In an increasingly integrated world trading environment, globalisation and the threat of terrorism have brought security concerns to the fore. New regulations dealing with everything from container inspection requirements to “trading with the enemy” restrictions are increasingly common. They range from the imposition of sanctions (like export bans) to the regulation of exports and the handling of the product that is to be exported. Most of these regulations are well-intentioned. Some create trade “tilts” between countries, bringing opportunities for some and barriers for others. Strict compliance is essential, in all cases.
Products do not have to be specifically designed for a military purpose, or be inherently lethal, in order to be caught by international licensing requirements. So-called commercial dual-use goods (“dual-use goods”) are products essentially intended for commercial, or civilian, use that nonetheless could be used for military purposes. Some restrictions also extend to the export of services and information.
Moulis Legal acts for a number of exporters involved in the exportation of information technology, technical equipment, and high-tech products. We have advised on the cross-border movement of products ranging from printed circuit boards to steel assemblies for ship building. The value of trade in high technology goods and the penalties for getting it wrong underline the importance of ensuring that you are aware of the issues you face and that your documents and procedures are absolutely correct.
The imprisonment of three UK nationals in June this year for conspiracy to export controlled goods without authorisation brings home the seriousness with which international authorities treat these issues. The three were involved in the supply of oxygen cylinders to Iran. The cylinders were “dual-use goods”, having some limited civilian applications, but were ideally suited for use in Iranian F-14 fighter jets. The items had been sourced on e-Bay in the US and shipped to an address in Florida to avoid export controls, before onward dispatch to Iran via the UK, Romania and Hong Kong.
Sentences totalling 10 years were handed down by the UK court for this quite blatant breach of the UK’s export control laws and sanctions against Iran.
Singapore Customs and the US Commerce Department have just completed their third round of annual talks on dual-use goods. In 2008, Singapore Customs approved a total of 7,948 strategic goods permits, with 25 per cent of those by value being dual-use goods. To improve the trade, Singapore is negotiating for simpler documentation, which would translate into savings in business costs and time incurred by local traders of strategic goods.
In view of the fact that both Australia and Singapore have Free Trade Agreements with the US, changes to the treatment of one country’s exports may magnify the disadvantages for the other. The outcome of those negotiations is still unclear.
Australia and the US have submitted to various export control regimes and treaties, which are implemented through domestic regulation, and have agreed to a treaty that will, if ratified, simplify matters for Australians dealing with US technology. However ratification does not seem to be high on the agenda of the new US Administration.
In Australia, dual-use goods are controlled if they fall within Part 2 of the Defence and Strategic Goods List (“DSGL”), or within the Weapons of Mass Destruction (Prevention of Proliferation) Act 1995, which has a more general operation. There are a large range of products covered, many of which do not immediately suggest military uses to the layman. Some examples bear this out: for example certain types of optical finishing machine tools; manufacturing equipment for fibre-optic coil winding machines; solar cells, solar panels and solar arrays that are “space qualified”; and certain location systems using telecommunications technology.
Permits and licences of controlled dual-use goods are issued by the Defence Export Control Office. A decision to refuse a permit or licence can have significant commercial implications, and in that regard a statement of reasons for the decision must be given, except if the Minister determines that it is not in the national interest to divulge those reasons. Judicial review of the decision is available, however legal review cannot impinge upon considerations such as national and regional security, foreign policy and human rights.
The DSGL only applies to goods. However the WMD Act can also apply to services and “intangibles”. Accordingly export activities such as emailing source codes, or providing information by telephone, can be subject to the Act. If an exporter has reasonable grounds to suspect that goods or services will or may be used in a WMD program, a permit or licence and special Customs clearance will be required for any exportation of the goods or services concerned.
The WMD Act forces exporters to actively investigate and assess the identity of the overseas parties with whom they do business. The legal test is an objective one. It asks whether it was reasonable for the exporter to have the relevant suspicion: not whether the exporter did have that suspicion. Thus, an exporter must inquire about the end user of the goods, and carefully consider the circumstances of the transaction which is to take place. If any of those circumstances reasonably raise suspicion about the nature of the end user or its purpose in obtaining the goods or information concerned, then proceeding with the transaction would be in breach of the WMD Act. What could the goods or services potentially be used for? Where is the customer? Is the end-user in a terrorism-plagued part of the world? Why is urgent delivery requested, or cash payment proposed?
Exporters also need to be aware of country sanctions and the Denied Persons List that must be checked before contracting to supply a controlled item.
Exporting a DSGL- or WMD-controlled product without proper authorisation will prevent completion of your commercial arrangements, and more importantly is punishable by significant monetary fines or up to 10 years imprisonment, or both.
In America, commercial dual-use goods may be regulated under the Export Administration Regulations administered by the Bureau of Industry and Security within the Department of Commerce. The US equivalent of Part 2 of Australia’s DSGL is the Commerce Control List. Similar provisions to those in force in Australia apply to goods, services and intangibles that the exporter ought reasonably to believe will be used in a WMD program.
As in Australia, controlled goods need to be authorised for export, re-export (for example, where US-controlled goods are sent to Australia for repair and return) or re-transfer (where the goods are to be supplied to a third country national). However the process is more complex, and the time it takes to complete the process can be much longer. Penalties and compliance costs for US approvals are extremely significant. To avoid non-compliance, exporters have to ensure that their authorisations cover every aspect of their operations. Penalties can be levied against executives as well as against the companies concerned.
Unlike in Australia, the US scheme requires advance notice to be provided to the Bureau of everyone who is to come into contact with the technology. The Bureau may then decide to preclude persons of particular nationalities from such contact. Thus, in order to ensure that technology subject to US controls is isolated from non-US nationals, the nationality of employees, and the way they are treated, becomes a differentiating factor. This is particularly problematic in Australia, because this can amount to discrimination under Australian human rights laws. It is possible to obtain an exemption from anti-discrimination laws, in justified cases. For example, Raytheon Australia Pty Limited has successfully obtained an exemption, based on specific public interest grounds, but only after a long and expensive process which involved review of a decision of the ACT Human Rights Commissioner, an Administrative Appeals Tribunal decision and an appeal to the Supreme Court of the Australian Capital Territory.
Exporters also need to be aware that export controls of more than one country can cover the movement of one particular controlled item under one transaction, such as if repairs are conducted, or an intermediate manufacturing step is undertaken, in respect of goods that are then re-exported.
Knowing who is on the other side of an important transaction is a normal aspect of doing business. In security-related commerce it is essential, and calls for substantial due diligence. Reputable trading partners should understand and accept that dual use goods transactions require a higher level of disclosure and assurance.
Awareness of legal obligations is necessary to avoid having dual use goods stuck on the dock or impounded. All required authorisations need to be obtained correctly so that contractual obligations can be met and customers can be supplied on time. Exporters should prepare, implement and monitor compliance plans, so that appropriate procedures and monitoring are in place – and as a defensive mechanism if there is non-compliance.
Contracts should be drafted to ensure that suppliers have the rights and powers needed to comply with and to keep control of authorisation procedures. This includes the rights to obtain information and co-operation from your trading partner; to review information intended to be supplied to the government; to be kept informed; and, in some cases, to have access to locations for the purposes of inspection. Indemnities against penalties should be considered.
Dual use goods restrictions may even force exporters to contemplate different product description or marketing, and the isolation of risk through corporate separation. When adapting an existing civilian product for military applications, it might be best to design entirely separate components. Both from an operational cost and risk management point of view, if dual-use goods are a significant part of your business, the value of separation from other business segments should not be ignored.
For more information, please contact Daniel Moulis on +61 2 6163 1000 or email@example.com.
This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.
© Moulis Legal 2009