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24 April 2018 / article

Export controls and economic sanctions compliance: 5 common misunderstandings

Export controls and economic sanctions present a significant challenge for many industry sectors, resulting in an ever increasing compliance burden. This comes as no surprise, considering the large and growing variety of goods, services and technologies subject to controls or restrictions, as well as the demanding complexity of national, European and international regulations. Combined with a recent focus on enforcement measures in certain jurisdictions, export controls and sanctions impact virtually every sector: automotive, chemical, banking, food & beverages, life sciences & new technologies are but a few examples of areas having to deal actively with compliance processes.

As a general rule, export controls and sanctions regulations impose prohibitions or restrictions, by means of authorizations and licenses, but do not regulate how businesses should comply with such prohibitions and restrictions. Companies are expected to find their own way towards compliance. As such they will have to anticipate whether they are shipping controlled items or servicing a restricted party and check whether a government authorisation is required or not. 

Understanding the impact of export controls and sanctions is key. Therefore, we have highlighted the 5 common misunderstandings regarding export controls and economic sanctions.

Content

1. We are not selling military items / We do not produce goods, so basically export controls and economic sanctions will not be applicable to our company
2. We know the customs code classification of our products, so there is no need for additional export control classification
3. If the authorities do not detect any breaches, we are compliant
4. An Internal Compliance Program specially dedicated to export controls and sanctions is not necessary and too costly
5. We are a European company with no links to the US, so we only have to comply with EU regulations

 

1. We are not selling military items / We do not produce goods, so basically export controls and economic sanctions will not be applicable to our company

A wide variety of goods are subject to control

The main two categories of export controls in the EU are the military controls and the so-called dual-use controls, i.e. controls on items that can be used for both civilian and military applications and/or can contribute to the proliferation of weapons of mass destruction. This means that even when a product is manufactured for purely commercial purposes, the products can still qualify as dual-use, e.g. certain carbon fibers, chemicals, certain steel products, etc. The list of dual-use items in the EU is more than 300 pages long. 

Note that in future it is likely that the scope of dual-use items will be extended to items that can be used to violate human rights, such as cyber surveillance systems. 

Certain goods of high risk (i.e. items listed on the Common EU list of Military Goods and dual-use goods of Annex IV of the EU Dual-Use list) are also subject to EU export controls if the goods are transferred from one EU member state to another. 

In addition to these dual-use and military listed goods, certain items are also restricted under economic sanctions regulations if dispatched to certain end destinations and/or end-users. For instance economic sanctions regulations against Russia impose restrictions on goods used in the oil and gas sector.

But also services can be subject to controls

Even if you don’t own, produce or export goods, but you are merely performing services within the supply chain, for example as a freight forwarder, or you only conduct research activities without any intention to produce goods, for example as research centers of universities do, you might be subject to sanctions and export controls regulations. 

Certain services related to military and dual-use goods such as the non-physical transmission of software and technology, technical assistance and brokering services are also controlled. Furthermore, service providers like insurance companies, logistics companies, and financial institutions may be targeted by specific economic sanction regulations. 

Since services are non-tangible items, they will not physically cross borders or pass customs authorities and, therefore, they often lack a paper trail or any other structural record keeping. Because of this we suggest to document every controlled services or transmission of technology. For instance, an exchange of e-mails with a recipient outside the EU with respect to research of an item that is subject to dual-use controls can be controlled and considered as ‘export’ for dual-use purposes. Proper documentation of these e-mails is highly recommended in order to avoid future debate with the competent regulators.

2. We know the customs code classification of our products, so there is no need for additional export control classification

Invest in your export control classification

You can only know whether the items you are providing or servicing is subject to controls if you did a proper classification for export control purposes. Every exporter is responsible for determining whether the goods to be exported require a notification or an export license under applicable export control regulations. The following structure can serve as a high-level example of such classification procedure:

Export controls and economic sanctions: 5 common misunderstandings

 

The items to be classified include not only finished products but also spare parts and components, technology or software, etc.

Where items to be exported have been externally sourced, it is advisable – in case of doubt – to contact the original supplier/product manufacturer in order to obtain technical specifications and export classification data. If such information cannot be obtained from the original supplier/product manufacturer, the exporter should classify the products, if necessary in consultation with technical experts. 

Do not rely solely on the customs classification codes

The European Commission published a correlation table which establishes links between the customs classification codes (HS/CN) and export control classification codes (ECN) which is thus a useful tool. 

However, one should be cautious when using this tool in order to determine the export control classification. While a single item will only have one corresponding HS classification and one ECN, using the correlation table may not always provide clear guidance for a particular item. Because the scope and purpose of both classification systems are different, the two systems do not always correlate with one another. In order to avoid ‘correlation errors’, exporters will have to continue their ECN homework. The correlation table is useful but should not be the only source for export control classification.

3. If the authorities do not detect any breaches, we are compliant

It is true that export control authorities audit less regularly compared to, for instance tax authorities. This does not mean, however, that no investigations are opened into companies that allegedly breached the rules. We see more and more enforcement cases in this respect. Therefore, it is advisable to check proactively yourself whether and when your company is or was non-compliant and have procedures for correction in case of the detection of non-compliance issues. 

For instance, personnel suspecting non-compliance with the company's export control procedures or with any applicable export control regulations should promptly report such concerns to the Chief Export Control Office or any other person within the organisation responsible for trade compliance. The latter should investigate all such reports and consider whether the findings are an issue that should be escalated internally or to the competent authorities. 

In case of a (possible) breach, the company should ensure that the necessary corrective actions are implemented so that similar violations will not occur in the future and document the steps taken in case of a future audit by the competent authorities. In most cases of non-compliance it is recommended to disclose the issues to the authorities. 

Voluntary disclosure may result in mitigation of penalties. As a rule, the competent authorities of the EU Member States, like those of the US, will attribute considerable weight to a voluntary disclosure when deciding how to deal with a violation. Voluntary disclosure will typically result in a settlement and/or official warning with no financial penalties provided that: 

  • the party that is in violation is a first-time offender;
  • the disclosure provides all relevant information regarding the items or activities that required authorization;
  • authorization would have been granted had it been properly applied for; and
  • the activities in question or the destination or end-use of the items are not subject to sanctions

4. An Internal Compliance Program specially dedicated to export controls and sanctions is not necessary and too costly

An Internal Compliance Program: recommended but also becoming more and more compulsory

When operating in an international trade context, it is highly recommended to implement an Internal Compliance Program for export controls and sanctions. In some cases, exporters even need to present such compliance programs e.g. when applying for certain licenses. Also when authorities have detected a breach against regulations, companies might have a defence by showing that they followed the procedures of the Internal Compliance Program and could not have suspected that a certain transaction constituted a violation. 

Businesses having or aiming to have the Authorised Economic Operator (AEO) certification scheme for customs purposes, are in fact also required to embed export control compliance in their AEO program and procedures. 

Note that the EU is currently revising the EU Dual-Use Regulation and it is likely that the Internal Compliance Program will have a prominent role in the future. It is even possible that a certain ‘certification’-scheme for compliance programs will be implemented, so that exporters can receive a certification from the national authorities and have some (licensing) benefits. 

In summary, an Internal Compliance Program is not a cost for your company but an investment in your company.

Small and medium sized enterprises (SME’s)

With the added impetus of the exponential growth of the Internet, giving them ever wider access to global trade, SME’s are increasingly involved in the same global business environment as large multinational enterprises. 

Implementing and maintaining compliance programs should be balanced according to the size and organizational structure of each SME, but of course an SME’s should adhere to the same rules as multinational enterprises.

5. We are a European company with no links to the US, so we only have to comply with EU regulations

US export controls have a distinct extra-territorial reach. US regulations, therefore, definitely represent an additional risk and burden for European companies. 

First, US export controls potentially affect any company that integrates, resells or manufactures commodities using US origin products, components or technology. In case a product contains sufficient US origin controlled components, EU exporters also need to comply with US export controls. Even the integration of non-controlled items into a product, pay trigger the applicability of US regulations if such products are destined to certain jurisdictions that are subject to comprehensive US sanctions (e.g. Iran). 

Secondly, apart from these US-controlled items, certain sanction programs can have an extra-territorial reach, imposing obligations on non-US persons and entities: the so-called “secondary sanctions”. In case of non-compliance with these secondary sanctions, you risk to be placed on a US “black list” of blocked persons and entities. 

European companies should, therefore, definitely keep an eye on US export controls. Moreover, there is actually more and more enforcement action by US authorities against non-US persons, targeting European financial institutions particularly. 

Note that compliance with US export controls can sometimes be in conflict with EU regulations and legislation of the EU Member States, like data protection regulations and labour laws.

 



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