Regulatory Outlook: Dual-Use Goods and Export Control - November 2016

Current Issues

Modernisation of the European dual-use export control regime: The European Commission has for several years been involved in an extensive consultation about the European dual-use export control system. On 28 September 2016, the Commission published a proposal (available here) to amend legislation underpinning the current European dual-use export control regime, the EU Dual Use Regulation.

The proposed changes to the Regulation aim to:

• harmonise controls across the EU on brokering, technical assistance and the transit of dual-use items;
• simplify and upgrade the administration of dual-use licensing controls, by, for example, introducing EU General Export Authorisations and simplifying the controls of technology transfers (for example, transfers of sensitive technology to the cloud); and
• introduce a ‘human security’ dimension to the European regime to stop, for example, exports of certain cyber-surveillance technologies (essentially used by intelligence and law enforcement agencies) that may be misused for committing serious human rights violations.

The proposals will now be decided upon by the European Council and the European Parliament in an ordinary legislative procedure. The Regulation is binding and directly applicable throughout the EU. Assuming the ordinary legislative procedure is exhausted in advance of the UK formally leaving the EU – and the proposals are implemented in Member States – businesses operating within the UK will need to comply with any amendments to the Regulation in respect of any controlled goods, software or technology they export within the scope of the EU dual-use list.

Export Control Joint Unit: The Export Control Joint Unit, which began operating on 18 July 2016, derives from the UK Government’s 2015 Strategic Defence and Security Review and is intended to bring together resources and expertise. The export licensing process will remain unchanged, but should lead to a more harmonised approach to dealing with particular export issues.

UK Strategic Export Controls Annual Report 2015: The UK Strategic Export Controls Annual Report 2015 was published on 21 July 2016. The report provides details of strategic export controls policy and export licensing decisions for the period January to December 2015. You can read the Report here.

Russian economic sanctions: The European Council has extended the economic sanctions imposed on Russia until 31 July 2017. The restrictive measures include: an arms embargo; a prohibition on supply of dual-use items which are or may be intended for military end-use or for a military end-user in Russia; and the requirement to have an export licence for the export of certain energy-related equipment and technology to Russia (or any other country if such equipment or technology is intended for use in Russia).

Department for International Trade: The Department for International Trade (DIT) was formed on 14 July 2016 with overall responsibility for promoting British trade across the world. DIT will develop, coordinate and deliver a new trade policy for the UK, including preparing and negotiating free trade agreements and market access deals with non-EU countries.

Importantly for exporters of dual-use controlled items this new department will also take on the relevant trade functions of the former Department for Business, Innovation and Skills and will be responsible for overseeing the operations of the UK Export Control Organisation (ECO).

In Focus: Enforcement

The ECO, which is now part of the newly-created DIT, is the UK Government department responsible for controlling and, where applicable, granting licenses for the export of strategic goods included in the UK Strategic Export Controls Lists. The ECO monitors export control compliance through regular and ad-hoc audits of licence recipients using predefined criteria agreed with HMRC.

Where a suspected compliance failing comes to the attention of the UK authorities, it will be investigated by the ECO, HMRC or the UK Border Force (or a combination of all three). Where justified by that evidence-gathering exercise, those organisations (with the additional involvement of the Crown Prosecution Service (CPS) in certain circumstances) will enforce the UK’s strategic export and trade controls, sanctions and embargoes through a range of tools. The most common sanctions for breaching UK dual-use export control laws include:

• written warnings from the ECO;
• seizure of goods before they leave the UK;
• compound penalties – a penalty by which HMRC can offer companies the chance to pay a fine to settle a case which would justify being referred to the CPS for prosecution; and
• criminal prosecutions, should the CPS consider that the evidence obtained by HMRC (alone or in combination with the UK Border Force and/or ECO) supports a realistic prospect of conviction and whether it is in the public interest to commence criminal proceedings.

In recent years the UK Government has been keen to emphasise the high success rate of criminal prosecutions in the field of dual-use export controls – despite the CPS having not yet prosecuted a major international company for a breach of export or trade controls. Nevertheless, there has been a general shift towards HMRC using compound penalties in lieu of criminal prosecutions, with the objective of saving the taxpayer and company time and legal fees.

Early engagement

Early engagement with HMRC to negotiate a compound penalty can often be the quickest way of avoiding a criminal prosecution and the adverse consequences it can bring. Criteria used by HMRC for calculating a compound policy – which should be directly addressed by businesses assessing the merits of a voluntary disclosure to the HMRC – include an exporter’s previous history of offences and the types and value of the goods involved (including the strategic value of the goods).

The ECO’s recent introduction of the ‘First Contact’ stage inspections (usually over the phone to first-time registrants of Open Licences within six weeks of being allocated to an inspector) has also proved successful. For example, in 2015 the ECO engaged 107 exporters in this initial process, finding that it helped to raise awareness amongst exporters, enable inspectors to engage with more businesses throughout the year and reduce non-compliance. We expect this trend of engagement and enforcement to continue.

Dates for the diary

12 December 2016

Full day Export Control Forum planned for representatives of key stakeholders from civil society, industry and academics, as well as national governments, to discuss the Commission’s proposals to modernise and strengthen the Regulation.

Pre-1 February 2017         

The High Court has given permission for a judicial review into the legality of the UK Government’s continued approval of new licences for the sale of arms to Saudi Arabia. The hearing will take place by 1 February 2017. If the UK Government’s position is not supported, this could have major implications for the UK’s legal and regulatory export control framework.

July 2017                   

The government will publish the UK Strategic Export Controls Annual Report 2016 in July 2017. This report will cover the UK’s export control policy and practice during the period January 2016 to December 2016.

Throughout 2017

The Commission’s proposals to modernise and strengthen will now move through the European Council and the European Parliament as part of the ordinary legislative process.

For more information and details of all of the other areas covered by the Regulatory Outlook click here.