: National security considerations have always been part and parcel with procurement. It isn't a new factor necessarily, especially for defence contractors. However, it is and will likely remain a greater influence in how procurement is conducted going forward.

One of the underlying elements that was gaining traction even before COVID is the impact of governments moving to a more technology-based focus, for example, the use of cloud data storage. Another area where security is becoming more focused is the trend towards having industry innovate for government requirements, especially in the defence sector. Defence organizations worldwide are increasingly looking to industry for solutions to their requirements because industry is now innovating faster than traditional government can. That is another element that is coming into play with issues of national security that we didn't have to look at before.

Historically, government was the innovator and would have technology developed solely for its use. But, over time, this became an expensive proposition, leaving governments with what I call orphan technology - no wide user base to share the costs of ongoing maintenance and support and, sometimes, with no contractor to support the technology.

If a government is procuring any information technology, particularly cloud technology, it is going to involve national security. What this means for federal contractors is that there will be a security requirement for the procurement contract. For example, a federal contractor will likely have to be registered in the Contract Security Program. Registration can mean that their people, their office and maybe even their IT systems have to go through a security assessment and clearance process. Depending on the level of security clearance required, this can be a rigorous and complicated process.

National security infuses procurement at the federal level, but security in general is relevant at all government levels as government entities move toward tech-based delivery systems and have to consider things like data security.

Q: How is national security defined under the Investment Canada Act and related regulations?

Andrew: I've explained it to people in the following terms: National security means in Canada what the Government of Canada needs it to be at any given time or for any particular situation. That is in part unfair and tends toward arbitrariness, which makes the conduct of business more difficult than it should be because it creates uncertainty and robs deal proponents of the certainty that they may otherwise have.

But it's partially legitimate in the sense that the government needs the flexibility to see to that first duty, which is to see to the safety and security of citizens. The idea of taking action on a national security basis goes to the core of what government needs to do fulfill that mandate, so a certain amount of flexibility is certainly warranted. But in recent years, it has become a disincentive to investment in Canada, simply because there is a lack of clarity about the test that must be met or the bar that must be cleared by investors.

Q: Where and how do each of you engage with clients to assist them find the clarity and understanding they need to successfully conduct business or pursue a government contract?

Andrew: The first thing I try to do is help a client arrive at a place where they can make peace with the uncertainty that is inherent in any foreign direct investment involving a non-likeminded state. It isn't business as usual.

CEOs and executive teams used to business planning based on applying their business acumen to known factors often find themselves in very frustrating circumstances where they enter the unknown. They may not even know what they don't know. It does become extremely murky. Trying to dissipate the fog around what we can know and what is truly not knowable, and helping people make their peace with that early in the process is the first thing that we do.

Second, we really try to demystify some of the factors that government may be considering while looking at a foreign direct investment. All of these things are publicly available in one form or another. Government has spoken on the concerns it has when dealing with investments by foreign entities. They have never effectively, in my view, compiled these things in one place or elucidated them properly, so that business leaders can make clear choices based on clear questions.

Which is not to say the government hasn't gone to some length in making its case clear, I just don't think it's gone far enough. That's where we come in, to bring clients from a point of confusion to a place of knowledge and what deal proponents can do to mitigate the concerns government may have about a particular investment.

Marcia: My practice is geared towards navigation – helping clients navigate the requirements of national security to be a supplier to the federal government.

For example, how to register in the Contract Security Program, understanding what the requirements are, assisting those who are new to the program develop their policies, programs and operations to be compliant with the program. This is beyond the data and information requirements under privacy law. For Canadian suppliers, there are also the additional employment law considerations – requiring employees to be fingerprinted, managing the potential job impact for employees who cannot achieve the necessary clearance level, and just the deep level of personal information and detail that is required for a security clearance.

In some cases, the national security requirements are more nuanced – the tender or contract doesn't expressly say "this is a national security issue," but it is the basis for the requirement. So, I help clients interpret and understand why these requirements are necessary for national security even if they aren't expressly stated as such.

Q: How has the pandemic changed the approach to national security?

Andrew: Fundamentally, the pandemic has reintroduced scarcity into the equation for governments. Scarcity could relate to medical personal protective equipment (PPE), food, delivery of essential goods or services. No matter how you cut it, governments are worried that citizens will not receive the things they need or want on a timely basis.

This thrusts to the fore the concerns of a long-suffering group of individuals who have existed within government for years. These are the critical infrastructure experts who have been trying to sound the alarm that Canadians are not ready to face a national crisis, be it a pandemic, a conflict, or any of these life-changing events that introduce scarcity into our lives.

National security has always included examining the ways in which Canadians could be deprived of the things and services they need to survive – food, water, shelter. A chief question for a lot of these officials has been, "what do we do if a lot of people get sick, suddenly." How will that impact the basic operation of our country, given that if people become sick in large enough numbers, at least some of those will be in the banking industry, or in the telecoms industry, or will be responsible for the distribution of safe water and food to Canadians.

For example, if you lose the ability to safely secure groceries, that's also a threat to national security. We've entered a period where some of the most vital people in our society are those who grow vegetables, those who deliver them and those who sell them in corner stores. If you had put that thesis forward a year ago, you would have literally been laughed at. But we now know profoundly there is nothing funny about it.

Marcia: Procurement worldwide is seeing a shift, specifically because of those elements of critical infrastructure that are now front and center. Canada, like many countries, did not have sufficient stockpiles of personal protective equipment and did not have up and running manufacturing facilities to produce what we needed.

Like-minded governments around the world who were strong proponents of open trading relationships closed their borders. Most if not all used the national security exception under trade agreements to buy what they needed, on an urgent basis and without competition. The things being bought for national security purposes had nothing to do with defence. These were things everyone took for granted would always be available. Who would have thought hand sanitizer would become the most sought after item on Kijiji? And everyone became acutely aware of the risks of moving production offshore. We found ourselves at the thin edge of globalization.

We are seeing governments bringing production back to the domestic realm. We are seeing facilities for the production of PPE being built in countries, not just in Canada, but around the world. I think those ramifications from COVID are going to stay in the forefront. We've heard many politicians say, "Never again." And I expect that, at least in the near future, that will be how governments think about procurement and what national security means.

Q: Which leads us to COVID's long-term impact on international trade versus domestic interests.

Andrew: Canadians and Canadian political leaders are being forced to come to terms with the pros and cons of globalization. The challenge they face is maintaining the really profound advantages of globalization – Adam Smith's dream where we would have this international division of labour where everyone just did most efficiently that thing they were best at.

We've come a long way as a trading nation in really defining what it is that Canada is good at. This is often viewed as excelling at the knowledge economy and professional services. A lot of what we do is not manufacturing, but very much the high-level thinking work that supports manufacturing globally. Unfortunately, what the pandemic has illustrated is that there are basic goods that if we can't make them here in Canada, in time of crisis we may not be able to acquire them quickly enough to save ourselves. No amount of highly refined trading relationships will necessarily save us in that scenario.

That is a really stark and difficult conclusion. We are such a leader in promoting freer trade and economic globalization, but when push came to shove last winter and we really needed certain things, we even had trouble with our closest allies. I think of the pretty major dispute that broke out over masks with our largest trading partner. Even the suggestion that POTUS (President of the United Stated) was going to block the shipment of masks was pretty sobering.

Decision makers and policy makers are now turning their minds fully to the idea that we must preserve some domestic production capacity for a very rainy day. There will be profound political consequences for any politician who fails to fix that situation quickly so that Canadians are not at risk.

Further related reading

Why 'Work from Home' May Not Work for Federal Contractors at Home 

In this issue of Capital Perspectives: If you are a government contractor subject to the Contract Security Program (CSP) or the Controlled Goods Program (CGP), having your team work from home during the pandemic is far from simple and for both programs, requires advance approval to do so. Marcia, with Shannon Kristjanson, discusses how the contractor compliance requirements of these two programs impacts work from home. Read more.

The Long Arm of the Law: No Deal is Too Small – or Too Offbeat – for the Feds to Examine Under its National Security Review

Andrew discusses how important innovations, no matter how humble their beginnings in someone's basement, can become subject to a National Security Review if the inventor decides to sell to a foreign buyer. The regulatory scrutiny has only deepened with COVID-19. Many a brilliant electrical engineer or developer has been dashed on these rocks – here's what you need to know. Read more.