In part 1 of this diptych we discussed how to identify dual-use goods and we examined the catch-all provisions in EU export and sanction regulations. In part 2 we examine the so-called 'prohibitions of circumvention' in those same regulations. The purpose of prohibitions of circumvention is to protect the objectives of sanction regulations and export regulations – for example those concerning the export of dual-use goods to sanctioned countries – as best as possible, including protection against direct and indirect circumvention. This blog gives some helpful tips for conducting an initial check as to whether a prohibition of circumvention has been violated.
Sanction regulations often include general prohibitions of circumvention while more specific prohibitions are included in the export regulations and the EU regulations that establish the lists of dual-use and military goods.
Prohibitions of circumvention in sanction regulations Sanction regulations almost always include general prohibitions of circumvention, which also concern the sanctions that apply to dual-use goods. General prohibitions of circumvention are often phrased as follows (this particular example is taken from Sanction Regulation (EU) 833/2014 regarding Russia):
"It shall be prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent the prohibitions referred to in Articles (…)."
Sanction provisions concerning dual-use goods also often include veiled prohibitions of circumvention, which, for example, prohibit the direct and indirect performance of certain acts: 'It shall be prohibited to sell, supply, transfer or export, directly or indirectly (…) to any natural or legal person, entity or body in Russia or for use in Russia, if those items are or may be intended, in their entirety or in part, for military use or for a military end-user' (Article 2(1) of the aforementioned regulation).
Factual circumvention How are sanctions in practice circumvented? This happens, for example, when parties export goods to a sanctioned country via a non-sanctioned country (the so-called U-turn construction). A well-known example of a U-turn construction is to use Turkey as a non-sanctioned country to transport goods to Syria, which is a sanctioned country. This results in the circumvention of the sanctions against Syria. Another example is Saudi Arabia which is used as transit country to export goods to Yemen. A great deal of attention must also be paid to goods that are exported to the free zone in Dubai, as that in many cases is not the final destination of the goods but merely a transit hub used to subsequently export the goods to a country that is potentially subject to sanctions. In the latter case, the initial destination (the free zone) is not the place where the end-user is based: the goods are first supplied to an intermediary, such as a distributer, which subsequently exports the goods to the ultimate owner, also called 'end-user'.
Monitoring compliance with sanctions and export restrictions In terms of monitoring compliance with sanctions and export restrictions (including prohibitions of circumvention), it is therefore of the utmost importance to establish and identify the ultimate acquirer or user of the goods, since the prohibitions of circumvention mean that it is prohibited to supply goods to sanctioned parties via intermediaries. Such supplies are prohibited if you know, or could and should have known, that this was the case. Wilful ignorance is no longer allowed. Parties may not turn a blind eye: based on the sanction risk, parties are expected to take measures to find out and check, as much as possible, where, for what purpose and by whom the goods (or services) will be used. The greater the sanction risk, the more in depth the control must be (risk-based). This could mean, for instance, that it must be determined who is behind a particular party, for example for whom an intermediary is acting, but also who the shareholders of the client are. Especially in the case of red flags, i.e. possible indications that a sanction may be violated, you must keep asking questions and delve deeper into the matter. For example where incorrect, conflicting or insufficient information or answers are given regarding the envisaged use of a product, where the use stated does not match the product or the client, or in situations where it is unclear why the services of an intermediary were engaged or where the intermediary receives a disproportionate fee for its services.
Prohibitions of circumvention in the Dual-use Regulation A specific example of a circumvention prohibition concerning the export of dual-use goods with SGP codes 1C001 and 1C002 in the Dual-use Regulation (see part 1 of this blog for an explanation of the SGP codes) reads as follows:
"The object of the control should not be defeated by the export of non-listed forms alleged to be finished products but representing in reality crude forms or semi-fabricated forms."
Under this prohibition of circumvention, goods may not be designated as 'finished products' to circumvent the export prohibition applicable to the export of 'semi-fabricated forms'.
Furthermore, a prohibition of circumvention is included in the General Notes to Annex 1 to the Dual-use Regulation, i.e. the list of dual-use goods that is part of the Regulation, which reads as follows:
"The object of the controls contained in this Annex should not be defeated by the export of any non-controlled goods (including plant) containing one or more controlled components when the controlled component or components is/are the principal element of the goods and can feasibly be removed or used for other purposes."
The purpose of this prohibition of circumvention is to prevent goods that are subject to an export licence from being processed in other goods which are not subject to an export licence, thereby circumventing the obligation to have a licence. That prohibition of circumvention applies if (i) the part is the principal element of the good, and (ii) can easibly be removed or used for other purposes. Factors such as quantity, value and technological know-how must be assessed. The Dual-use Regulation does not state how 'feasibly be removed' must be construed. This can result in a great deal of discussion between companies and the authorities because the authorities often interpret that phrase broadly.
Prohibitions of circumvention raise important questions and checks and give the authorities extensive possibilities to take action.