What is required for secure cooperation with defense companies? This article explains the role of product classification, export licenses, and compliance processes.
Cooperation with defense companies: Key considerations
Why export controls must be addressed early on
Case study: Entering the defense industry
Which classification scenarios must be distinguished?
Measures for compliance with export control requirements
Conclusion: Classify first, then manage the process
Companies entering the defense industry for the first time must familiarize themselves at an early stage with the export control requirements governing trade in military goods.
The central export control challenge when entering the defense sector is the classification of goods. Companies must be able to reliably distinguish between military and civilian goods, as export controls – specifically licensing requirements for exports and transfers – are based on this distinction.
For industrial companies operating exclusively in the civilian sector, such as automotive suppliers, entering into business relationships with defense companies represents a qualitative shift in their trade compliance requirements. This applies in particular to goods classification and the licensing procedures administered by the respective governing national authority (for example, in Germany, the German Federal Office for Economic Affairs and Export Control, or short: BAFA).
Typically, the complex export control requirements are addressed only superficially during the many information events held with representatives of National Armed Forces and their advisors. It is often not even mentioned that violations of export licensing requirements may result in criminal liability.
Military goods may not be traded freely. Strict rules from the governing national authorities apply. Under the German Foreign Trade and Payments Ordinance (AWV), for example, all cross-border shipments of military goods require authorization. This means that companies must implement organizational measures to ensure compliance with licensing procedures. It is therefore advisable to incorporate export control considerations into decision-making processes as early as possible.
Using practical examples, this article highlights the key issues associated with military export controls and outlines organizational measures that can help companies minimize the risk of trade compliance violations.
An automotive supplier (A) in Germany has been developing and exporting transmissions for civilian vehicles for many years. A defense contractor (R) has now expressed interest in these products.
What should be considered, and what organizational measures should A implement to work with R?
A must organize its processes in a way that ensures compliance with export controls, namely the licensing requirements established by the AWV. For military goods, these requirements are linked to a listing in Part I Section A of the German Export List (Ausfuhrliste). Listed military goods include weapons, ammunition, and military equipment.
Companies can therefore only comply with licensing requirements if they can correctly classify their products. For A, which has previously operated exclusively in the civilian sector, it is important to distinguish between civilian and military transmissions, since a product can only be classified as either military or civilian.
At this point, it is already clear that neither the actual end use nor the potential end use may play a role in goods classification.
For A's future cooperation with R in the defense industry, three scenarios must be distinguished. The decisive factor is whether the existing civilian product remains unchanged, is modified for military purposes, or is newly developed from the outset according to military requirements.
If R purchases a civilian transmission already contained in A's product portfolio and installs it in a military vehicle without modification, the transmission remains an unlisted civilian product.
A modifies the transmission at R's request. A must determine whether the modified product becomes military equipment within the scope of Part I Section A of the German Export List.
Specifically, it must be assessed whether the modifications cause the product to meet the criteria of the Export List Entry under the position 0006a:
0006 Ground vehicles and components therefor, as follows:
(...)
a) Ground vehicles and components therefor, specially designed or modified for military purposes;
(...)
A develops a new transmission for a military truck based on R's requirements. The product is specially designed by A for military purposes and is therefore listed as military equipment under Export List Entry 0006a.
What organizational measures must A implement in the respective three scenarios to comply with export control requirements before exports or transfers can take place?
The transmission remains an unlisted civilian product. No product-based licensing requirements apply.
However, other elements of trade compliance remain relevant, including business partners (sanctions list screening), the countries involved (embargo screening), and end-use controls. A must continue to perform these checks even for its unlisted products.
Once A has classified the products under Export List Entry 0006a in Scenarios 2 and 3, master data maintenance becomes an essential part of a robust export compliance process.
A should identify the transmissions specially designed or modified for defense contractor R in its master data records as military goods under Export List Number 0006a. The company must then ensure that these transmissions are never shipped abroad without the required authorization.
AEB's Export Controls software can support this process. For exports and transfers involving transmissions listed under 0006a, Export Controls identifies applicable licensing requirements and proposes suitable authorizations.
Depending on the countries involved, A must either apply to BAFA for an Individual Export License for transfers and exports of transmissions listed under 0006a or make use of a General Export Authorization. BAFA has issued a broad range of General Export Authorizations for trade in military goods. These authorizations are subject to different eligibility requirements and contain differing conditions and obligations.
Careful assessment and selection of the correct authorization is a fundamental component of trade compliance for companies entering the defense sector.
AEB's License Management software supports companies throughout the licensing process, particularly with respect to the legally required reporting, documentation, and record-retention obligations.
Entering the defense industry creates new business opportunities for many industrial companies. At the same time, it introduces new export control obligations that do not start only when goods are ready for shipping.
Companies should assess the applicable legal requirements at an early stage when entering the defense sector. This includes especially the accurate classification of products that were requested by defense companies. New organizational measures are required and should be documented within an Internal Compliance Program (ICP). It is important to have effective communication channels between the relevant teams within the company and to build the essential knowledge base in the area of trade compliance.
The use of specialized software such as AEB Export Controls and AEB License Management is recommended for companies trading in military goods. Licensable exports and transfers are reliably identified and blocked. The subsequent licensing process is managed in a structured manner, while all requirements for registration, reporting, documentation, and record-retention are fulfilled and documented in a legally compliant way.
