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For the most part, tangible signposts guide decision making on Australian export controls by the government agency that has that responsibility, Defence Export Controls (DEC). The most significant of these is the Defence Strategic Goods List (DSGL). The DSGL lists the munitions and dual-use goods, technologies and software that are export-controlled. Sure, questions will still arise – does the technology meet the ‘control’ threshold, is the manner of ‘supply’ covered by the legislation, etc. But the DSGL does at least give export control managers a reference point against which they can test any given transaction.

However, Australia’s export controls are not limited to the items listed on the DSGL and the potential application of those controls may not be apparent even after undertaking rigorous due diligence. Moulis Legal’s Alistair Bridges and Mitchell Scott are being called upon to advise in this area of law more than ever before. In this article, they consider the scope and operation of the power of the Minister for Defence to prohibit exports, and how companies should prepare and respond.

The Defence Strategic Goods List is informative, but not exclusive

Australia is a party to a number of multilateral export control regimes. The purpose of these regimes is laudable, being, generally, to limit the proliferation of various forms of munitions, goods and technologies that may have military-end uses. While it might not be diplomatic to accuse the destination countries of potentially turning those goods and technologies against their own people, or against other countries, or against Australia, there is that too.

The DSGL brings the types of goods identified under these regimes together under the one list. Unless DEC grants a permit, the export of goods listed on the DSGL is generally prohibited. Permits will only be granted where DEC determines that the proposed exportation will not ‘prejudice the security, defence or international relations of Australia’.

What if goods are not listed on the DSGL?

That means that goods that are not listed on the DSGL can be exported without the intervention of DEC, right? Actually, that is not right. Hiding in plain sight in the Customs Act 1901 is a residual power (‘112BA’) that allows the Minister for Defence to issue notices prohibiting the exportation of goods that are not listed in the DSGL, if the Minister suspects they ‘would or may be for a military end-use that would prejudice the security, defence or international relations of Australia’.

Framing the operation of 112BA around goods that may have a military end-use may sound rather limiting, but that is not the case. The law can be applied very broadly:

  • not only if the goods are going to a particular person or entity, but also because the goods are going to a place, if what is going on in that place is of concern to the Minister; and
  • not only if the goods are to be used in the military operations or exercises of the armed forces of the foreign government, but also if it is suspected they may be used in any activities by any armed force, whether ‘friend’ or ‘foe’ of the foreign government.

So, the Minister’s suspicion need not be limited to concern about a military end-use by a foreign government or entity. The Minister’s suspicion, and therefore his or her prohibition of the exportation, may extend to suspicion of non-military activities in a place, as long as the suspicion of armed forces and prejudice to our international relations is somewhere in the background. There is no reason 112BA could not prevent the exportation of innocuous items, such as paperclips, pillow slips and chamomile teabags, depending on who the Minister thinks might get their hands on the goods.

This sounds serious! Have I done something wrong?

Of course, the Minister needs to suspect that the end-use would prejudice Australia’s security, defence, or international relations. But when that will be the case is not defined. There are no strict limitations on the Minister’s discretion under the Act, such as by way of regulations making clear ‘who’ and ‘where’ are no longer supported as customers or as export destinations. The exportation of goods to places that are not aligned with Australia’s political positions and ideologies are more likely to attract the attention of the Minister than are allies of Australia.

Explained in this way, 112BA trespasses into ‘sanctions’ territory, without the greater certainty of named countries, corporations, political groups or individuals that sanctions laws provide. The important take-home here is that traditional export controls and sanctions compliance will not necessarily pick up 112BA risk. Companies need to adopt more sophisticated ‘early warning’ systems, especially if the goods concerned involve significant pre-sale design costs or are not easily saleable to other buyers.

How DEC detects which deliveries to detain

The way that Australia’s customs system operates means that potential issues under 112BA relating to innocuous goods are unlikely to come to light until the exporter lodges an export declaration with Australian Border Force (ABF). DEC apprises ABF of destinations, entities, and possibly discrete categories of goods for which there may be a security, defence, or international relations sensitivity. Should an export declaration fall within these criteria, it will be flagged by ABF and referred to DEC for further consideration.

From there, DEC will issue an information request to the exporter, seeking further details regarding the goods and the exporter’s relationship with the customer. At this point the exporter will become aware of the nature of the hold-up at the border. However, this awareness is otherwise uninformed. DEC operates on the basis of information that is not readily available to the public, and, as anyone who read the Mueller Report knows, sources and methods need to be protected. So, the exporter will be made aware there is an issue and may be given some form of explanation of the issue and will be given the opportunity to provide further information.

Now these are heavy issues of national security which need to be treated with due respect and gravity. That said, there are also commercial interests involved, and although those interests should not prevail over security considerations, they are still important to exporters who may be unwittingly caught up in a governmental concern which was unknown to them when they entered into the commercial transaction underlying the exportation of the goods.

Keep your employees trained, your eyes open, and your contracts tight

The threshold for the operation of 112BA is a ‘suspicion’. That is not a high threshold in a legal sense. The fact that the transaction has been flagged does not mean it will be prohibited and does not create liability for the exporter simply because it was entered into. DEC will be interested to hear from the exporter about the nature of the goods, the course of trade with the customer, what the exporter knows of the end-use, and the overall compliance practices the exporter has in place.

If an exporter thinks DEC’s concerns are misplaced, it will need to argue its case – something which is always more credibly achieved if the exporter can point to a high degree of due diligence, applies customer screening, requires the issuance of end-use certificates, and can highlight contractual terms relating to end usage, to explain why, in the relevant instance, the regulator may be jumping at shadows.

Ultimately, the outcome from this exchange of views with DEC will be one of two:

  • DEC may be satisfied that the exportation should be allowed to go ahead. DEC will inform ABF of this, and ABF will then issue the authority to deal, enabling things to move forward from there.
  • Alternatively, DEC may consider its initial concerns legitimate, and recommend that the Minister for Defence issue a notice prohibiting the exportation of the goods. A contravention of such a notice can result in fines of up to AUD555,000 and imprisonment for up to 10 years.

In either case, one of the key consequences an exporter needs to be aware of is delay at the border. Even if the outcome of the discussion with DEC is that the goods can be exported, it can take a long time to get to that point. And if that period of time exceeds any contractual leeway for performance of the contract with the foreign customer, and the customer loses patience, the exporter stands to lose a lot more. Again, contract terms can help here, so that this kind of interruption does not constitute a breach of obligations owed to the foreign customer.

Legal appeal avenues may not be helpful

If a 112BA instrument is issued, it will be in place for 12 months. If an exporter still thinks the decision is wrong, the exporter can attempt to have it revoked during this period through continued submissions to DEC or seek judicial review before the Federal Court of Australia.

The difficulty in sufficiently demonstrating that such an instrument ought to be revoked is that the Minister must not disclose the reasons for the decision if it is believed that such disclosure would prejudice the security, defence, or international relations of Australia. An exporter seeking revocation will be shadow-boxing against an inferred rationale that the exporter has already failed to knock-out. Not an impossible task, but certainly not the easiest of propositions.

Judicial review is focussed on whether there was a legal error in the making of the decision. Given the low threshold for activating 112BA (a ‘suspicion’ rather than a ‘satisfaction’), it would generally be difficult to have a decision quashed on the basis of a legal error. It would not be impossible – interpretations of legislation such as the Customs Act 1901 can be contorted by many factors, and the scope of different powers may vary widely. In the right circumstances, a case could be successfully brought.

Insecurity increasingly impacts international business

International relations are ‘on edge’. Major nations are jostling for industrial supremacy, control of supply routes, and data flows. The linkages between political ideology and economic power, and how to influence both, are a subject of open debate. COVID-19 has fanned national self-interest and fear of outsiders. Businesses can find it difficult to keep up with the shifting sands of alliances, threats, and intrigue.

In this environment, exporters are best served by investigating overseas business opportunities and foreign customers more carefully than ever before. To know where problems might arise, companies should keep abreast of world events and the attitudes of the Australian Government to those events.

If contacted by DEC with concerns that goods intended for export may have a military end use, exporters should be ready to express confident and well-informed opinions to address that concern. Being able to satisfy DEC of the legitimacy of your exports will not only achieve your commercial goals, but will also demonstrate your company’s support for the government’s efforts to maintain Australia’s security, and place you in good stead should ABF be required to flag your exports again.

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 2021