Export Control Fundamental for Compliance Managers

ICPA

Jasper Helder, Baker & McKenzie, AmsterdamJasper.Helder@bakermckenzie.com

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Compliance checklist (1)

– What is your product?

– Understand your product

– Does it fall within a control list?

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Compliance checklist (2)

– For what will/can your product be used?

– What is (or could be) the end-use that the product is being supplied for?

– Will the supply be caught by a controlled end-use?

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Compliance checklist (3)

– Whom are you supplying to?

– Who is your customer?

– Does your customer raise end-use concerns?

– Is your customer a “prohibited party”?

– What about other third parties? (Parents, affiliates, directors, primary contractors, sub-contractors, end-users)

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Compliance checklist (4)

– Where are you supplying to?

– What country is the customer/end-user based in?

– Does it raise end-use concerns?

– Is it subject to any relevant sanctions regime?

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The US controls – where the action is(?)

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When are US Trade Restrictions Relevant to Non-US Transactions?

– Whenever the transaction involves either:

– “US origin”/“US content” goods, software or technology

OR

– “US persons”

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Restrictions on US Origin/Content Items

– Exports from the US

– Reexports from third countries of 100% US origin items (e.g. UK to Iran)

– Exports/reexports of non-US items with more than de minimis controlled US content

– In some limited cases, exports/reexports of certain non-US items with no US content but based on US technology

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Deemed Exports/Reexports

– Any release of technology/software to a foreign national is a deemed export/reexport to that foreign national’s home country (e.g. to Iranian or Indian engineer based in UK)

– Releases:

– Visual inspection of US origin equipment/facilities

– Oral exchanges of information in US or abroad

– Application to situations abroad of personal knowledge/technical expertise acquired in US

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Destination

– Cuba, Iran, Sudan, Syria, North Korea

– Virtually all exports/reexports prohibited

– Other countries

– Check Country Chart (Part 738 of EAR) to see if licence required based on ECCN ‘Reason for Control’

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Restricted End-Uses

– Proliferation-related end-uses, e.g.:

– Nuclear

– Chemical/biological weapons

– Missile technology

– Under China military end-use rule licence required for:

– exports/reexports to or transfers within PRC

– of 31 ECCN items

– where knowledge or informed by the US Department of Commerce (BIS)

– that item destined for military end-use

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Restrictions on “US Persons”

– Sanctioned countries

– Sanctioned persons

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US Trade Sanctions Targets– Country-based

Comprehensive:– Cuba– Iran– Sudan

Significant:– Myanmar (Burma)– North Korea– Syria

Limited: Balkans, Belarus, Cote d’Ivoire, DR Congo, Iraq, Liberia, Zimbabwe

– Entity/Person-based– Specially Designated

Nationals (SDNs)– Narcotics Traffickers– Terrorists– WMD Proliferators

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Who is a “US Person”?

– US companies and foreign branches

– US citizens and permanent resident aliens (Greencard holders), wherever located or employed

– All persons within the United States

– For Cuba only, separately incorporated owned or controlled non-US subsidiaries

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Basic Prohibitions

– All forms of US person involvement in transactions that directly/indirectly involve a sanctioned country/person

– US Person facilitation of transactions by non-US Persons

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Examples of Prohibited Activities– Supply of product/services– Approvals/directions– Financing, bank guarantees, warranties– Referral of orders to non-US persons– Negotiation/review of commercial terms/contracts– Strategising business– Other support (technical, legal, credit review, etc.)– Changing or ignoring company policies/procedures to eliminate US

person involvement– Limited permissible activities:

– Legal advice on compliance with sanctions– Receipt and review of reports on sanctioned country business

(passive)

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US controls v. EU controls comparison

– Key differences between EU and US systems

• Extraterritorial impact of US controls

• More unilateral controls in US (controlled product lists and sanctions)

• No deemed export rules in EU

• No re-export rules in EU

• Dealing in illegally exported items under US controls

• Enforcement and penalties

• Statute of limitations

• Just because you are compliant with US controls does not mean you are compliant with EU controls!

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The EU system

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The EU export controls regime

– Regulation 428/2009 – applies directly in all 27 EU Member States (most recent accessions: Bulgaria and Romania)

– EU-wide rules (including establishment of common dual-use list)

– Military items dealt with under separate national regimes

– National implementation by EU Member States, particularly in respect of licensing and enforcement

– Outcome: common regime with 27 flavours

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EU dual-use control list (1)– EU control list in Annex I of EC regulation (over 200 pages of technical

specifications) – goods, software and technology

• Category 0 Nuclear materials, facilities and equipment

• Category 1 Materials, chemicals, micro-organisms and toxins

• Category 2 Materials processing

• Category 3 Electronics

• Category 4 Computers

• Category 5 Telecommunications and information security

• Category 6 Sensors and lasers

• Category 7 Navigation and avionics

• Category 8 Marine

• Category 9 Propulsion systems, space vehicles and related equipment

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EU dual-use control list (2)

– Sub-categories:

• A (systems, equipment and components);

• B (test, inspection and production);

• C (materials);

• D (software);

• E (technology)

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If controlled, are they subject to an exception?

– System of Notes

– Nuclear Technology Note (NTN)

– General Technology Note (GTN)

– General Software Note (GSN)

– Cryptography Note (CN)

– Other specific exceptions built into the text

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Examples of controlled dual-use items

– Infrared imaging cameras– Bearings– Chemicals– Valves– Pumps – Alloys– Detonators and igniters– Pulsed neutron generators– Spectrometers– Accelerometers– Gyros– Encryption items– Related software and technology

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Exports of EU Annex I items

– Only exports to outside EU caught (apart from limited exceptions) and require export licence

– Shipment from UK to UK Continental Shelf is an export to outside EU

– No re-export controls (in US sense)

– No ‘deemed export’ rules

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What is an export?

– Physical/tangible shipments (including technology on documents or other fixed media)

– Hand carries– Intangible transfers:

– email– intranet and electronic downloads– fax– telephone (if relevant controlled parts are read out or

described) – video conferencing

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Intra-Community transfers

– No licence required for transfer to another Member State of significant majority of Annex I items (but must keep records)

– Licence is required for transfer of most sensitive items listed in Annex IV (e.g. certain explosives, switching devices, pulsed neutron generators, pressure sensors and cryptanalytic software)

– Member States may under national law require licence if known final destination outside EU and no processing or working to be performed

– Licence may be required for intra-Community transfer where item ultimately intended for WMD end-use outside EU

– All relevant commercial documents for all Annex I items must clearly indicate that the items are subject to controls if exported from the Community

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Transit rules

– Transit of Annex I items through EU (i.e. simply passing through EU territory) can be prohibited if items are/may be intended for WMD end-use

– Member States can extend this prohibitions under national law to:

– all items (not just Annex I items)

– military end-use in embargoed countries

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WMD end-use/ “Catch-all” clause– WMD end-use: chemical, biological or nuclear weapons and related

missile delivery systems

– Any items may also require export licence if exporter

• is aware OR• has been informed by authorities OR• has grounds for suspecting (optional control under national law)

that item is or may be intended for a WMD end-use

– WMD controls are very complex. Tread carefully and do not automatically assume not applicable to your business!

– Increased sensitivity in current international political climate

– Most likely area for strict enforcement in EU

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WMD End-Use

– “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”

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Military end-use (1)– Any item requires export licence if exporter:

• is aware OR

• has been informed

that item is or may be intended for military end-use in countries under an arms embargo agreed by EU, OSCE or UN

– Armenia, Azerbaijan, Burma, DR Congo, DPRK, Iran, Iraq, Ivory Coast, Lebanon, Liberia, Sierre Leone, Somalia, Uzbekistan, Zimbabwe

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Military end-use (2)

– Incorporation into item on national ML item

– Use of production, test or analytical equipment in production, development or maintenance of national ML items

– Use of unfinished products for production of national ML items

– Use as parts or components in national ML items exported without licence

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Brokering activities

– Brokering:

– negotiation or arrangement of purchase, sale or supply of items between two non-EU countries

– selling or buying items between two non-EU countries

– Licence required if broker aware or informed Annex I item intended for WMD end-use

– Member States may under national law extend to:

– non-Annex I items

– grounds for suspecting WMD end use

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Licensing

– The EU does not issue export licences (other than CGEA)

– Member States may grant or refuse an export licence (other than CGEA)

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The Community General Export Authorisation (“CGEA”)

– ‘Administered’ at EU level

– Covers all items listed in Annex I, with certain exceptions

– Valid throughout the Community (EU27)

– Covers exports to Australia, Canada, Japan, New Zealand, Norway, Switzerland, and the US

– What if you know at time of export item is or maybe intended for onward shipment from CGEA territory?

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National licences

– For exports of all other items:

– licence from Member State where the “exporter” is established

– national licences can be individual, global or general

– licence valid throughout the Community

– issue of licence may be subject to requirements and conditions (e.g. end-user undertaking)

– for global licences, Authority must take into account whether exporter has proportionate and adequate compliance means and procedures

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Record-keeping

– Exporter must keep documents or records for at least 3 years from the end of the calendar year in which the transfer took place (including intra-Community transfers)

– More stringent obligations in relation to cryptography exports

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Enforcement

– Enforcement, prosecution and penalties are left to Member States

– Penalties must be proportionate, dissuasive and effective – generally a mixture of criminal and administrative

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EU sanctions

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EU sanctions policy

–EU follows so-called “smart” sanctions policy–Mostly follows UN multilateral regime–Some unilateral regimes (e.g. Burma,

Zimbabwe or extended Iran regime)–EU sanctions regulations directly applicable

in all 27 EU Member States–Licensing, penalties and enforcement left to

Member States

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Whom do EU sanctions apply to?

–Within the territory of EU (including transit and airspace)

–On board aircraft or vessels under EU Member State jurisdiction

–Nationals of EU Member States, wherever located–Any legal person, entity or body incorporated or

constituted under laws of EU Member State–Any legal person, entity or body in respect of any

business done in EU

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Preferred EU sanctions measures (1)

–Freeze on funds and economic resources of designated persons (DPs)

–Prohibition on making funds and economic resources available directly/indirectly to or for the benefit of DPs–Complexity when dealing with non-DP related

to DP–Investment ban against DPs or certain sectors

(e.g. granting credit or purchasing shares)

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Preferred EU sanctions measures (2)– Arms embargo (including arms-related financial or technical

assistance)– Other country-specific measures (e.g. for Iran, Burma, DPRK

covering supply of specific items)– Internal repression lists– Covers direct and indirect measures – Also covers acts intended to circumvent prohibitions or to promote

prohibited activities– Currently no comprehensive trade embargo

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Designated Party Programmes ChartCountry U.N. E.U. U.S.

Belarus ■ ■

Burma / Myanmar ■ ■

DR Congo ■ ■ ■

Cuba ■

Iran ■ ■ ■

Iraq ■ ■ ■

Ivory Coast ■ ■ ■

Lebanon ■ ■ ■

Liberia ■ ■ ■

North Korea ■ ■ ■

Palestinian Authority ■

Sudan ■ ■ ■

Syria ■ ■ ■

F.R. Yugoslavia/Serbia/Balkans ■ ■

Zimbabwe ■ ■

Al-Qaida/Taliban ■ ■ ■

Terrorists ■ ■

ICTY ■

Narcotics traffickers ■

Non-proliferation ■

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Watch out for “internal repression”

– There are a number of EU sanctions that deal with

"equipment that might be used for internal repression“

– Need to pay particular attention to what is on the controlled Annex. Why?

– If one looks at e.g. Cote d’Ivoire, controlled annex includes:

– Firing sets, detonators, igniters, boosters & detonating cord

– Linear cutting charges

– Other explosive not controlled on UK Military List

– Technology

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Sanctions - Iran– UN SC Resolution 1737

– 27th. February 2007, EU issued Common Position

– travel bans and asset freezes on certain officials named in UNSCRs or designated by the UN Sanctions Committee at a later date, as well as "other persons or entities directly associated with or providing support for" Iran's nuclear activities;

– a ban on exports of goods or technology that could contribute to enrichment-related activities as defined by the Nuclear Suppliers' Group and Missile Technology Control Regime and

– the implementation of steps to prevent teaching from being provided to Iranian nationals in "proliferation sensitive subjects."

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The EU rules– Common Positions

– 2007/140/CFSP

– 2007/246/CFSP

– Implemented by Regulation 423/2007 which is amended by

– Regulation 423/2007 (Annex IV)

– Decision 242/2007 (Annex V)

– Regulation 618/2007 (military goods)

– Regulation 1110/2008 (revised annexes)

– consolidated version

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Regulation 423/2007 as amended– Prohibited to sell, supply, transfer or export, directly or

indirectly, goods and technology on Annex I, whether or not originating in the Community, to any natural or legal person, entity or body in, or for use in, Iran or to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent that prohibition.

– Prohibited to purchase, import or transport the goods and technology listed in Annex I, from Iran, whether the item concerned originates in Iran or not.

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Regulation 423/2007 as amended

–Prohibited to provide, directly or indirectly, technical assistance, or brokering services related to (i) Annex I and Ia goods and technology and (ii) to the provision, manufacture, maintenance and use of goods listed in Annex I to any natural or legal person, entity or body in, or for use in, Iran (“technical assistance and brokering”)

–Prohibited to provide investment to any entity in Iran manufacturing Annex I and Ia goods or technology (“investment”);

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Regulation 423/2007 as amended

–Prohibited to provide, directly or indirectly, financing or financial assistance related to the Annex I and Ia goods and technology (“financing”)

–Prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent that prohibition

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Regulation 423/2007 as amended

A licence required to sell, supply, transfer or export, directly or indirectly, goods and technology on Annex II, whether or not originating in the Community, to any natural or legal person, entity or body in, or for use in, Iran

– A licence required to engage in “technical assistance and brokering”, “investment” or “financing” for Annex II items

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Regulation 423/2007 as amended

Freeze of funds for all persons on Annexes IV and V (but can add new credit as long as frozen – includes interest and credit related to obligations prior to 31/12/2006)

No new funds made available to either group directly or indirectly

No evasion of either rule above

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Licensing – a bit of a mess?

licence required to sell, supply, transfer or export, directly or indirectly, goods and technology on Annex II, whether or not originating in the Community, to any natural or legal person, entity or body in, or for use in, Iran

A licence required for sale, supply and transfer?

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Licensing – a bit of a mess?

UK, Netherlands, Portugal – licence required for all relevant activities

Germany – licence required for any relevant activities involving export from Germany

Italy, Spain, Commission – licence only required for export from EU

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UK Specific WMD rules

– BIS introduced a list of Iranian entities that raise end-use concerns

– http://www.BIS.gov.uk/europeandtrade/strategic-export-control/licensing-policy/end-use-control/page29307.html

– Not “notice” to exporters under UK rules

– Encouraging exporters to make “Ratings Enquiry” focussing on end-users

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Sanctions - DPRK

– UN SC Resolution 1718 – EU implementation: Common Position 2006/795/CFSP &

EU Regulation 329/2007 as amended by 117/2008– UK implementation: The North Korea  (United Nations

Measures) Order 2006 (S.I. 2006/2958); The North Korea (United Nations Measures) (Overseas Territories) Order 2006 (S.I. 2006/3327); & The Export Control Order 2008 (SI 2008/3231)

– Recent expansion of sanctions under UN SC Resolution 1874 – implementation imminent in EU/UK

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Sanctions - DPRK

– Military embargo (expanded)– Luxury goods embargo (maintained)– New blanket ban on lending to DPRK for all purposes– DPRK cargoes now to be searched for prohibited goods,

including on high seas– Blacklist of individuals/entities (expanded)– Humanitarian aid carve-out

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Sanctions - Sudan

– UN SC Resolutions 1556 (2004) and 1591 (2005) – specific to:- North/South/West Darfur - All belligerents within those regions- All parties (including Sudanese government) to N’djamena Ceasefire Agreement

– EU legislation- Applicable to whole of Sudan- Originally preceded UN measures - Common Position 2004/31/CFSP & Regulation 131/2004- Subsequently implemented UN SC Resolutions - Common Position 2005/411/CFSP & Regulation 838/2005

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Sanctions - Sudan

– Military embargo – across whole of Sudan– Blacklist of individuals in Darfur region– Humanitarian aid carve out across whole of Sudan

- Non-lethal military equipment- Material intended for EU / UN crisis management- Mine clearance equipment- Protective military clothing for UN / EU personnel

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Sanctions - Burma

– No UN SC Resolutions

– EU: Common Position 1996/635/CFSP & Regulation 817/2006, further renewed by Regulation 194/2008.

– UK implementation: The Burma (Sale, Supply, Export, Technical Assistance, Financing and Financial Assistance) (Penalties and Licences) Regulations 2006 (SI 2006/2682) & The Export Control (Burma) Order 2008 (SI 2008/1098)

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Sanctions - Burma

– Military embargo– Embargo on export of equipment used for torture/internal

repression– Embargo on export of mining machinery/equipment – Import restrictions on timber, precious/semi precious

stones and mining products (unless for personal use)– Extensive blacklist of individuals/entities– Humanitarian aid & de-mining carve-outs

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Sanctions - Belarus

– No UN SC Resolutions– EU withdrew Belarus GSP status resulting in increase in

import duty for Belarus products (Regulation 1933/2006)– EU blacklist of certain government officials subject to travel

bans and asset freeze– UK: The Belarus (Restrictive Measures) (Overseas

Territories) Order 2006– No telecommunications or encryption specific sanctions

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Sanctions - Lebanon

– UN SC Resolution 1701 (2006)– EU implementation: Common Position 2006/625/CFSP

and Regulation 1412/2006– UK implementation: The Export Control (Lebanon, etc)

Order 2006 (SI 2006/2683); The Lebanon (Technical Assistance, Financing and Financial Assistance) (Penalties and Licences) Regulations 2006, SI 2006/2681; and The Export Control Order 2008 (SI 2008/3231)  

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Sanctions - Lebanon

– Military embargo– No entries on UN blacklist– Lebanese individuals/entities still relevant for screening

against UK HMT financial sanctions list– Humanitarian aid and government end-user carve outs

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EU sanctions - terrorism

– Regulation 881/2002 targets persons and entities associated with Usama bin laden, Al Qaida and Taliban

– Regulation 2580/2001 targets persons, groups and entities involved in terrorist activities or associated with those who are

– Prevention of financing of global terrorism

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EU blocking sanctions

– Targets extra-territorial effects of US sanctions against Cuba (Helms-Burton and CACR) and Iran (ISA)

– Obligation of non-compliance with targeted US laws; European Commission may authorise compliance

– Obligation to notify European Commission of direct and indirect effects of targeted laws on economic and financial interests

– Compliance with US rules can be blocked– Any recovery in US (or under US jurisdiction can be

“clawed back”)

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EU blocking sanctions

– Potential solutions to Catch 22 situation?

– Genuine commercial reason not to deal

– US parent has full responsibility for Cuba

– US parent or EU subsidiary relies on non-listed US laws (EAR?)

– US parent in management role at some point, and points to its need to comply with US law: HQ just can’t do the necessary step

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Consequences of non-compliance

– Enforcement left to Member States: mix of criminal and administrative penalties

– UK penalties include:– Up to 7 years’ prison and/or an unlimited fine

for freeze-related violations– Up to 10 years’ prison and/or an unlimited fine

for export-related violations– Unlimited fine for violations of blocking law

– Reputational risks can be more damaging

Export Control Fundamental for Compliance Managers

ICPA

Jasper Helder, Baker & McKenzie, AmsterdamJasper.Helder@bakermckenzie.com