Export controls: objectives, pitfalls, checklist

Export controls are an international issue, because the objectives can only be achieved when efforts are coordinated as much as possible on a global scale. Talk to people about export control law, and you’ll find that it’s often mentioned in the same breath as customs – and regarded as an appendage to customs law.

But these two areas of law pursue different objectives, and losing sight of that greatly increases your risk of violating export control regulations and being targeted by law enforcement authorities.

Here we’ll explore the topic of export controls: how it works, what the objectives are, and where the pitfalls lie. We’ll also describe the organizational measures you should take to ensure you stay on the right side of the law, and we’ve included a checklist at the end of the article.

All these considerations begin with the basic concept of free foreign trade. Restricting this freedom through export controls is permissible to uphold national or international security interests.

The UN Security Council decided in its Resolution 1540 (2004) of 2004 that all states must adopt and enforce effective measures to fulfill their commitments to arms control and disarmament and to prevent the proliferation of all types of weapons of mass destruction. Member states were called upon to adopt appropriate and effective non-proliferation measures targeting nuclear, chemical, and biological weapons as well as conventional armaments.

For the purpose of tangible references, we’re using going forward in this article the example of a company based in the EU and specifically, in Germany. The example and general approach, however, are easily transferable to other regions.

With the EU Dual-Use Regulation 2021/821 and Germany’s Foreign Trade and Payments Ordinance (AWV), the EU and Germany have complied with the UN Security Council’s request and issued general regulations designed to achieve the UN objectives. The key tool of general export control regulations is licensing requirements. Listed goods always require a license when exported.

Non-listed goods require a license only where there is knowledge of one of the legally defined end-uses. Export control laws similar to those in the EU and Germany exist in many other countries. The US Export Administration Regulations (EAR), the American counterpart to our EU Dual-Use Regulation 2021/821, are known around the world for their extraterritorial nature.

The licensing requirements arising from general export control regulations are primarily linked to lists of goods. In the area of civilian export controls, these requirements are found in Annex I of the EU Dual-Use Regulation (EU dual-use goods list) and Part I Section B of the "Ausfuhrliste" (German dual-use goods list). Germany’s export control list for military goods can be found in Part I Section A of the Ausfuhrliste, which is an annex of the AWV.

Export controls for civilian goods mainly apply to the licensing requirement for exports of the dual-use items listed in Annex I. The licensing requirement for dual-use items is regulated in Art. 3 (1) of the EU Dual-Use Regulation, and there are no exceptions to this requirement.

Annex I of the EU Dual-Use Regulation is a technical list describing dual-use items requiring a license based on their specific technical parameters. All goods with the technical specifications described therein are subject to export controls as dual-use items. The concept of goods in export controls extends beyond the physical objects of goods per se to also include software and technology developed in connection with those goods.

The classification of goods is a technical check that involves comparing the technical attributes of the goods to be classified with the those described in the control list. A common mistake is to include the known use or simply the mere possibility of use in the goods classification.

This approach leads to huge uncertainties, since the same goods are classified differently based on their use. The legally compliant classification of goods must be independent of the recipient and use.

Goods classification requires unique internal organizational measures that should be part of an internal compliance program (ICP). What’s important here is clear documentation of technical checks and systematic maintenance of master data.

The export and transfer of non-listed goods are generally free from licensing requirements. A license may be required, however, if you are aware or have been notified by Germany’s Federal Office for Economic Affairs and Export Control (BAFA) of one of the designated uses specified in Art. 4 (1) and Art. 5 (1) of the EU Dual-Use Regulation or Section 9 AWV. These standards are referred to as catch-all clauses, as they make the vast majority of non-listed goods subject to a license in the circumstances described.

The following designated uses are defined under the law:

• Uses in connection with the proliferation of nuclear, chemical, or biological weapons and carrier technology (Art. 4 (1a) EU Dual-Use Regulation)
• Military end-uses if the country of buyer or country of destination is under an arms embargo (Art. 4 (1b) EU Dual-Use Regulation)
• Use in the field of civilian nuclear power under the conditions specified in Section 9 (1) AWV
• Use of non-listed digital surveillance goods in connection with internal repression and serious violations of human rights or international humanitarian law pursuant to Art. 5 (1) EU Dual-Use Regulation

EU sanctions regulations are more targeted laws that take precedence over general export control regulations. EU sanctions regulations primarily stipulate restrictions on trade in certain goods and the associated services and financial resources, in addition to direct and indirect bans on the provision of economic and financial resources.

Denied party screening lets you determine whether any of your business partners are subject to EU direct bans. If so, any provision of economic or financial resources is prohibited.

The EU’s Consolidated Financial Sanctions Parties List (CFSP List) is a database in which the persons, companies, and organizations subject to EU financial sanctions are consolidated on a daily basis. EU sanctions regulations stipulate not only direct bans on the provision of economic and financial resources but also indirect bans.

Indirect bans apply to business partners not directly listed but owned by a sanctioned entity. In practice, there are different ways to check for indirect bans. In addition to ad hoc inquiries about ownership structures, there is also the option to use fee-based databases to check which parties are involved.

In addition to bans on the provision of economic and financial resources, EU embargo regulations restrict business transactions with certain countries. Companies wishing to do business with embargoed countries must begin by checking in each individual instance whether the planned transaction is subject to the restrictions of the embargo regulation.

To use a current example: Any company in the EU that is doing business with Russia must check whether the planned transaction is subject to any restrictions in the form of bans or licensing requirements under the current embargo against Russia set forth in EU Regulation 833/2014. Similar to the EU Dual-Use Regulation, the EU embargo regulations also work with export control lists in the annexes.

The current embargo regulation against Russia has a large number of annexes that affect very different groups of goods. In addition to listed and non-listed high-tech goods, the annexes include equipment from the energy sector; goods relating to oil refinery production, aerospace, and maritime shipping; luxury goods; and goods that strengthen Russia’s industrial capacities. The goods in question are identified in most annexes by a commodity code.

A company intending to sell a door seal with the commodity code 40169300 to Russia, for example, must check whether the door seal falls within the scope of the Russian sanctions before submitting a binding quote. Annex XXIII of the Embargo Regulation No. 833/2014 against Russia lists the relevant commodity code.

The restrictions described in Art. 3k of the Regulation apply to the goods listed in Annex XXIII. Art. 3k imposes a general ban on trade in the goods listed in Annex XXIII. Exceptions to this ban are possible and must be reviewed on a case-by-case basis. Embargo regulations are amended frequently and sanctions packages take effect without notice, so it is advisable to pay particular attention to business transactions with embargoed countries when organizing your company’s export controls.