Over- and under-compliance in export controls and sanctions law

• 83% of those present answered yes, saying that the defining attribute for classifying goods as dual-use is their potential use for civilian and military purposes.
• 17% answered no, disagreeing with this definition of dual-use goods.

Dual-use goods are civilian goods listed in Annex I of the EU Dual-Use Regulation 2021/821 with reference to their technical attributes. It follows that the classification of a product must be based on its technical parameters. The decisive factor is whether or not it is included in the EU Dual-Use Goods List. If so, the product must be classified under the appropriate dual-use item number. The actual use of an item has no bearing on its classification.

Question 1 was answered incorrectly by the majority of all workshop participants. This makes it clear that in practice the procedure for classifying goods is often not in sync with the requirements of the EU Dual-Use Regulation 2021/821. This wrong approach can lead businesses to both under- and over-compliance.

• 43% of the workshop participants answered yes, sharing the view that under these conditions a standard rotary swaging machine is classified as munitions.
• 57% answered no, believing that the military use did not classify the machine as munitions.

The use or user have no impact on the goods classification. The rotary swaging machine would only be classified as munitions if specifically designed or modified for military purposes. The rotary swaging machine would be a dual-use item if listed in Annex I of the EU Dual-Use Regulation with reference to its technical parameters.

Almost half of all workshop participants answered question 2 incorrectly. This reveals uncertainty about how to proceed with the classification of munitions. Companies that have not taken organizational measures to accommodate the presence of special design attributes from the military sector run the risk of unauthorized munitions exports and thus under-compliance.

• 85% of all participants answered yes, regarding the export control classification of goods using the TARIC database as inappropriate.
• 15% said no, seeing no risk in using the TARIC database to classify goods based on commodity code.

The commodity code does not reflect “especially constructed or modified for military purposes” as a criterion for distinguishing between munitions and civilian goods. The TARIC database does not indicate the potential classification as munitions in the scenario outlined above. This increases the company’s risk of coming under the scrutiny of the public prosecutor for unauthorized arms exports and transfers. Only for civilian goods does the TARIC database offer the option of running a plausibility check for export control classification using the commodity code.

Question 3 was answered correctly by the overwhelming majority of all workshop participants. The example illustrates, however, that classifying goods for export controls using the TARIC database can in practice carry a considerable risk to businesses of under-compliance.

• Only one of the workshop participants answered yes to this question.
• Everyone else felt that the level of the match detected by the software does not allow any conclusions to be drawn as to sanctioning.

The software simply runs a comparison between the name of the screened business partner and the names on the integrated sanctions lists. If a match is found, the software provides a percentage value of the similarity between the two names. Since sanctions are linked to a person and not to similar or identical names, the business partner is sanctioned only if the person is identical to the list entry. Software matches must always be manually checked to ensure that both names are one and the same person. This verification is referred to in practice as match handling.

Question 4 was answered correctly by the majority of participants and illustrates how match handling, when performed incorrectly or skipped altogether, can lead to over-compliance.

• 56% of participants answered yes, agreeing that screening the customer’s commercial bank reduces the risk of violating EU and US sanctions.
• 44% said no, disagreeing that screening the customer’s commercial bank reduces their company’s risk.

The risk of violating EU and US sanctions can be minimized through sanctions list screening only if the company falls within the scope of the sanctions to which the lists refer. Without a business relationship, the necessary link is missing. As for the question about screening the banks of business partners: An EU-based supplier, for example, has no business relationship with the bank of its foreign customer. The supplier does not fall within the scope of possible EU or US sanctions against the bank of its foreign customer.

Question 5 was answered incorrectly by a slim majority of participants, illustrating how the selection of entities to be screened can lead to over-compliance.

• 62% of participants said yes, agreeing that it is advisable even for EU companies without US products in their product master to check the BIS lists.
• 38% answered no, seeing no reduced trade compliance risk from screening against the lists issued by BIS.

EU businesses fall within the scope of the aforementioned BIS lists only when trading US products subject to the US Export Administration Regulations (US EAR). German companies with no US products in their material master are not affected by US re-export controls under the US EAR, so they are not affected by these lists either.

An important thing to remember here: US lists can be found not only in the export control provisions of the US EAR but also in US sanctions law, which is governed by the Office of Foreign Assets Control (OFAC). OFAC administers two lists, the Specially Designated Nationals List (SDN) and the Consolidated Sanctions List (CSL). These lists have different criteria than the BIS lists and include secondary sanctions, especially with regard to the various US sanctions regimes against Iran.

Most respondents answered question 6 incorrectly, illustrating that navigating the requirements of US export controls and sanctions law without a basic understanding of what’s involved can quickly lead to both over- and under-compliance.

• 52% of participants said yes, believing that most EU-manufactured products with US content do not require a de minimis calculation.
• 48% of participants answered no, regarding a de minimis calculation as necessary for most EU-manufactured products.

The majority of US products in EU companies have an EAR99 classification or a US domestic ECCN with “9” as the third character (900 series, ZB9ZZ). These products require a license under the EAR only for Syria, Cuba, Iran, North Korea, Russia, and Belarus. For all other destinations, these US products are not generally controlled, so they are not subject to de minimis calculations when incorporated.

Question 7 was answered correctly by the majority of respondents, highlighting significant over-compliance if the de minimis calculation is made for all products with incorporated US products.