The key points in brief:
In order to take the necessary and appropriate measures to ensure compliance in export controls, the economic stakeholders must undertake a risk assessment. For this assessment it is above all important to determine which actions relevant to export controls are to be monitored in the company:
The export of listed dual-use goods, including software and technology, is regularly subject to authorization or even prohibited. Primarily depending on their intended end-use also the export of “non-listed“ dual-use goods can be subject to restrictions and reporting requirements (“use-related“ or “catch-all“ controls). The particularly complex rules for export of technology are outlined separately. The concept of technical assistance is even wider. Brokering restrictions have the function of supplementing existing export controls. Within the EU also the transit of “listed“ non-EU dual-use items in context with weapons of mass destruction or carrier systems may be prohibited. Prohibitions of provision of economic resources/funds prevent listed persons from receiving additional funds or economic resources.
The key points in brief:
The export of listed dual-use goods, including software and technology, is regularly subject to authorization or even prohibited. Within the EU we talk about an export if goods leave the customs territory of the EU. Similarly, this applies to third countries such as the USA for goods leaving their customs territory.
In contrast, deliveries within the borders of a customs territory (EU resp. third country) are defined as (in-country/intra-EU) transfers. These are not considered to be exports but can be regulated in certain cases too.
The system of issuing licenses for export of listed dual-use goods is uniformly regulated within the EU and differs in detail in the U.S. and other third countries. The particularly complex rules for export of technology are outlined separately.
An export always involves crossing the relevant customs territories external borders. Actions that may constitute an export are
EU Dual-use Law
U.S. Dual-use Law
In the U.S., a more differentiated system is established to determine whether an export license is needed: Each five-digit Dual-use position (so called ECCN within the U.S.) determines certain license requirements for exporting by stating certain reasons for control. These reasons for control have to be matched with the so-called Commerce Country Chart (CCC) to determine, whether a license for exports is required for this particular ECCN item to this particular country. License Exceptions can in turn rule out a thereby determined license requirement.
The key points in brief:
The export of “non-listed“ dual-use goods can also be subject to restrictions (such as authorizations or even prohibitions) and reporting requirements (“use-related“ or “catch-all“ controls). While technical properties are decisive for license requirements for listed goods, their intended end-use is of primary importance for unlisted goods. The aim is to ensure that, even if the goods are not listed, nobody, who pursues to build a sensitive item, is provided with the necessary resources.
“Use-related“ controls play an important role especially in connection with Country Embargo Regulations.
The decisive parameter for “catch-all” controls in EU law is regularly the exporters knowledge or reason to believe, that the goods to be exported will be used in context with a biological, chemical, nuclear weapons or ballistic missile weapons program, or for use in violation of an arms embargo. These so-called sensitive use triggers the duty of export control.
In the U.S., also various requirements of the U.S. Export Administration Regulations (EAR) are dependent upon the exporters knowledge of the end-use, end-user, ultimate destination, or other facts relating to a transaction or activity.
“Use-related“ or “catch-all“ controls within the EU
Within the EU use-related restrictions are applicable for exports to defined arms embargoed countries in connection with military end-use. In addition, restrictions apply for exports to all countries if goods are intended for weapons of mass destruction or carrier systems or for use in connection with unauthorized exported military goods.
Finally, the EC Dual-use Regulation contains an opening clause for Member States to prohibit or impose an authorization requirement on the export of not listed dual-use items for reasons of public security or human rights considerations (Art. 8). In Germany this clause was used for regulations regarding nuclear purposes in certain purchasing countries or countries of destination.
Export, Embargo Country and Military End-use (Art. 4 paras. 2 and 4 EC Dual-use Regulation)
According to EU law authorization is required for the export of not listed dual-use items if the purchasing country or country of destination is subject to an arms embargo imposed by a Common Position or Joint Action adopted by the Council of the European Union or a decision of the Organization for Security and Cooperation in Europe (OSCE) or an arms embargo imposed by a binding resolution of the UN Security Council and if the enterprise or its staff have been informed that the items in question are or may be intended, in their entirety or in part, for a military end-use. If the enterprise or its staff has positive knowledge, not a vague suspicion, of such a destination, the exporter is obliged to notify the competent local authority, which will then decide whether an authorization requirement applies.
Export, Weapons of Mass Destruction or Delivery Systems (Art. 4 paras. 1 and 4 EC Dual-use Regulation)
Moreover, the export of dual-use items that are not listed requires authorization if the enterprise or its staff have been notified that those items are or could be intended, in their entirety or in part, in connection with weapons of mass destruction or delivery systems. On being aware of this without having been notified, the exporter is obliged to notify the competent local authority, which will then decide whether an authorization requirement applies. This requires positive knowledge, not a vague suspicion.
Export, Military Use and Export Without Authorization or in Violation (Art. 4 paras. 3 and 4 EC Dual-use Regulation)
Lastly, the export of dual-use items that are not listed is subject to authorization if the enterprise or its staff have been informed that those items are or may be intended, in their entirety or in part, for use as components of military items listed in the national military list that have been exported from the territory of that Member State without authorization or in violation of an authorization. On being aware of this the exporter is obliged to notify the competent local authority, which will then decide whether an authorization requirement applies. This requires positive knowledge, not a vague suspicion.
The key points in brief:
Besides material goods and software also technology can be a dual-use good. Technology is defined as specific technical knowledge necessary for the development, manufacture or use of a product. The technical knowledge takes the form of 'technical data' or 'technical assistance'. The term technology thereby for example also includes documents for the manufacture. To be differentiated from this are technical manuals that are usually delivered together with the product; their specifications do regularly not enable manufacture.
Therefore, license requirements should also be considered with regard to possible exports of know-how in the sense of provisioning technology by electronic means, including fax, telephone, e-mail to a destination outside the relevant customs territory. The oral transmission of technology when the technology is described e.g. on the telephone, is also included.
Technology, which is directly linked to nuclear products, is subject to particularly strict regulations.
Technology representing the absolutely necessary minimum for the construction, operation, maintenance and repair of those goods for which an export authorization has been granted, is not regulated. This also applies to generally accessible information, scientific basic research or information required for patent applications.
In terms of provisioning, the technical possibility of access is decisive as well as, in addition, the purposeful creation of such accessibility, so that the technology is handed over and later access can no longer be controlled and prevented. An export in the sense of the provision therefore does not presuppose that a download of the technology actually took place. On the contrary, the creation of the corresponding possibility of access is sufficient to confirm an export. In order to prevent an export, it is necessary to carry out security measures, which must effectively prevent access.
An oral transmission in form of a description can constitute an export of technology without an embodiment being required. However, not every international call, whose subject is the development, manufacture or use of a listed product, is technology export. Rather, an indispensable specific technical knowledge must be passed on. This requires at least a certain detail accuracy of the description of technology. The technology hat to be described in such a way that, as a result, listed technology is passed on.
The key points in brief:
In contrast to the export of technology, the concept of technical assistance is wider as it includes all technical assistance, whether it is necessary for the development, manufacture or use of a product or not.
Technical Assistance comprises any technical help in connection with repair, development, manufacture, assembly, testing, maintenance or any other technical service. Technical assistance may take the form of instruction, training, passing on practical knowledge or skills or it may take the form of consultancy services. It also comprises verbal, telephone and electronic forms of assistance.
Technical Assistance in connection with Proliferation is under national law regularly subject to restrictions (such as authorizations or even prohibitions) and reporting requirements and is also regulated in many embargo regulations on goods.
The EU has no jurisdiction to regulate technical assistance in connection with dual-use goods: For an understanding of the purely national regulation within the EU, it is helpful to know that, according to a legal opinion of the European Court of Justice (ECJ), the EU lacks the competence for technical assistance in connection with dual-use goods associated with the border crossing of a person. The purely national provisions on technical assistance should fill this gap.
The key points in brief:
Brokering is the conciliation of a contract for the acquisition or the transfer of goods or the proof of an opportunity for concluding such a contract. The exclusive provision of ancillary services is excluded from this definition. Ancillary services are transportation, financial services, insurance or re-insurance, or general advertising or promotion.
Brokering restrictions have the function of supplementing existing export controls. Especially in the case of illegal trafficking of arms, brokering unfortunately plays a major role.
Authorization requirements and Prohibitions related to brokering arise of many embargo regulations on goods, including restrictive measures to combat terrorism, of national law and within the EU of the EC Dual-use Regulation.
According to the EC Dual-Use Regulation brokering of “listed” Dual-use goods is subject to authorization if the EU broker has been informed by the competent national authority that the goods are or could be intended, in their entirety or in part, for weapons of mass destruction or carrier systems. If the broker is already aware of such a connection, he must inform the authority about it. The authority will then decide whether the transaction should be subject to authorization. Within the EU this also applies by national law to the execution of corresponding brokering by EU nationals in a third country.
Additionally within the EU similar authorization requirements apply by national law to brokering of weapons of war and conventional arms, in the latter case dependent on the place where the goods are to be found.
The key points in brief:
Within the EU transit is defined as a transport of non-EU dual-use items entering and passing through the customs territory of the EU with a destination outside the EU.
The transit of “listed“ non-EU dual-use items may be prohibited by the competent national authorities where the transit occurs if the items are or may be intended, in their entirety or in part, for weapons of mass destruction or carrier systems.
The transit of goods can be regulated (prohibited or subject to authorization requirements) also according to national law, cf. §§ 74, 76 German Foreign Trade and Payments Act.
The concept of transit is important for the delimitation of exports and (intra-EU) transfers. Transit, export and (intra-EU) transfer are mutually exclusive. Goods which transit the EU territory can not be exported or transferred intra-EU at the same time. The delimitation between the terms is based on the customs-approved treatment or use of goods according to the provisions of the Customs Code. If a product has received one of the following customs-approved treatment or use, transit can no longer be carried out: customs warehouseing, inward processing, processing under customs control and temporary admission.
The key points in brief:
Embargos Against Persons regularly freeze all funds and economic resources belonging to, owned, held or controlled by any listed natural or legal person, entity or body (freezing order) and prohibit to make available funds or economic resources, directly or indirectly, to these (prohibition of provision of economic resources/funds).
Although in both provisions funds and economic resources mark the reference objects of the sanction, both sanctions have to be distinguished clearly: The freezing order practically leads to a blockage of assets and economic resources of the affected parties; the use of funds and economic resources is prevented. The prohibition of provision of economic resources/funds prevents the beneficiaries from receiving additional funds or economic resources. To this extent, the two regulations are complementary.
In business practice as well as in application of law, the so-called indirect provision of economic resources/funds via owned or controlled persons has proven to be particularly difficult to distinguish.
The above mentioned EU Guidelines and Best Practices interpret the freezing order prohibition of provision of economic resources/funds as follows:
Freezing of Funds
The freezing of funds, unlike confiscation, does not affect the ownership of the funds concerned. Persons that hold or control freezed funds are not required to cease such holding or control, or to obtain an authorization to continue it. So the freezing does not authorize confiscation of cash and funds carried by a designated person; such confiscation may be appropriate in certain circumstances as a matter of national law.
All uses of, and dealings with, funds, moving and alterations such as portfolio management, and whether by the designated person or another person holding or controlling such funds, require prior authorization. The authorities are obliged to prevent those funds from being moved, transferred, altered, used, accessed or dealt with in a prohibited way.
Freezing of economic resources
Economic resources are frozen so as to prevent their use as a parallel or surrogate currency, and avoid circumvention of the freezing of funds. Competent authorities should therefore concentrate on preventing targeted persons and entities from obtaining financial or economic benefits (e.g. funds, goods or services) from economic resources.
Personal use of frozen economic resources (e.g. living in one’s own house or driving one’s own car) by a designated person is not prohibited by the Regulations and does not require an authorization. Assets which are only suitable for personal use or consumption, and therefore cannot be used by a designated person to obtain funds, goods or services, do not fall within the definition of ”economic resources”. However, if use of frozen economic resources amounts to an economic activity which could result in the designated person obtaining funds, goods or services (e.g. if the designated person seeks to let his or her house or to operate his or her car as a taxi), it will require prior authorization.
Making funds available
Making funds available to a designated person or entity, be it by way of payment for goods and services, as a donation, in order to return funds previously held under a contractual arrangement, or otherwise, is generally prohibited unless it is authorized by the competent authority. However, interest accruing to a frozen account can be added and payments already due under prior contracts, agreements or obligations can be added to that account without prior authorization. Apart from these cases, a third party initiating the transfer of funds to a designated person needs prior authorization. National laws can define procedures on how to deal with the funds subject to an attempted transfer which is in breach of restrictive measures.
Making economic resources available
Making economic resources available to a designated person or entity, including by gift, sale, barter, or returning economic resources held or controlled by a third party to a designated owner, is prohibited in the absence of an authorization.
The term ”making economic resources available” has been interpreted by the European Court of Justice (ECJ) as having a wide meaning. Rather than denoting a specific legal category of act, it encompasses all the acts necessary under the applicable national law if a person is effectively to obtain full power of disposal in relation to the economic resource concerned. The prohibition on making economic resources available applies to any mode of making available an economic resource, whatever the consideration.
Making available assets which are only suitable for personal use or consumption, and therefore cannot be used by a designated person to obtain funds, goods or services, does not amount to ”making economic resources available” in the sense of the Regulations and therefore does not require an authorization.
Ownership and control
The criterion to be taken into account when assessing whether a legal person or entity is owned by another person or entity is the possession of more than 50% of the proprietary rights of an entity or having majority interest in it.
The EU Guidelines and Best Practices furthermore obtain eight exemplary criteria a) - h) to be taken into account when assessing whether a legal person or entity is controlled by another person or entity, alone or pursuant to an agreement with another shareholder or other third party, such as having the right or exercising the power to appoint or remove a majority of the members of the administrative, management or supervisory body of such legal person or entity (criteria a). If any of the eight exemplary criteria are satisfied, it is considered that the legal person or entity is controlled by another person or entity, unless the contrary can be established on a case by case basis.
Making indirectly available funds or economic resources to designated persons and entities
If the ownership or control is established in accordance with the above criteria, the making available of funds or economic resources to non-listed legal persons or entities which are owned or controlled by a listed person or entity will in principle be considered as making them indirectly available to the latter, unless it can be reasonably determined, on a case-by-case basis using a risk-based approach, taking into account all of the relevant circumstances, including the criteria below, that the funds or economic resources concerned will not be used by or be for the benefit of that listed person or entity.
The criteria to be taken into account according to the EU Guidelines and Best Practices include, inter alia a) the date and nature of the contractual links between the entities concerned, b) the relevance of the sector of activity of the non-listed entity for the listed entity, c) the characteristics of the funds or economic resources made available, including their potential practical use by and ease of transfer to the listed entity.
An economic resource will not be considered to have been for the benefit of a listed person or entity merely because it is used by a non-listed person or entity to generate profits which might be in part distributed to a listed shareholder.
The EU Guidelines and Best Practices explicitly note that the indirect making available of funds or economic resources to listed persons or entities may also include the making available of these items to persons or entities which are not owned or controlled by listed entities.