Export controls EU, UK, US, CN: Focus on extraterritorial applications
Case studies

Export controls EU, UK, US, CN: Focus on extraterritorial applications

Questions about extraterritoriality in export controls? These five EU, UK, US, and CN case studies help you size up what your company needs to know.

Author: Ulrike Jasper
Ulrike Jasper
27.11.2023

Extraterritoriality: Uncertainties and half-truths
What extraterritoriality in export controls means
Extraterritoriality scenarios and workshop
Details and case study for extraterritoriality: EU
Details and case study for extraterritoriality: UK
Details and case study for extraterritoriality: CN
Details and case study for extraterritoriality: US EAR
Details and case study for extraterritoriality: US OFAC

Uncertainties and half-truths around extraterritoriality

Extraterritorial applications in the export control and sanction laws of various countries are a frequent topic of conversation and the source of great uncertainties in many companies. The issue has also come under increased scrutiny in connection with China’s export control law that came int force in December 2020.

Statements such as “[…] Due to the extraterritorial scope, the new regulations affect companies with and without a branch office in China equally. Companies doing business in China are therefore well advised to act now in running a critical risk assessment on their supply chains and trade routes and to make any necessary adaptations to the new requirements. […].” are all too common and give the impression that every company doing business in China needs to respond to China’s new export control law.

A dangerous mix of half-truths have cropped up and spread around the concept of extraterritoriality. That’s why it’s so essential for business leaders to acquaint themselves with the facts. This begins with understanding what “extraterritoriality” is and is not.

What exactly is meant by extraterritoriality in export controls

In foreign trade law, extraterritoriality means that a state applies and enforces its law to matters and persons outside its borders. It goes without saying that this leads to considerable difficulties in practice. The basic problem – aside from language barriers, since laws are typically available only in the language of the country where they are enacted – is a lack of legal knowledge. As a result, the legal context under which foreign laws are applied is often vague.

Businesses that lack knowledge of a foreign legal system are also unaware of the options that foreign authorities may have to impose sanctions, and this often affects how they design their internal processes. Their fear and uncertainty frequently lead to over-regulations that negatively impact their own operations and supply chain. Some striking examples of this can be found in how companies across the world implemented the US re-export law.

Running case studies with industrial and commercial enterprises

To bring more clarity to this issue, we held an academy session on the subject of extraterritoriality in export controls. The workshop was booked to capacity with 150 attendees – a response that confirmed the need for more information on this topic. The objective of the workshop was to examine the global applicability asserted by the EU embargo regulations, the UK sanction laws, China’s new Export Control Law (ECL), the US Export Administration Regulations (EAR), and the sanction law of the US Office of Foreign Assets Control (OFAC).

Case studies were used to demonstrate what’s critical for companies when implementing extraterritorial requirements and where the pitfalls lie in practice. The results that were obtained are of great interest to other companies as well – which is why we’re sharing them here in the following sections by jurisdiction.

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1. Extraterritoriality of EU sanctions regulations in the example of Art. 13 of EU embargo regulation no. 833/2014 against Russia

Excerpt from Art. 13 (click to show details)

This Regulation shall apply:
[…]
c) to any person inside or outside the territory of the Union who is a national of a Member State;
d) to any legal person, entity, or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State; […]

The EU embargo regulation against Russia is extraterritorial in nature and applies worldwide, but only when the aforementioned criteria are met:

  • Individuals: nationals of an EU Member State
  • Legal persons: incorporated or constituted under the law of an EU Member State

Case study question:

Does the independent Russian subsidiary of an EU company in Russia have to observe the EU embargo against Russia?

  • 48% of our workshop participants answered “yes” to this question, believing that the independent Russian subsidiary also falls within the scope of the EU embargo regulation against Russia.
  • 52% answered “no.”

The correct answer is “no”: The independent Russian subsidiary is a legal person organized under Russian law, so it does not fall within the scope of the EU sanctions against Russia.

Observing country embargoes at all times

Many jurisdictions around the world issue and frequently amend various embargo measures. AEB's Export Controls software runs automated embargo checks for your export transactions to help you prevent violations of worldwide embargoes.

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2. Extraterritorial jurisdiction of UK sanctions regulations

Excerpt from the UK Sanctions and Anti–Money Laundering Act 2018 (click to show details)

(1) Prohibitions or requirements may be imposed by or under regulations under
section 1 in relation to –
(a) …
(b) Conduct elsewhere, but only if the conduct is by a United Kingdom person.
(2) In subsection (1) “United Kingdom person” means –
(a) a United Kingdom national, or
(b) a body incorporated or constituted under the law of any part of the United Kingdom.
(3) For this purpose, a United Kingdom national is an individual who is –
(a) […]

The UK sanctions regulations are extraterritorial in nature and apply worldwide when the following criteria are met:

  • Individuals: UK national
  • Legal persons: incorporated or constituted under UK law

Case study question:

EU company A with headquarters in Brussels (or any other EU location) is the independent subsidiary of UK company A Ltd. Does A fall within the scope of the UK Sanctions and Anti–Money Laundering Act 2018?

  • 55% of our workshop participants answered “yes” to this question, believing that an EU company that is the subsidiary of a UK company is subject to the UK Sanctions and Anti–Money Laundering Act 2018.
  • 45% answered “no.”

The correct answer is “no”: The EU company is a legal person organized under its respective national law within the EU, so it does not fall within the scope of the UK Sanctions and Anti–Money Laundering Act 2018.

3. Extraterritorial jurisdiction of China’s new Export Control Law (ECL)

Excerpt from ECL Article 2, jurisdiction of ECL (click to show details)

For the purposes of this Law, export control means the prohibitive or restrictive measures taken by the State against the transfer of any Controlled Items out of the People’s Republic of China, and the provision of any Controlled Items by any citizens, legal persons or non-corporate organizations of the People’s Republic of China to any foreign organizations and individuals.

The ECL is not extraterritorial in nature. It covers exports from China and the transfer of controlled items (“deemed exports”) by Chinese nationals (individuals and legal persons) to non-Chinese nationals.

Case study question:

Is a Dutch company that exports Chinese products to the US affected by the ECL?

  • 83% of participants answered “yes” to this question, believing that the Dutch company in this example is subject to the ECL.
  • Only 17% did not see this as within the scope of the ECL.

The correct answer is “no”: The ECL’s jurisdiction is limited to exports from China, and re-exports do not fall under its jurisdiction.

China's Export Control Law (ECL)

What does the new Chinese law include and what are the consequences of violations? What are the recommendations for global trade compliance programs? We have summarized relevant details for you.

More information

4.1 Extraterritorial nature of US Export Administration Regulations (EAR)

Excerpt from the EAR (click to show details)

§ 734.14 EAR REEXPORT
(1) An actual shipment or transmission of an item subject to the EAR from one foreign country to another foreign country [...]
§ 732.1.c EAR
(c) Are your items and activities subject to the EAR?
You should first determine whether your commodity, software, or technology is subject to the EAR (see part § 734 of the EAR concerning scope)

The EAR are extraterritorial in nature and apply worldwide, but only when the criteria named in § 734.3–5 are met:

  • Individuals: US nationals, Green Card holders, permanent residents
  • Legal persons: organized under US corporate law, companies with an American legal structure
  • US products as defined by § 734.3 & 4 EAR

Case study question:

Is a Swedish company that exports US products to China subject to US re-export law under the EAR?

  • 93% of participants answered “yes” to this question.
  • Only 7% did not see this as the jurisdiction of EAR.

The correct answer is “yes”: US products worldwide are subject to the EAR. The shipment of US products to China is, from the US perspective, a re-export that falls within the scope of the EAR.

4.2 Extraterritoriality of US sanctions regulations of OFAC

Excerpt from US Department of the Treasury website, POLICY ISSUES (click to show details)

OFAC outlines the scope of the Specially Designated Nationals (SDN) List on its website as follows:

“As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called ‘Specially Designated Nationals’ or ‘SDNs.’ Their assets are blocked and US persons are generally prohibited from dealing with them.”

This means that the OFAC sanctions provisions are not extraterritorial in nature, and their scope is generally restricted to US persons (primary sanctions). There are exceptions to this general principle, however. The sanctions regulations against Iran and Russia also standardize sanctions for non-US persons (secondary sanctions).

Case study question:

The Head of Sales of EU-based company B is a US national. Does this make B a US person subject to all US sanctions administered by OFAC?

  • 41% of participants answered “yes” to this question.
  • 59% answered “no.”

The correct answer is “no” but: A legal entity organized under corporate laws within EU member states does not generally become a US person within the scope of US sanctions administered by OFAC because it employs a US national. The definition of US person varies from law to law, however, so it’s important to consult the provisions of the law in question in each instance. Note in particular the divergent definitions of US persons in the embargo regulations against IR, CU, SY, and KP.

Standarddatei

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Extraterritoriality in export controls: Conclusion

Anyone who is involved with the extraterritorial nature of foreign laws and does not want to fall victim to hearsay is well advised to take a look at the foreign law and check whether it is extraterritorial in nature, which criteria for worldwide application are specified, and whether these criteria apply to the case in question.

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