Export control involves government regulation of cross border trade in certain types of goods, technology and information. It has evolved significantly in recent years as international conflicts have forced governments to focus their attention on stemming the flow of equipment into rogue states and groups around the world. By way of example, the UK government has vastly increased the resources it dedicates to raising awareness of export control, investigating non-compliance and taking enforcement action. All countries should have some form of an export control policy, legislation and enforcement mechanism.
Compliance with export control and sanctions are often overlooked by companies when exporting. However, the consequences of getting it wrong and being caught without the requisite export licence(s) can potentially prove costly. Companies are at risk of either fines, a prison sentence or both. Equally important, however, is the potential impact on your business in terms of loss of reputation, contractual penalties and logistical problems.
Therefore, it is important for all companies, including those within the industrial manufacturing sector, to understand their export control / sanctions responsibilities and to take the opportunity to gain an understanding of export licence controls in the U.S., the EU and of course, nationally.
Within the EU, export is controlled simultaneously at a supra-national EU level by EU legislation and also at a national state level. The current EU legislation is Council Regulation (EC) 428/2009 setting up a community regime for the control of exports, transfer, brokering and transit of dual-use items. This is directly applicable in all Member States (i.e. it applies automatically). The administration and enforcement of the EU rules are left to individual Member States pursuant to their national laws. In the UK, this is primarily done through the Export Control Act 2002 and the Export Control Order 2008. The UK has supplemented the dual-use controls set forth in Regulation 428/2009 through additional product controls. Military export controls are the responsibility of individual Member States.
However, there is already a level of harmonisation of export control requirements in the EU as the EU has adopted a “Code of Conduct of Arms Exports” which establishes criteria for export licensing decisions taking into account issues such as human rights, terrorism, national security and proliferation.
Controls based on the characteristics of the items
In the UK the export control regime details a large number of goods and technologies which are “controlled” i.e. they may not be exported to any or to certain countries without written authorisation from the Export Control Organisation (“ECO”) (which sits within the Department for business, Innovation and Skills). Controlled items are classified under different categories, or Strategic Export Control Lists, the most important of which are:
- the UK Military List, which controls goods, technology and software designed or modified for military use
- the EU Dual-Use List, which controls goods, technology and software which, whilst not specially designed for military use, are of such high technical specification that they could be used for a military purpose or be utilised in a Weapons of Mass Destruction (“WMD”) Programme.
However, export control is now of a far wider application than many businesses appreciate. Even if the relevant goods or technologies do not fall within the Military List or the EU Dual-Use List, an export licence may still be required if:
- the exporter has been informed by the ECO that the dual-use items, not otherwise subject to control, are or may be intended for incorporation into military equipment, or for the development, production or maintenance of such equipment, or for use in a plant for production of such equipment in an embargoed destination
- the exporter has been informed by the ECO that the dual-use items are intended for use as parts of components of military goods which were illegally obtained from the UK, irrespective of destination
- the exporter is aware that the proposed export is or may be intended for any of the uses in the two bullet points above.
In these cases, the exporter must stop all acts and inform the ECO of the export and it will decide whether a licence is required and, if so, whether to grant one.
Moreover, any good or technology, whether dual-use or not, may be controlled if the exporter knows or suspects that the good or technology to be exported may have a WMD end-use. A WMD end-use is where the items in question:
“are or may be intended, in their entirety or in part, for use in connection with the development, production, handling, operation, maintenance, storage, detection, identification or dissemination of chemical, biological or nuclear weapons or other nuclear explosive devices or the development, production, maintenance or storage of missiles capable of delivering such weapons.”
This control can be invoked over any item, and can in theory be applied to any export to any end-user involved in WMD in any country outside the EU, although in practice it is used sparingly. If the exporter knows or suspects a WMD end-use, he is legally obliged to immediately stop exporting and apply to the ECO for a licence.
From a UK standpoint, a business is required to make “all reasonable enquiries” if it has any suspicion that the goods or technology may have a WMD end-use. Ignorance or negligent handling of facts makes a business highly vulnerable.
The days when export controls related purely to the physical movement of goods are over. Companies must be alive to the fact that electronic transfers of technical information, such as engineering drawings, blueprints, test results and diagrams transferred by fax or e-mail, or stored on a central server or internet site with wide access available are also controlled. Companies must be able to demonstrate the existence of robust procedures to manage information stored on laptops and other data storage devices when travelling overseas.
Restrictive measures (or sanctions) are instruments of a diplomatic or economic nature which seek to bring about a change in activities or policies such as violations of international law or human rights, or policies that do not respect the rule of law. Within the framework of the Common Foreign and Security Policy (“CFSP”), the EU applies restrictive measures in pursuit of the specific CFSP objectives set out in the Treaty on the Functioning of the European Union. Sanctions have been frequently imposed by the EU in recent years, either on an autonomous EU basis or implementing binding resolutions of the Security Council of the United Nations.
As at 5 January 2012, the EU has trade restrictions or embargoes on the following countries (please note that this list is not exhaustive):
Afghanistan; Belarus; Bosnia and Herzegovina; Burma/Myanmar; China; Democratic Republic of the Congo; Cote D’Ivoire; Egypt; Eritrea; Federal Republic of Yugoslavia & Serbia; Haiti; Iran; Iraq; Ivory Coast; Lebanon; Liberia; Libya; North Korea (Democratic People’s Republic of Korea); Republic of Guinea; Serbia and Montenegro; Somalia; Sudan; Syria; Tunisia; USA; and Zimbabwe.
Restrictive measures imposed by the EU may target governments of third countries, or non-state entities and individuals with which the EU has concern. The restrictive measures imposed may comprise arms embargoes, other specific or general trade restrictions (import and export bans), financial restrictions, restrictions on admission (visa or travel bans), bans on the provision of specific services (brokering, financial services, technical assistance) or other measures, as appropriate.
By way of example, the EU’s current sanctions against Iran include:
- Prohibition on doing business with people listed by the UN or considered by the EU to be assisting with Iran’s proliferation programmes
- Prohibitions on nuclear proliferation items e.g. things which could be used to build an enrichment plant
- Prohibitions on the sale, supply, transfer or export of dual-use goods and technology
- Prohibitions on the sale, supply, transfer or export of key equipment and technology for the oil and gas industry (with a limited exemption for transactions required by, or obligations arising from, contracts that were in place before 27 October 2010)
- Asset freezes against listed individuals and entities and a prohibition on making economic resources available to them (including by the supply of goods and services which may be used to obtain funds)
- Restrictions on transfers of funds to and from Iran.
On 21 November 2011, HM Treasury unilaterally imposed further restrictions in relation to Iran, requiring all UK credit and financial institutions to cease both existing and future business relationships and transactions with all Iranian banks (including all branches and subsidiaries and the Central Bank of Iran). This Direction applies to existing contracts in the same way as it applies to new business transactions. Whilst the Direction has been given to UK credit and financial institutions, it will in practice have a widespread effect on all those doing business in the UK with Iran.
Please note that we anticipate further amendments to the restrictions in general against Iran towards the end of January 2012 both at a national and EU level.
EU sanctions measures impose obligations on inter alia (i) any person within the EU; (ii) any person that is a national of an EU Member State, even if located outside the EU; (iii) any legal person incorporated in the EU; (iv) any legal person incorporated outside the EU, but only in respect of business conducted in whole or in part in the EU; and (v) any acts undertaken in the territory of the EU, in airspace or on board any vessel or aircraft under the jurisdiction of an EU Member State.
Typically, the competent authorities of EU Member States are responsible for (amongst other things):
- determination of penalties for violations of restrictive measures
- granting of exemptions
- receiving information from, and cooperating with, economic operators (including financial and credit institutions).
Why is compliance with the rules important?
Civil and criminal penalties for violating export control / sanctions rules may be imposed both on companies and individuals, depending on the nature of the breach. In the UK, the maximum penalties for issues such as exporting without approval, failing to maintain adequate records or facilitating illicit transfers are imprisonment for up to 10 years and/or an unlimited fine. Enforcement has become a priority in the UK, with a number of recent criminal prosecutions against both corporations and individuals.
Furthermore, the reputational consequences of being subject to an investigation or enforcement action can be significant. Commercial relationships with suppliers and customers can be damaged and customs seizures and prosecutions can attract high levels of negative publicity. Existing relationships with the competent authorities may also be damaged, making future export licence applications very much more difficult.
How do you ensure that your business complies with export control law?
Whilst you are not required to look into every aspect of a transaction, you are required to examine any element that might raise suspicions about the transaction. Accordingly, before carrying out the contemplated transaction, the following must be looked for to eliminate any possible breach of export control law (this list is not exhaustive):
- The purchaser or purchasing agent is reluctant to offer information about the end- use of the item
- There is a military or government end user
- The product’s capabilities do not fit the purchaser’s line of business
- The item ordered is incompatible with the technical level of the country to which it is being shipped
- The purchaser has little or no business background
- The purchaser is unfamiliar with the product’s performance characteristics but still wants the product
- Routine installation, training or maintenance services are declined by the purchaser
- The purchaser has unusual shipping requests (for example, the purchaser is in India, but requests that the goods be shipped via China).
More generally, you should seek to improve awareness of export controls / sanctions within your business and always conduct thorough due diligence i.e. know your product, your supplier and your customer.