World ECR News and alerts 2

Australia introduces defence trade bill 2

U.S. professor loses tech transfer appeal 5

Inside Flowserve’s $3m voluntary disclosure 7

Asia focus: are export controls set to tighten? 10

CISADA: expanding U.S. sanctions against Iran 16

A wide net: China’s encryption restrictions 20

Export controls in Poland: an introduction 23

Dual-use controls in Germany 27

ITAR rule change guidance for the UK 30

ISSUE 7. NOVEMBER 2011 www.WorldECR.com News and alerts News and alerts

Australia introduces defence trade bill

On 2 November, Australia’s internet or through brokers. Minister for Defence These are not captured Materiel, Jason Clare MP under the existing controls.’ introduced the Defence Trade Controls Bill 2011 Catch-all provision (‘the Bill’) to parliament In addition to the main along with the Customs legislation, proposed amend - Amendment (Military End- ments to the Customs Act

s i

Use) Bill 2011 , which is n 1901 effectively introduce a n i M intended to support ‘catch-all provision’ in the p i l l provisions within the Bill ‘to i form of a new power to h strengthen export controls P prohibit the export of ‘non- in line with international Bills introduced to the Australian parliament ‘should regulated’ goods that may best practice’. ‘strengthen export controls in line with best practice.’ contribute to a ‘a military end A key feature of the new use that may prejudice legislation is that it be categorized as pertaining By way of illustration, it Australia’s security, defence implements the Australia- to four areas: notes that the existing or international relations.’ United States Defence Trade l intangible transfer of export control regime has a However, the government Cooperation Treaty (See technology; focus on exports of physical says that it believes that this WorldECR issue 5) which l provision of services goods, but that ‘with the will be used in exceptional removes the requirement for relating to defence and growth of technology, many circumstances, and will have individual licences to be strategic goods and defence export services can a ‘negligible impact’ on obtained for each export, technology; be provided over the industry and trade. and allows for the licence- l brokering of supply of free movement of eligible these goods, technology Links and notes defence articles within the and related services; and The Defence Trade Controls Bill can be found at: approved Australian and exportation of goods l http://parlinfo.aph.gov.au/parlInfo/download/legislation/bills/r4700_first U.S. communities. intended for a military -reps/toc_pdf/11226b01.pdf;fileType%3Dapplication%2Fpdf Introducing the Bill, end-use that may The Customs Act amendment is at: Clare said that around half prejudice Australia’s http://parlinfo.aph.gov.au/parlInfo/download/legislation/bills/r4696_first of Australia’s war-fighting security, defence or -reps/toc_pdf/11224b01.pdf;fileType%3Dapplication%2Fpdf assets are sourced from the international relations. United States, and that over the course of the next ten to 15 years, the country would be upgrading or replacing Europe strengthens Burma sanctions around 85% of its military equipment. Consequently, On 27 October, the benefit of the natural or to suspect, that their he said, ‘Strengthening this European Commission legal persons, entities or actions would infringe area of our alliance announced the tightening of bodies listed in Annex VI. this prohibition. cooperation is…clearly in sanctions against Burma. 3. The participation, our national interest.’ The changes amend knowingly and intent - Annex VI is also Currently, Australian Regulation (EC) No. ionally, in activities the amended so as to include companies that need access 194/2008. Key changes now object or effect of which ‘senior members of the to defence items or read as follows: is, directly or indirectly, former State Peace and technology from the United to circumvent the Development Council States must seek an export Article 11 measures referred to in (SPDC), Burmese author - licence from the U.S. 1. All funds and economic paragraphs 1 and 2 shall ities in the tourism sector, Department of State in resources owned, held or be prohibited. senior members of the accordance with the controlled by the natural 4. The prohibition set out in military, the Government or International Traffic in or legal persons, entities paragraph 2 shall not the security forces who Arms Regulations (‘ITAR’). and bodies listed in give rise to liability of any formulate, implement or Annex VI shall be frozen. kind on the part of the benefit from policies that Gaps in the system 2. No funds or economic natural or legal persons impede Burma/ Myanmar’s In explanatory literature, the resources shall be made or entities concerned, if transition to democracy, Australian government says available, directly or they did not know, and and members of their that it had recognized that indirectly, to or for the had no reasonable cause families.’ there were gaps in the Full details of the amendment at: country’s existing defence http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:281:0001:0002:EN:PDF export controls which could

2 World ECR www.worldecr.com News and alerts News and alerts

represents a fraction of the U.S. enforces anti-boycotting laws possible number of violations given that boycott provisions are found in The United States Bureau of contained Israeli materials’. Reform Act 1976 apply to many contracts drafted by Industry and Security (‘BIS’) World Kitchen LLC of ‘Any U.S. tax payer or Arab League and other announced settlements with Pennsylvania , which, it is member of a controlled countries, which, he warns, a total value of $72,000 for alleged, failed on five group which includes such are not always obviously alleged anti-boycotting law occasions to report to the tax payer’, and also includes worded. ‘A contract may violations, at the end of Department of Commerce U.S. shareholders of foreign request that the other party October. The settlements the receipt of a request to companies. conforms to, for example, all were with four companies. engage in a restrictive trade UAE laws. This could be U.S. anti-boycott laws practice or boycott, in Caveat SME interpreted as meaning prohibit U.S. persons from connection with transactions Dj Wolff, an associate at the conforming to boycotting acting with intent to comply between the United States Washington D.C. office of legislation. Companies with or support unsanct - and the United Arab Crowell & Moring, has been recognizing a clause – or ioned foreign boycotts. In the Emirates, will pay $10,000. following BIS anti-boycott something that could be vast majority of cases, this law enforcement. He told interpreted as a clause – in means the boycott against Tollgrade Communications, WorldECR that while larger a contract should ask either Israel by the Arab League or also of Pennsylvania, which, companies fielding sophis - for it to be removed, or other countries. on three occasions, it is ticated compliance teams are clarified. For example, to alleged, furnished prohibited on top of U.S. laws, dangers specify that “conformity” The settlements infor mation in a statement lurk for those smaller with UAE or Saudi or Chemguard Inc. of Texas regarding its activities with companies who may not Yemeni law, means agreed to pay $22,000 to or in Israel, and on one ‘know anything about the “conformity with health and settle seven allegations that it occasion failed to report the Arab League, the boycott, or safety, environmental or violated the anti-boycott receipt of a request to engage the boycotting laws and run employment law,” and not provisions of the EAR. in a restrictive trade practice, the risk of violating the with an anti-Israeli boycott.’ BIS alleged that, between will also pay $10,000. sanctions without having any 2005 and 2007 the company intention to ostracize Israel.’ Higher penalties made seven violations, in Scope of controls Activities that are Wolff also points out that connection with trans actions The U.S. Treasury and the prohibited by the EAR and while average settlement involving the sale and/or Department of Commerce penalized by BIS include: amounts have not typically transfer of goods or services each have their own anti- been high (around $3,000- (including information) from boycott legislation, with l Agreements to refuse or $4,000 per violation), that is the United States to the subtle differences in scope actual refusal to do not to say that there is not United Arab Emirates. On and application. One key business with or in Israel potential for more two occasions, BIS says, the difference between the or with blacklisted significant penalties to be company furnished prohibit - regimes is that while the BIS companies. imposed. There is ed information in a publishes details of enforce - l Agreements to speculation that the lower statement regarding the ment, the Treasury does not. discriminate or actual penalties reflect BIS’s blacklist status of the There are also differences discrimination against litigation risk assessment – carrying vessel, and, on five as to whom each applies. other persons based on sums it believes it can settle occasions, failed to report the Commerce Department race, religion, sex, for without pushing alleged receipt of a request to engage legislation (section 8 of the national origin or violators to the courtroom. in a restrictive trade practice Export Administration Act, nationality. In fact, anti-boycott or boycott, as required by the the International Emergency l Agreements to furnish or regulations are currently Export Administration Economic Powers Act, and actual furnishing of governed by the Regulations (‘EAR’), to the the Restrictive Trade information about International Emergency Department of Commerce . Practices and Boycotts part business relationships Economic Powers Act of the EAR) apply to: ‘U.S. with or in Israel or with (‘IEEPA’), which provides The Shanghai-branch of the persons, including indivi- blacklisted companies. for penalties of up to the Bank of New York Mellon duals who are U.S. residents l Agreements to furnish or greater of $250,000 per agreed to pay $30,000 to and nationals, business and actual furnishing of violation ‘or twice the value settle allegations that, in “controlled in fact” foreign information about the of the transaction for admin- connection with transactions subsidiaries, with respect to race, religion, sex, or istrative violations of involving the sale and/or activities in the interstate or national origin of another Anti-boycott Regulations, transfer of goods or services foreign commerce of the person. and up to $1 million and 20 (including information) from United States.’ years’ imprisonment per the United States to United By contrast, Treasury Wolff says that of around violation for criminal anti- Arab Emirates, the bank powers under the Ribicoff ten settlements announced boycott violations,’ ‘furnished prohibited info - Amendment to the Tax each year, enforcement only accord ing to the BIS website. rmation in a statement For a comparison of the two regimes, see: certifying that the goods were http://www.bis.doc.gov/complianceandenforcement/comparison-antiboycott-laws.pdf neither of Israeli origin nor

3 World ECR www.worldecr.com News and alerts News and alerts

IATA cuts Iran Air access to EU updates Guinea measures settlement systems extension On 27 October, the European Commission In October, subsequent to United States government 1 November that the announced the extension the September designation would determine that we company has ‘managed to for one year of existing of Iran Air as a sanctioned might be in violation of its bypass the sanctions measures against the entity by the State laws for providing services imposed by the Republic of Guinea. Department, IATA, the to Iran Air. We have offices International Air Transport See: http://eur- International Air Transport and employees in the United Association’, by changing its lex.europa.eu/LexUriServ/L Association, decided to deny States and that would of method of selling tickets – exUriServ.do?uri=OJ:L:2011 the airline access to its course have very serious although he did not say :281:0028:0028:EN:PDF settlement system and consequences for us. The how. Congo changes clearing house by which law is the law; we had no The agency said that On 20 October, the international ticket sales are choice but to suspend the Parvaresh had criticized European Commission processed and funds airline.’ However, Flint IATA’s decision, arguing updated the list of persons distributed to appropriate added, ‘That said, we have that ‘IATA is a non- and entities in DR Congo parties. However, the serious concerns with a law governmental union which designated by UNSCR Association has registered that designates a civil has been founded on the Resolution 1533 (2004), as with the U.S. State aviation company. This, we members' money and it is implemented by the Department its belief that feel strongly, contravenes not [necessary] to comply Council’s Decision the designation is not the spirit of the Chicago with the U.S. sanctions laws 2010/788/CFSP. appropriate. Convention [the Convention against Iran. What was done The updated list can be Washington D.C.-based on International Civil by IATA... was the result of found at: http://eur- IATA spokesman, Perry Aviation].’ the U.S. administration's lex.europa.eu/LexUriServ/L Flint told WorldECR : ‘After According to Iran’s Fars pressures and this decision exUriServ.do?uri=OJ:L:2011 :276:0050:0061:EN:PDF a careful and considered News Agency, Iran Air’s is in essence not related to review, we saw that there managing director Farhad the specified duties of the was a possibility that the Parvaresh told reporters on union.’

OFAC round-up New licences permit However, a small food exports to Sudan number of foodstuffs will Iran and Sudan refused. It also revealed that and Iran still require specific licences licensing application the average time processing OFAC has adopted as final a for export or re-export to details published licences was 93 days, and previously interim rule ‘the governments of Sudan OFAC released its quarterly that for ‘return without which amends the Sudanese or Iran, any individual any report of licensing activities action’ letters it was 19 days. Sanctions Regulations and individual or entity in an under the Trade Sanctions the Iran Sanctions area of Sudan other than the Reform Act (‘TSRA’) on 20 New designations Regulations by issuing Specified Areas of Sudan or October. The report covers under Iran sanction general licences that in Iran, and persons in third the processing of licence legislation authorize the export and re- countries purchasing applications requesting The OFAC has designated export of ‘food’ to specifically for re-sale to any authorization to export six shipping companies ‘individuals and entities in of the foregoing, as well as agricultural commodities, which it describes as fronts an area of Sudan other than the exportation or re- medicine and medical for the Islamic Republic of the Specified Area of Sudan exportation of food to devices to Iran and Sudan Iran Shipping Line (‘IRISL’). and in Iran’. military or law enforcement under the TSRA. These companies are: OFAC defines ‘food’ as purchasers or importers.’ The report revealed that ‘items that are intended to Specific licences are still from January to March n Galliot Maritime Inc be consumed by and provide required also ‘for the export 2011, OFAC: n Indus Maritime Inc nutrition to humans or or re-export of agricultural n Kaveri Maritime Inc animals in Sudan or Iran – commodities that do not fall n Received 428 appli - n Melodious Maritime Inc including vitamins and within the definition of food cations for Iran licences n Mount Everest Maritime minerals, food additives and in the general licenses, and 44 for Sudan Inc supplements, and bottled medicine, and medical n Issued 313 Iran licences n Rishi Maritime Inc. drinking water – and seeds devices.’ and 36 for Sudan that germinate into items n Issued 45 amended Iran Full details are available at: that are intended to be Full details are available at: licences and 8 for Sudan. http://www.treasury.gov/resource- consumed by and provide http://www.treasury.gov/resource- center/sanctions/OFAC-Enforcement/ nutrition to humans or center/sanctions/Programs/Docume No applications were Pages/20111027.aspx animals in Sudan or Iran.’ nts/gl_food_exports.pdf

4 World ECR www.worldecr.com News feature News feature

U.S. professor loses tech transfer appeal

On 3 October, the United of educational institutions States Supreme Court denied and other research centres on John Reese Roth, a retired their export control university professor, an compliance programmes and appeal for a 2009 conviction has been following the Roth under which he was case closely. He argues that sentenced to four years’ while the particulars of imprisonment for breaches of Roth’s conviction make it the U.S. Arms Export Control unique, it still raises some Act (‘AECA’). questions which will only be o k r

Roth’s crime was to share a settled by further Y

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with non-U.S. (Iranian and, l prosecutions: ‘This case is in particular, Chinese) O something of an outlier, in graduate students, the fruits Reese Roth worked on developing plasma actuators for drones, that Roth, who, it seems, was of his research into an ITAR- technologies controlled under the Arms Export Control Act. warned on numerous controlled project. The occasions, assured the professor had worked with a company called Atmospheric university that he was aware of his export compliance Glow Technologies on the development of plasma actuators obligations and apparently proceeded to breach them in development for use in U.S. Air Force drones. These anyway. His behaviour appears to have been pretty technologies are controlled under AECA, which regulates egregious.’ the import and export of defence articles listed on the And yet, says McBride, the Supreme Court’s denial of United States Munitions List, codified in Section 121 of the Roth’s appeal will place renewed attention on the case, and International Traffic in Arms Regulations (‘ITAR’). Under the more general issue of export controls in education. ITAR, such technologies are controlled as technical data, ‘Export controls are not designed to stultify the development and providing instructions on their use is controlled as a process,’ he says. ‘But there are prohibitions on sharing defence service. Transfers of ITAR-controlled items, certain technologies with non-U.S nationals, including technical data or services to foreign nationals or countries students otherwise authorized to be in the United States. It’s are generally prohibited without a licence. This extends to got to be said that the line in the law isn’t always abundantly the sharing of such data with foreign nationals in the United clear; but if things have got to the point that the university States. is having to talk to faculty members about their teaching activities it looks as though that line is being reached.’ Similar cases to follow? Much teaching is covered by what is called the Sheppard Mullin partner Thad McBride advises a number Fundamental Research Exception (see box below), which

The Fundamental Research Exemption Information becomes “published” or considered as “ordinarily published” when it is generally accessible to the interested National Security Decision Directive publication of the information resulting public through a variety of ways-publication (‘NSDD’) 189, issued in 1985, states that from the research, other than limited in periodicals, books, print, electronic or any fundamental research is not subject to the prepublication reviews by research other media available for general licence requirements of export control sponsors to prevent inadvertent distribution to any member of the public or regulations. divulging of proprietary information to those that would be interested in the ‘Fundamental research’ is defined as provided to the researcher by the material in a scientific or engineering ‘basic or applied research in science and/or sponsor or to insure that publication will discipline. engineering at an accredited institution of not compromise patent rights of the Published or ordinarily published higher learning in the United States where sponsor; or material also includes the following: readily the resulting information, in some cases, is available at libraries open to the public; ordinarily published and shared broadly in (2) the research is federally funded and issued patents; and releases at an open the scientific community and, in other specific access or dissemination conference, meeting, seminar, trade show, cases, where the resulting information has controls regarding the resulting or other open gathering. A conference is been or is about to be published. information have been accepted by the considered “open” if all technically qualified Fundamental research is distinguished university or the researcher.’ members of the public are eligible to attend from research that results in information and attendees are permitted to take notes that is restricted for proprietary reasons or As explanatory notes on the website of or otherwise make a personal record (but pursuant to specific U.S. government Tennessee Technology University point out: not necessarily a recording) of the access and dissemination controls. ‘The EAR and the ITAR approach the proceedings and presentations. In all cases, University research will not be deemed to issue of publication differently. For the EAR, access to the information must be free or qualify as fundamental research if the requirement is that the information has for a fee that does not exceed the cost to been, is about to be, or is ordinarily produce and distribute the material or hold (1) the university or research institution published. The ITAR requirement is that the the conference (including a reasonable accepts any restrictions on the information has been published. profit).’

5 World ECR www.worldecr.com News feature News feature

allows for a great deal of technology sharing within a connections, for example family ties, or how often they visit university setting so long as certain conditions are met. the countries in which they were born.’ Nonetheless, McBride says, export controls can create real tensions between faculty staff and university management: When may the institution itself be liable? there is an inherent conflict between an academic The Roth conviction was a headline case and from the facts, institution’s role as a facilitator of knowledge and the it is evident that the University of Tennessee did everything restrictions placed by export controls, even when those that it could to make the professor aware of his potential controls are intended to further the purpose of national violations, and to warn him from continuing. But an security. interesting question (which the particulars do not answer) McBride believes that the challenge for universities and relates to the liability of a university or research facility in other research centres is having the right infrastructure in the event that they were found to have failed to have taken place to ensure that staff are aware of the applicable laws – the necessary steps – either through sufficient awareness and that the government is actively enforcing them: ‘The training or disciplinary action – to have prevented the more sophisticated research institutions in the game for a transfer from having taken place. ‘Had that been the case,’ while either have experienced outside counsel or some says McBride, ‘it would have been interesting to see whether compliance team who actively review contracts, and grants, the government would have focused on the university corporate work etc.’ instead of the individual professor.’ Clearly, this is a difficult area for all concerned. It has a Controls focus on nationality bearing on the respective roles of universities as flag bearers A key feature of the ITAR regime of course, is that it applies of knowledge, but also custodians of national security – and to virtually every country in the world, and thus, in theory, also begs questions as to the limits of what can legitimately the scope of enforcement is extremely broad. But McBride be published in academic research journals or on the suggests that a prosecution would have been much less internet. ‘Once something is out there in the public domain, likely had the plasma technology been shared with, say, an it’s very difficult to claw back,’ McBride points out. EU or Australian national: Iranian and Chinese nationals Because they deal with the transfer of intangibles, are far more likely to be on the figurative radar screen, deemed exports are very much more difficult to prove/police raising the question of selective enforcement. For example, than the exports of hardware; but the potential damage that in the case of naturalized citizens or lawful permanent breaches can cause is no less real. Which is why, says residents of the United States of Iranian or Chinese origin, McBride, the U.S. government is hungry to make examples ‘the U.S. government very well might say that if technology where it can. ‘It’s a hell of a wake-up call for universities and is shared [with such persons], then, given U.S. concerns, their faculty,’ he says. And a particularly unpleasant one for there could be a heightened duty to look at their John Reese Roth.

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6 World ECR www.worldecr.com Flowserve interview Flowserve interview

Putting its money where its mouth is

Many talk about their commitment to export controls compliance but rare is the company that embarks on a global audit of its systems and voluntarily discloses the findings to the authorities. Scott Sullivan speaks to WorldECR about Flowserve’s recent $3m settlement with OFAC and BIS.

n 3 October Flowserve, a U.S.- was doing everything their own way. There headquartered provider of flow wasn’t great communication internally over O control products and services, rule changes, so some people were doing announced it had entered into settlement things under old rules while there was a agreements with both the Commerce general lack of understanding regarding Department’s Bureau of Industry and the new rules.’ Security (‘BIS’) and the Treasury A common finding was general Department’s Office of Foreign Assets misunderstanding of U.S. rules and Control (‘OFAC’) for voluntary disclosures regulations on the part of non-U.S. of breaches of export controls and persons, some of whom ‘had economic sanctions under which it is to pay misunderstood the meaning of some very a combined penalty of around $3 million. complex regulations and over the years The company’s multi-site internal review were acting under the belief that X was ok which culminated in the settlement is Sullivan: ‘We were determined to and Y was not when those weren’t fully perhaps the largest ever undertaken, right the ship and restore our accurate interpretations.’ This was covering over 40 sites around the globe, reputation with the authorities.’ complicated by a reluctance among some to and as such represents a landmark raise issues they thought they were investigation. It was both a painstaking and sometimes prohibited from raising with U.S. persons: ‘Typically, what intense process, as WorldECR discovered when it spoke to happened was that non-U.S. persons, when they heard the Scott Sullivan, Vice-president, Global Trade, Compliance & words “Iran”, “Sudan” or “Syria”, didn’t want to talk to their Corporate Inquiries, and a core member of the investigation U.S. colleagues because they were afraid that they’d get them team. into trouble. So, it became a self-reinforcing problem. They didn’t want to taint the transaction and get their colleagues Catalyst for change in trouble. That was the scenario – a perfect storm.’ It was an Export Administration Regulations (‘EAR’) rule change that first alerted Flowserve to the possibility that not Rolling out the review all was as it should be on the export control front. In April The review process was a major operation, commencing with 2005, BIS amended the EAR to strengthen export controls classification of on equipment and technology designated as having potential hundreds of the Flowserve’s export compliance use in chemical or biological weapons programmes. The company’s sites. ‘Of statement result was to increase the number of countries requiring a each one we asked: Is it Flowserve Corporation, recognized as one U.S. export licence in order to export or re-export controlled a manufacturing of the world’s premier providers of flow products sold by pump/valve manufacturers from around 37 facility? Is it a service management systems, has a firm to over 150 – with potentially drastic repercussions both for centre? Is it domestic commitment to product integrity, security the company’s business and its compliance record. sales only? Is it export? and compliance with US and/or local In the spring of 2006, Sullivan was due to undertake a And so on. Then we export laws and regulations. Under no general review of the company’s control processes when he issued survey circumstance will Flowserve knowingly discovered a number of potential violations: ‘So we sat down questionnaires and export products and/or technology contrary to US and/or local export and with management and walked them through some of the gathered a vast amount import laws and regulations. issues,’ he recalls. ‘Given what we found at a few sites, we of data which we went realized that there could be other things out there. That was through to determine The company’s compliance commitment is underlined by its trade compliance policies on its March 2006 and that’s when we started looking at a more which sites we needed website. See: http://www.flowserve.com/About- comprehensive review programme to determine our to visit and what might Flowserve/Corporate-Information/Trade-Compliance compliance, or lack thereof, with export controls.’ be the risks for each. A key issue for the company was that like many others, This was a lot of work, Flowserve is essentially ‘a conglomeration of conglomerates’. involving multiple ERP systems, multiple languages, and Everything, says Sullivan, was decentralized ‘and everyone generally a whole host of jurisdictions and legal systems to

7 World ECR www.worldecr.com Flowserve interview Flowserve interview

deal with.’ entire disclosure process: time on site, topics to be covered. Flowserve At each site, we did transactional audits, policy and procedural involved outside review and enhancement and we also undertook training.’ counsel (U.S. Typically the team would include one or more often two law firm Kelley, lawyers from Kelley, Drye & Warren, two people from the Drye & Warren, internal export control compliance team and one project with partner Eric manager. ‘At each site we have an export compliance McClafferty as coordinator. We were at a site for anything between one and lead lawyer), two weeks reviewing the data, doing interviews, doing from ‘the get-go’. training, analyzing policy and procedure, reviewing Sullivan’s view is transactions and all those kinds of things – quite a few hours that bringing in help early on ‘provided greater on planes and time away from home.’ independence, additional expertise, and constructive engagement with government reg ulators,’ than would have Cultural awareness been possible had the company en gaged a firm further down Aside from the logistic and people management issues in the road, though he is keen to point out that it was important such an exercise, Sullivan points out there are intrinsically that the company did not use the external counsel as a human and political considerations that need to be borne in bulwark between itself and the government agencies. ‘It mind. ‘One of the things that we found – and there’s a great wasn’t as though we handed it off directly to outside deal of sensitivity around this issue – is that it can be difficult counsel,’ he says. ‘I think generally it was more like a for non-U.S. people to accept the extra-territorial symbiotic relationship which leveraged the strength of each jurisdiction of the United States. There’s a lot of essentially of the parties. We know the business and the operations. political resentment and anger about America, or Outside counsel is an expert on the law. So we were able to Americans, extending our grip overseas.’ pair those two up and develop a lot of quick processes and This issue, suggests Sullivan, has to be fronted within any evaluative tools in identifying where we had problems and multinational: ‘Ulti mate ly the way that we successfully risks.’ navigated this was by It was a process that wasn’t without a degree of pain and having internal political Flowserve at a glance discomfort. ‘We opened the kimono completely. We’re the discuss ions about l Founded: In 1997 with the merger of only company on the books presently that has done a true, things such as sanctions BW/IP and Durco International full global disclosure. Most companies have done one or two programmes and anti- l Core Business: Manufacture engineered sites or maybe three. But we essentially went to all our boycott rules – often and industrial pumps, industrial valves, significant manufacturing sites and beyond, and did a full informally, for example control valves, nuclear valves, valve five-year look back. We looked at literally millions of over lunch or after actuators and controls and precision transactions – and the breaches that we did disclose do have training sessions. I mechanical seals and related sealing to be seen in that context.’ might say, “I’d love to support systems, and provide a range of smoke a Cuban cigar related flow management services, primarily for the process industry A whole lot of obstacles sailing down the Nile l 15,000+ employees in 50 countries The challenges were myriad, especially given the into Sudan while eating l Customers in more than 70 countries international nature of the investigation: ‘You’ve got to caviar on a Persian l Sales: $3.24bn, up 12.2% on previous year consider the issue of attorney/client privilege. And you’ve carpet but I can’t.” got to consider data privacy, which is particularly an issue That’s the corporate in Europe. If you’re doing email searches for example, it’s reality of being a U.S.-headquartered, publicly traded important that you’re careful that they’re done according to company. It might not always be fair but it is what it is and all the applicable rules and even policies in certain it should be treated as a business requirement.’ jurisdictions. This can be very time consuming.’ And on a practical note, there were naturally issues to do That settlement in full with language: ‘When you’re conducting interviews that The total $3million package to be paid by Flowserve potentially involve legal liability, you’ve got understand what represents two settlements conjoined, one with BIS and one you’re asking.’ with OFAC. ‘Both the agencies have their own internal This was not a cheap process, and while Flowserve hasn’t calculation methods. BIS has a “FOIA” room [Freedom of put a price tag on it Sullivan suspects that the cost easily Information Act reading room], so what we did was look matched the settlement figure. The bulk of the money was back to try to find analogous or similar cases. Because we spent on law firm fees: ‘Most of the translation was done did a voluntary disclosure, that typically represents a 50% internally. But it cost a great deal in management and cent mitigation, and BIS also further mitigated our penalty employee time, IT resources to pull data – though the law by taking into consideration other remedial factors like firm we used did have a data mining group which was very enhanced policies and proecedures. We ended up proposing cost-effective; it meant that we could use the consulting arm a settlement amount and while there’s a little bit of back and of the firm to assist in analysis and so reserve the higher paid forth, at the end of the day we came out with a fair lawyers for the major issues. We worked pretty hard to do it settlement. We were keen to wrap the whole thing up, put it right but also in the most efficient, cost-effective manner.’ behind us, and continue to move forward as a company.’ Sullivan believes the road to efficiency lay in being methodical: ‘We had an export compliance team in place. We The way forward beefed up that team, and then also brought in project Sullivan says he hopes to never again be in the position of managers, and then physically mapped and planned out the having to do another global disclosure – but recommends

8 World ECR www.worldecr.com Flowserve interview Flowserve interview

similar organizations consider the process: ‘Given the investigations in the FCPA arena, the same is starting to complexity of the regulations, companies may be fooling apply to export controls and if you uncover one problem, themselves into thinking that they don’t have issues or you’re effectively left to prove that the same problem isn’t problems around. Having a compliance occurring elsewhere.’ programme in place can minimize, or Sullivan believes that electronic mitigate but it can’t eliminate. Human ‘However much you filing has enhanced the ability of error is recognized by the Commerce systematize and put regulators to detect issues, adding, ‘And Department as one of the top five now after 9/11 there’s a lot more reasons for export violations occurring. in IT programmes, information sharing within the U.S. However much you systematize and put government but also between other in IT programmes, you’re going to be in you’re going to be in governments.’ This, he argues, is bound the position at some point of having to to result in a greater number of global, make disclosures.’ the position at some multi-jurisdictional prosecutions in the In the future, thinks Sullivan, there’s future. going to be a greater expectation on the point of having to part of the authorities that companies And the benefits? with a major multi-jurisdictional make disclosures.’ An undertaking on such a scale is a presence will conduct increasingly thorny nettle, touching not only on thorough internal investigations of the kind that Flowserve compliance and processes but also underlying issues undertook. including company identity and cohesion, internal ‘You’re almost left to answer a negative,’ he says. ‘If you communication and different attitudes to risk. So why grasp have major multinational presence, you’re likely to have t it? consider whether you have systemic problems. If you go to Sullivan is clear that Flowserve did the right thing: ‘I site A and you identify some problems and you say, “Here’s think it was just something about the culture of the company our disclosure, thank you very much,” increasingly the that we wanted to do so. We were determined to right the response to that is going to be, “Well, how do you know that ship, clean the slate, and restore our reputation with the you don’t have similar problems at site B or C, D?’ It all government authorities. We worked hard to do that. And in depends on the jurisdictions that you’re in, on the nature of so doing we’ve bettered the company and we’re much the items that you’ve uncovered. Just as there are now global stronger.’

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9 World ECR www.worldecr.com Feature: Asia export controls Feature: Asia export controls

Cross-winds blowing in the East

Does the arrest of four Singaporean citizens following a the introduction last year of new request by the U.S. that they be extradited to face charges of legislation and new enforcement powers (see ‘Malaysia’s new Strategic illegally exporting US-made radio equipment to Iran signify a Trade Act’, WorldECR issue 1). Such tightening of export control laws is Asia? Tom Blass reviews the pressure is unlikely to ease and today it evidence. extends across the region. How the different Asian countries respond to it n 26 October, it was announced Export controls in Asia remains to be seen. that the government of Export control policy and practice in Wendy Wysong, partner at the O Singapore had arrested four Asia is a patchwork of economic, Hong Kong office of Clifford Chance, Singaporean citizens following a political and geopolitical drivers and its says that there’s an ‘ebb and flow’ to the request from the United States that the realities are often obscured: ‘It isn’t dynamic of export controls and anti- four be extradited to face charges for always possible to know what’s actually proliferation efforts (not only in Asia exporting radio equipment to Iran going on or why,’ one export control but elsewhere) as countries weigh the which was subsequently used in lawyer said. ‘Generally you only get to relative national security advantages of roadside bombs in Iraq. Wong Yuh find out what governments want you to exerting stronger or weaker laws: Lan, Lim Yong Nam, Lim Kow Seng know.’ ‘While it may seem that restrictive laws and Benson Hia Soo Gan were accused are most effective in protecting of breaching international sanctions The response to the national security, in some cases such following a U.S. Justice Department restrictions actually undermine investigation that uncovered a extradition request national security. Restrictions that are conspiracy to ship 6,000 radio would appear to too strong encourage companies to frequency modules from a Minnesota- evidence the United move their operations and expertise based company in the U.S. through elsewhere, thereby costing the overly Singapore to Iran. According to States’ continued restrictive country any degree of reports, the modules, which could extension of its extra- control at all over that technology as transmit wirelessly for up to 40 miles, well as the technological edge that were ordered for a Singapore territorial jurisdiction company provided. Moreover, stronger telecommunication project but were to the East. controls can slow down the process of then re-directed to Iran. getting technology to allies, The response to the extradition encouraging buyers to look for request would appear to evidence the Export control regimes across Asia alternative sources. Companies in less United States’ continued extension of have on occasion come under fire from restrictive countries are incentivized to its extra-territorial jurisdiction to the the West for being ineffective or even reverse-engineer products or even East. But does it also signify an invisible. For example, following the resort to theft of industrial secrets in increased willingness on the part of the exposure of the AQ Khan network in order to meet the demand. Singaporean authorities to embrace 2004 (see the box ‘Malaysia, AQ Khan ‘On the other hand, Asian countries international sanctions and export and the Strategic Trade Act’), Malaysia are also realising that if they have a controls? And if it does, should came under sustained pressure from well-developed system they can say to, observers expect to see other Asian the United States to improve its for example, the U.S. and its allies, countries seriously stepping up their policing and controls of anti- “Look, you can trust us with exports anti-proliferation efforts? proliferation activities. The result was because we have sufficient safeguards

2 0 7 9 5 3 i

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10 World ECR www.worldecr.com Feature: Asia export controls Feature: Asia export controls

in place that you can lower yours with function in Asia. And while some for low-cost labour economies such as regard to us.” We’re seeing that line of commonalities are shared between Vietnam, for example, and to an extent argument in Hong Kong and countries, the dynamics of each are Thailand, the incentive for Singapore, and attempts to adopt often unique, if not dissimilar. strengthening their regimes lies in their similar positions by India and China, According to Sim, ‘Singapore, for need to attract Japanese investment in for example.’ example, as one of the world’s most order to thrive.’ Edmund Sim, a partner at the important transhipment hubs, is very Japan is the largest foreign investor Singapore office of Appleton Luff, also anxious to be seen to be supportive of into Thailand, typically accounting for sees the pull and push of factors U.S. anti-proliferation efforts. That’s around 40% of inward investment: affecting the way that export controls largely the same for Hong Kong. But according to the Thai Board of Investment, in the first five months of the year, Japanese investors applied for Malaysia, AQ Khan and the Strategic Trade Act investment incentives for 221 projects In April 2010, Malaysia enacted a new law to address loopholes which had left valued at Bt57.438 billion. That was it vulnerable to being exploited by those involved in nuclear proliferation. This from a total value of all investment was in response to mostly U.S. pressure and also in recognition that Malaysia applications during the period of had been perceived as being lax in its efforts to block weapons of mass Bt141.196 billion. destruction (‘WMD’) proliferation. Vietnam, likewise, courts Japanese It was the use of Malaysia as a transhipment hub by the Pakistani nuclear investment: on 2 November, following scientist AQ Khan that most aroused U.S. concerns. In 2004, Khan confessed a meeting with 20 Japanese business that he had orchestrated the transfer of WMD technology to a number of heads, Prime Minister Nguyen Tan countries, including Iran, North Korea and Libya, largely with the assistance of a Dung publicly welcomed public- Malaysian-based middle-man, Buhary Syed Abu Tahir, who procured from a private partnerships with Japanese Malaysian company, SCOPE, several thousand high-precision aluminium business to develop his country’s centrifuge parts for use in the manufacture of nuclear weapons. The parts were infrastructure. later intercepted aboard a ship BBC China, bound for Libya. Such appetite for Japanese At the time, Malaysia was a signatory to the Nuclear Non-proliferation Treaty investment may prove to be the United (‘NPT’) but did not participate in the Zangger Committee or the Nuclear Suppliers States’ greatest aid in fighting Group (‘NSG’). Nor were the components controlled by any national legislation – proliferators. Investment on this scale thus SCOPE was not actually in breach of the law, according to domestic could influence the development of interpretations of both Malaysian law and the terms of the NPT at the time of the export controls and enforcement in the BBC China’s interception. region. As Edmund Sim continues: Subsequent cases with a Malaysian dimension further heightened fears about ‘Japan has made it very clear that it is the efficacy of the country’s legislation. In the past three years, the United States not going to invest in high-end has charged, convicted or sentenced defendants in at least six cases involving industries unless those countries have transfer of U.S. military technology through Malaysia (according to the anti- sufficient export controls in place – and proliferation group NTI). for this reason: Japan is very The 2010 Strategic Trade Act outlaws the shipment of weapons of WMD and dependent on U.S. investment and related materials through Malaysian territory. It defines WMD as ‘[A]ny weapon companies; it is a major supplier, for designed to kill, harm or infect people, animals or plants through the effect of instance, to Boeing’s 787 programme. nuclear explosion or dispersion or the toxic properties of a chemical weapon or This means that they have to take the infectious or toxic properties of a biological weapon, and includes a delivery proliferation measures very seriously. system designed, adapted or intended for the deployment of such weapons.’ In turn, they’re pushing other regional The law authorizes the appointment of a Strategic Trade Controller to establish economies in order that they can and coordinate a unified licensing system for trade in strategic materials, and outsource assembly operations outside further extends the control over strategic items being trans-shipped through of Japan, where production is cheaper. Malaysian ports. Gradually, those countries are waking However, some observers have argued that while the move is positive, it is at up to the realization that they will lose odds with the country’s economic objectives; with academics Stephanie Lieggi out unless they, too, take the issue and Richard Sabatini from the Monterey Institute for International Studies having seriously.’ stated in a 2010 paper that while commendable as a first step ‘ensuring that Kuala Lumpur prevents future trans-shipments or exports of sensitive dual-use Different views goods will remain difficult. Given the critical importance of exports of high-tech Of course the picture changes from goods to Malaysia’s economy, many within the domestic system will remain country to country. Observers on the reluctant to block shipments without clear proof that the goods in question are ground comment that not all destined for a weapons purpose—a very difficult standard to meet.’ jurisdictions are equally equipped to They also argue that this ‘reluctance’ is characteristic in South East Asia, and introduce new legislation: ‘This manifest in a generally ‘lukewarm’ appetite for implementing UN Security Council [improving export controls] isn’t high Resolution (UNSCR) 1540 which ‘mandates that states establish and enforce on the agenda in Indonesia or the effective measures against the proliferation of weapons of mass destruction, Philippines, which don’t actually have their means of delivery and related materials, thereby attempting to stem WMD the capacity to enforce their existing proliferation to state or non-state actors’. import/export laws,’ says one. Indeed, there remain concerns that

11 World ECR www.worldecr.com Feature: Asia export controls Feature: Asia export controls

some Asian governments have yet to s e e

fully take on board the underlying a r i

Member and a n d i o i s m n s p p reasons behind international export e a y a a a p n l n i a

signatory? i n l l g o t i i control regimes, which may explain a a n d e h h i i h n S V I T P why some appear to take their Yes or No? C M implementation less than seriously. Sim points out that while the Association of South East Asian Australia Group NNNNNN N Nations (‘ASEAN’) has a Treaty on the Biological Weapons Convention YYYYYY Y Southeast Asia Nuclear Weapon-Free Zone and Declaration for a Zone of Chemical Weapons Convention YYYYYY Y Peace, Freedom and Neutrality Comprehensive Test Ban Treaty YNYNYY Y (Zopfan), there is a feeling in some parts that export controls are ‘driven by Missile Technology Control Regime NNNNNN N the West, particularly the United States’, and that they go too far, in Nuclear non-proliferation treaty YYYYYY Y effect discouraging the export of items Nuclear Suppliers Group YNNNNN N which present no security threat. In one marked respect, ASEAN Proliferation Security Initiative NNNYYN N countries have a very particular take on their region, with some quarters Wassenaar Arrangement NNNNNN N making a collective call for a relaxation Zangger Committee YNNNNN N of sanctions against Burma/Myanmar, something that is at odds with the Source: BAFA. This table does not purport to be exhaustive. West’s policy. This, of course, is not a proliferation issue, but it does serve to highlight the extent to which there are business leaders in those countries may international reputations – are real differences between the United be failing to understand, however, is anxious to be seen to be abiding as States and Europe and even countries that that is not a defence for turning a much by the spirit of anti-proliferation which they regard as close allies. blind eye to proliferation activities in regimes as by the letter. And that, One lawyer at the Hong Kong office the mind of the United States. according to Edmund Sim, is arguably, of an international law firm points out Other lawyers in the region report in microcosm, the approach of the that until April this year Hong Kong that while they often run training countries themselves. ‘Singapore is had not implemented UNSCR 1929 sessions and briefings for local certainly more public [than some against Iran (which was passed in June business, certain companies are others] about enforcement, but it isn’t of last year). It did so, notably in looking closely at the parameters of the transparent,’ he says. ‘That’s very response to EU and U.S. pressure, who law as much to understand what much the Asian way. Just as with the sought the closure of some significant doesn’t apply to them as what does and case of the extradition of arms dealer loopholes with respect to U.S. so be able to profit. Clifford Chance’s Viktor Bout, you won’t find out about blacklisted HK shipping companies. It Wendy Wysong explains: ‘We give some of these things unless the is unclear how strictly the training on CISADA all over Asia, and government has reason for wanting it implementing law is actually being ensure that our clients know what they in the public domain. It’s very much enforced. ‘It is my impression,’ says the need to in order to remain compliant. along the same lines as enforcement of lawyer, ‘that companies in the region We’re asked to review transactions and the Foreign Corrupt Practices Act. For are continuing to do business with sometimes it’s clear that a party is a long time, you just couldn’t say how sanctioned companies for the reasons trying to take advantage of many people, were being extradited for that it is an established part of their opportunities that arise by virtue of the breaching it.’ business activities, that other fact that they’re not directly covered by The point is echoed by Wendy companies do it, because of lack of U.S. or EU sanctions regulations. Then Wysong, who says that just because knowledge of the rules and perhaps we can’t get involved.’ there’s little information about because of a lack of enforcement.’ This This is a not uncommon enforcement available, that’s not to say lawyer adds that, in their experience, observation. Other lawyers at EU- and that it doesn’t happen: ‘Enforcement there is a noticeable lack of awareness U.S.-headquartered firms say that they does happen – I’m currently working of the various sanctions regimes back out of any discussions when it on investigations in Hong Kong and amongst companies in the region, becomes apparent that their clients are Taiwan – and I’d say that every despite the fact that many ‘employ or looking at taking advantage of company has an interest in making are run by EU and U.S. nationals’. sanctions regulations that don’t apply sure that it doesn’t give any It is of course arguable that given to Asian companies. enforcement agency anywhere an the fact that many of the region’s excuse to make things difficult for governments are neither members nor Will to enforce them.’ But the details remain signatories to certain export control Despite these concerns, it seems that effectively shrouded, except to insiders regimes and treaties, that is simply to certain Asian companies – arguably who rely on word of mouth and be expected (see table, above). What those with an eye to their future industry information-sharing as a

12 World ECR www.worldecr.com Feature: Asia export controls Feature: Asia export controls

China’s export control regime

Relevant laws and regulations Other ministries, such as Agriculture, Health, and Science and Technology also play a consultative role and China based its export control regulations on the Foreign are called upon by MOFCOM to advise on individual Trade Law, which was amended in 2004 and took effect on licences. 1 July 2004. China has separate export control regulations on chemicals, biological agents, missiles, nuclear goods 4. State Administration for Science, Technology and and related technologies, and catalogues of products Industry for National Defense (‘SASTIND’): Under the subject to export control. The Ministry of Commerce jurisdiction of the Ministry of Industry and Information (‘MOFCOM’) issued the regulations on import/export Technology (‘MIIT’), SASTIND has an important role in licensing of dual-use items and technologies and updates regulating China’s exports (and possibly imports) of the catalogue of dual-use items and technologies subject to sensitive military items, and in vetting all of China’s import/export licensing on a yearly basis from 2007. conventional military exports, including missile-related exports. SASTIND also has influence over the vetting of Main competent government agencies nuclear exports. China Atomic Energy Agency (‘CAEA’) under SASTIND is responsible for vetting applications to export 1. State Council (China’s cabinet): It sets overall export nuclear materials, equipment and technology. (Nuclear control policy, but does not get involved in day-to-day related dual-use items are vetted by MOFCOM in licensing matters. However, licensing issues are discussed consultation with SASTIND and CAEA.) within the State Council when issues of state security are 5. General Armaments Department (‘GAD’): It plays an involved or when there is disagreement within the system. active role in the export control review process. For The State Council has the authority to invoke catch-all example, GAD is responsible for controlling exports of provisions and can add items to the existing control lists. nuclear materials. GAD also has a hand in vetting exports 2. Central Military Commission (‘CMC’): Senior officials of military products and certain missile systems along with from the CMC meet with State Council officials to discuss other agencies such as MOFCOM. export policies, mainly those related to military exports; 6. Chemical Weapons Convention Implementation Office ‘major’ military exports and contracts must be examined (‘CWCIO’): It reviews applications for exports of chemicals and approved by the CMC and the State Council. Note, listed in the Chemical Weapons Convention (‘CWC’) (Other however, the CMC does not play a role in vetting exports of chemical items are vetted by MOFCOM). Applications for nuclear or chemical materials, equipment or technologies. transfer of scheduled chemicals (i.e. items on the CWC 3. Ministry of Commerce (‘MOFCOM’): The Department of schedule of chemicals) first go to the CWCIO and are then Mechanics, Electronic and High-Tech Industry (‘DMEHT’) passed to MOFCOM for final licensing approval. To assist in within MOFCOM has the primary authority on application vetting, the CWCIO maintains a hotline with (i) formulating and implementing national policies on MOFCOM, GAC, and MOFA. import/export control and rules on import/export of 7. General Administration of Customs (‘GAC’): It is the dual-use goods and technologies; enforcement bureau for export control. It is responsible for (ii) approving import/export licences for dual-use goods inspecting exports before they leave China to ensure they and technologies as well as precursor chemicals; have the appropriate export licenses and transit (iii) coordinating the enforcement of laws and regulations on documents. Export companies often first go to the GAC import/export controls across regions and governmental before applying for a licence in order to determine if an agencies; item is subject to China’s export control regulations. The GAC has a computer database listing controlled items. (iv) undertaking the work of expert committee on export control on dual-use nuclear goods and related 8. Ministry of Foreign Affairs (‘MOFA’): The Department of technologies; Arms Control within MOFA reports on issues such as international arms control and export control, and (v) issuing end-user certificates for dual-use goods and participates in China’s export control legislation and policy- technology import; and making. (vi) supervising and managing end-users. Courtesy of White & Case LLP i a h c n a w

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13 World ECR www.worldecr.com Feature: Asia export controls Feature: Asia export controls

means of taking soundings as to what’s something for political reasons and trying to be fair; that is, it tries to apply occurring behind the scenes. inflating it.’ the law equally to foreign and domestic According to one Beijing-based companies. But there is definitely a Chinese whispers lawyer, in more than five years of his discrepancy, and sometimes a tension, The situation in China is, of course, working in China, he has not seen any between provincial governments and quite different to that which prevails high-profile or stringent application of central government. The former are elsewhere in the region. China regards export control legislation. That’s not to probably more likely to exhibit itself (rightly) as a political and say, he points out, that businesses favouritism, taking the attitude, “We economic powerhouse and one which shouldn’t endeavour to keep their ‘…I’s are far from the Emperor…”.’ will only bow to outside pressures dotted and T’s crossed…’. But on paper when it is clearly in its own interest to at least, the regime is complex, and To the future do so. There is, say lawyers on the characterized by ‘a mish-mash of Perhaps it could be said that it is a ground, considerable dialogue at agencies and authorities’ (see ‘China’s general uncertainty as to the location of government to government level export control regime’ and the article by “the Emperor” (Is he in Beijing, between China and the outside world, Chris Cloutier and Jane Cohen in this Bangkok, Tokyo or Washington?), that including information sharing and issue) and various lists of categories of sets the tone for anti-proliferation sharing of best practices. But export restricted and prohibited technologies. policy, legislation and enforcement in controls remain a tricky issue for The implementation of the controls Asia at large. The situation may be companies doing business in the that do exist is further complicated by becoming clearer, but the wide range of Middle Kingdom. As one lawyer notes: the fact that enforcement of the law in competing factors is always likely to ‘Look at the Rio Tinto “state secrets” China is not consistent across the prevent it from being straightforward. case in 2009. It was a typical example country. As one lawyer comments: ‘In of the government seizing on general, I think that the government is Tom Blass: [email protected]

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14 World ECR www.worldecr.com Editorial Editorial

Today, the rules apply to everyone

cott Sullivan of Flowserve offers also on the settlement. And it’s particular circumstances to make sure a fascinating insight into the becoming apparent that while that they bear no resemblance to their S work of an in-house export enforcement agencies are focusing own and that the Chinese students they controls practitioner in a major much of their attention on high-profile, are so actively targeting for future fees multinational. During an internal multi-million or billion dollar turnover will not render them and their investigation into possible breaches of companies, that certainly doesn’t academics guilty of similar breaches. U.S. export controls in more than 100 represent the full extent of their Every issue, we aim to provide our of the company’s sites around the interest. readers with insights into the export world, Sullivan and his team uncovered control laws of jurisdictions which obstacles to compliance that they never Increasingly, being might otherwise be quite literally alien expected. Such a glimpse into the day- to them. On paper of course, there are to-day activities of those on the ‘front large does not place a often similarities and common sources. line’ isn’t easy to come by – the data company above the law; This time round, we wanted to take gathering, translation, cultural nor does being small soundings from those on the ground – challenges, and interactions with in a number of Asian countries in this government agencies – and we’re place it below the instance. The resounding message was delighted to be able to present it in this radar. that for a number of reasons, security- issue. To the best of its ability, related and economic, export controls Flowserve left no stone unturned in its are gradually being ratcheted up – efforts to get things right. And given, as Smaller companies are fair game for although progress is patchy and laws Sullivan pointed out, that the company investigation, as are individuals – like often selectively enforced. is a ‘conglomerate of conglomerates’ John Reese Roth, the Tennessee The latter point, say observers, (like so many corporations), this was professor whose continued breaches of means that businesses should take not the easiest thing for the corporation the ITAR in a university setting have extra care to ensure their compliance to ask of itself. We applaud Flowserve’s earned him a four-year prison for, increasingly, being large does not initiatives and efforts. The company sentence, his appeal having failed. The place a company above the law; nor can look to the future with a clean bill circumstances of professor Reese does being small place it below the of health. Roth’s case may have been very radar. Of course, Flowserve is a particular – but there will be a raft of multinational with the resources to academic institutions across the U.S. Tom Blass, November 2011 spend – both on the investigation, and and Europe who will be studying those [email protected] Memberships Available! Inquire at: www.icpainc.org Conferences! Discounts! Annual conferences with four days of Your membership brings discounts informative seminars by industry experts. to trade publications and various trainings.

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15 World ECR www.worldecr.com US:IRAN US:IRAN

CISADA and the expansion of U.S. sanctions against Iran

The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (‘CISADA’) broadens the scope of sanctions that can be imposed on those engaged in business activity with Iran. Jason M. Waite and Diego S. Marquez consider its impact.

n 1 July 2010, President certain activities, the steps that the Specifically, CISADA provides that Obama signed the Obama administration has taken to the President must impose sanctions O Comprehensive Iran Sanctions, implement the new sanctions over the against a person he determines Accountability, and Divestment Act of last year, and how the expanded ‘knowingly’ sells, leases or provides any 2010 (‘CISADA’) into law. This sanctions have impacted the worldwide of the following, when such items have expansion of U.S. sanctions, and the business community. The article then a fair market value of $1m or more or sanctions imposed by the United offers recommendations for companies an aggregate fair market value of $5m Nations and the European Union in the interested in maintaining compliance or more in a 12-month period: Summer of 2010, and by Japan and to avoid the imposition of the South Korea in September 2010, expanded sanctions, and concludes by l goods, services or technology that suggested a growing global consensus considering the types of additional could directly and significantly on the need for the international actions that could be taken by the facilitate the maintenance or community to further isolate the United States. expansion of Iran’s domestic Iranian regime. production of refined petroleum One year later, as this article goes to CISADA: expanding the scope of products; press, news of an alleged Iranian plot existing sanctions l refined petroleum products (to to assassinate the Saudi ambassador to CISADA amends the Iran Sanctions Iran); or the United States in a Washington Act (‘ISA’) to broaden the scope of l goods, services or technology that restaurant has heightened concerns in sanctions targeting investments in could directly and significantly the U.S. capital about the Iranian Iran’s energy sector. In particular, contribute to the enhancement of regime and CISADA has come under CISADA expands the activities subject Iran’s ability to import refined review in the United States Congress as to sanctions and establishes additional petroleum products. the government considers further sanctions that can be imposed on those actions. engaged in such activities. While the law requires persons to The ISA authorized sanctions on act ‘knowingly’, that term is defined to CISADA goes further any person that (1) invested more than include both actual knowledge and $20m in the enhancement of Iran’s constructive knowledge. than the Iran ability to develop petroleum resources Congress identified the refined or (2) exported, transferred or petroleum industry as a vulnerability of Sanctions Act in otherwise provided to Iran goods, the Iranian regime; at the time of services, technology or other items CISADA’s passage into law, Congress terms of its scope of knowing that the provision of such estimated that Iran imported between items would contribute materially to 25% and 40% of its refined oil needs prohibited activity Iran’s ability to develop or acquire due to limited domestic refining and provides for weapons of mass destruction or certain capacity. Believing that refined- other advanced weapons. The new petroleum-related sanctions could new ‘triggers’ that sanctions under CISADA similarly have a significant impact on the target investments ($20m or more or Iranian economy, Congress targeted would require the $5m per investment, totaling $20m or more than the mere sale or provision of more in a 12-month period) that refined petroleum products or imposition of directly and significantly contribute to significant investments in the Iranian the enhancement of Iran’s ability to oil industry. The ‘triggers’ for the sanctions. develop its petroleum resources. imposition of sanctions extend to a However, CISADA goes further than wide range of activities that could This article summarizes the changes the ISA in terms of its scope of enhance Iran’s refining capacity or enacted through CISADA to expand prohibited activity and provides for assist in the delivery of refined the scope of sanctions that may be new ‘triggers’ that would require the petroleum products. The triggers now imposed against companies engaged in imposition of sanctions. include assistance in the construction,

16 World ECR www.worldecr.com US:IRAN US:IRAN

modernization or repair of petroleum refineries, including through the sale of Available sanctions parts and equipment, or the transfer of technology, as well as less direct Sanctions available under the ISA contributions to Iran’s refined Denial of Export-Import Bank loans, credits, or credit guarantees for U.S. exports petroleum industry, such as certain Denial of licences for the export of military, dual-use, or nuclear-related goods or insurance or reinsurance services, technology financing or brokering services, the supply of ships and the provision of Denial of U.S. bank loans exceeding $10m in any 12-month period shipping services. Prohibition on service as a primary dealer in U.S. government bonds, and/or Prior to CISADA, the President had prohibition on serving as a repository for U.S. government funds, if the sanctioned available to him a menu of six options party is a financial institution (each counts as one sanction) from which to choose sanctions once a Prohibition on U.S. government procurement from the sanctioned party determination was made that an entity Restriction on imports from the sanctioned entity was violating the ISA. Now, under the ISA as amended by CISADA, the President has three new options Sanctions now available under CISADA available on the menu of sanctions, Prohibition on foreign exchange transactions subject to U.S. jurisdiction options that specifically target access to Prohibitions on banking transactions subject to U.S. jurisdiction financial services by allowing the President to prohibit foreign exchange Prohibitions on transactions with respect to any property subject to U.S. transactions and banking transactions, jurisdiction in which the sanctioned party has an interest and broad authority to block property subject to U.S. jurisdiction. The chart ‘Available sanctions’ lists the sanctions promulgated by the Treasury Mandatory investigations and that may be imposed by parties found Department’s Financial Crimes the enforcement of CISADA to be engaged in prohibited conduct. Enforcement Network (‘FinCEN;), Critics of the sanctions in place prior to The newly available sanctions are effective 11 October 2011, that requires CISADA questioned the level of significant in their scope; the U.S. banks, upon request from discretion left to the President in prohibition on transactions with FinCEN, to inquire of certain foreign determining whether to investigate respect to property subject to U.S. banks for which the U.S. bank activities that could trigger sanctions. jurisdiction, for example, essentially maintains a corresponding account as The ISA stated that the President means that an entity subject to this to the activities of those banks with ‘should’ investigate potentially sanction is prevented from doing any respect to certain parties of concern. sanctionable activity, but the ISA did business with U.S. persons even where Administration officials have indicated not require an investigation. CISADA that business takes place entirely that FinCEN has already issued represents a significant change in that outside the United States. The impact requests to certain foreign banks it amends the ISA to require that the is likely to be felt by a sanctioned party suspected of dealings with designated President investigate activities that even more broadly than is actually entities. could potentially violate the act’s intended given the practice of many CISADA also includes provisions prohibitions. global companies to screen all of their targeting officials responsible for President Obama delegated his worldwide transactions against lists of human rights abuses, exporters of authority to investigate potential prohibited parties and their tendency technology used to restrict violations of the ISA as amended by to avoid business with such parties as a communications, and countries that CISADA to the Department of State in prophylactic matter, even if U.S. allow for diversion of certain goods, a presidential memorandum dated 23 persons may not be involved in the technologies and services. It imposes September 2010 (through which the transaction. Indeed, the three new requirements on U.S. government President also delegated other additional sanctions greatly expand the contractors and grants state and local authority under CISADA to both the President’s power to reach foreign governments the authority to adopt departments of State and Treasury). entities doing business with Iran. and enforce measures to divest Investigations are being handled by the There are additional provisions of government funds from entities Office of Terrorism Finance and CISADA beyond those described above. engaging in business with Iran’s Economic Sanctions Policy (‘OTFESP’). These include provisions calling for the energy sector. Indeed, many state Some members of Congress have imposition of sanctions on foreign pension funds have begun reviewing lamented the lack of resources in the banks that knowingly facilitate Iranian the activities of companies in which OTFESP and delays in the investigation efforts to acquire weapons of mass they are invested and divesting from process. Others have expressed destruction or engage in doing business those engaged in Iran business, and frustration over the office’s apparent with key Iranian banks, the Iranian certain states, including California and failure to initiate investigations into Revolutionary Guard Corps (‘IRGC’) or Florida, have implemented state laws certain companies publicly suspected entities sanctioned by the UN Security prohibiting state government of having engaged in sanctionable Council. U.S. regulators have been contracts with companies investing in activities. active in implementing these Iran’s energy sector (see, WorldECR However, the administration has requirements, including in a rule issue 4). taken a number of actions to enforce

17 World ECR www.worldecr.com US:IRAN US:IRAN

CISADA. On 30 September 2010, the Iran. On 24 May 2011, the State sanctions represent a significant State Department announced that Department announced sanctions development given that they targeted Naftiran Intertrade Company, a Swiss against seven companies under companies providing shipping services company owned by National Iranian CISADA: PCCI, Royal Oyster Group, and not just companies investing Oil Company, would be the first entity Speedy Ship, Tanker Pacific, Ofer directly in Iran’s energy sector, sanctioned under CISADA. The State Brothers Group (later clarified to list providing an example of the extended Department then sanctioned specific members of the group), reach of sanctions under the ISA as Belarusneft, a state-owned Belarusian Associated Shipbroking, and Petroleos amended by CISADA. energy company, in March 2011 for de Venezuela (‘PDVSA’) for shipping The administration has also used its having entered into a $500m contract transactions involving refined authority under CISADA to persuade with Naftiran to develop an oilfield in petroleum products. These May 2011 companies to wind down business with

Impact on business – new compliance considerations

As we wait to see whether the Obama sanctions. Companies outside the employing contractual language that administration will take further energy sector should also analyze the allows ship owners to refuse to deliver actions under CISADA, companies extent to which supply of their refined petroleum cargoes to Iran. should evaluate their own compliance products or services, even general use These types of contractual provisions and susceptibility to CISADA goods, such as pipes, valves, pumps, help protect such service providers sanctions. Because the sanction power generation systems, and other from the risk of engaging in ‘triggers’ under CISADA now include significant machinery and equipment, sanctionable activity, and similar assistance in the construction, could potentially trigger sanctions. approaches can be developed for modernization or repair of petroleum Logistics companies, insurance and other sectors and types of business. refineries as well as less direct other financial services providers, for Lastly, after identifying activities contributions to Iran’s refined example, should take active steps to that are or may be sanctionable under petroleum industry (such as the understand their customers’ business. CISADA, companies should weigh the supply of equipment and technology, It is often difficult for such companies benefits of approaching the State insurance or reinsurance services, to know the types of goods or services Department, OTFESP, under the financing or brokering services, and that could serve to enhance Iran’s ‘special rule’ to clarify the the supply of ships and shipping petroleum refineries or Iran’s ability to permissibility of the activities, and, if services), the sanctions could impact import refined petroleum, but through necessary, negotiate a winding-down companies and industries one or two active efforts to know their customers, of any operations of concern and steps removed from the energy sector. such companies can reduce the risk avoid the business and reputational For example, transportation and of engaging in activities that could be costs of a State Department shipping companies, logistics considered to be sanctionable. investigation and potential providers, industrial equipment and Implementing clear written internal subsequent sanctions. It is generally machinery producers, infrastructure policies and procedures can also help understood that companies may be development companies, consultants mitigate risk. CISADA provides that no permitted to fulfil existing contractual and other service providers should sanctions are to be imposed on obligations, but the detailed nature of examine their customer base, analyze underwriters, insurers, or reinsurers such obligations will have to be the potential uses of their goods, that exercise due diligence in presented to the U.S. government. services, or technologies, and establishing and enforcing official Indeed, companies availing consider the potential impact of the policies, procedures and controls that themselves of the special rule are CISADA sanctions on their business. aim to ensure compliance with the encouraged to provide a detailed Given the reach of the sanctions prohibition on support to Iranian catalogue of their existing activity in available to the President under imports of refined petroleum Iran as well as their plan for winding CISADA, even companies with no U.S. products. This exception suggests down any sanctionable activity as business should take proactive that, at minimum, companies, soon as possible. Companies with U.S. measures to ensure their activities are including those outside the insurance affiliates, or even companies that not sanctionable. and re-insurance industries, would be merely employ U.S. persons or have Companies can take various steps wise to have such compliance controls U.S. board members, will need to be to avoid engaging in sanctionable in place. Companies should also comfortable that these U.S. persons activities under CISADA. Generally consider adopting business practices have not been engaged in activities speaking, this calls for increased due that further protect against potential related to Iran that would constitute diligence in undertaking new violations. The State Department, for violations of the generally applicable business. Entities operating in the example, encourages the use of Iran sanctions administered by the energy sector or providing coverage exclusions in insurance Office of Foreign Assets Control construction, maintenance or other policies for losses associated with the (‘OFAC’), and, if necessary, address services to that sector should weigh delivery of refined petroleum potential OFAC regulatory concerns the full scope of their activities against products. Similarly, shipping prior to or concurrent with any the list of activities that could trigger associations have suggested approach to the State Department.

18 World ECR www.worldecr.com US:IRAN US:IRAN

Iran. In fact, several companies have companies have been targeted by the Legislation has been introduced in avoided investigation by the Obama administration, other suspected the Senate that would define what administration because of the ‘special violators have not been investigated. constitutes ‘credible information’ rule’ in CISADA that allows the Members of Congress, for example, requiring initiation of an investigation, President to decline to investigate have identified potential violators and and would explicitly require the companies that agree to wind down inquired about such entities with the President to take action with respect to prohibited activities and certify that President, yet it is unclear whether entities potentially engaged in they will no longer engage in such such companies have been sanctionable activity and identified in activities. On 30 September 2010, for investigated. Similarly, a letter co- written requests by members of example, the State Department signed by 92 U.S. senators was Congress. Senator Robert Menendez announced that Royal Dutch Shell PLC delivered to the administration in (D-NJ) has proposed legislation that of the Netherlands, Total SA of France, August 2011 urging the President to would prohibit EU refiners from using Statoil ASA of Norway and ENI SPA of sanction the Central Bank of Iran Iranian crude oil in gasoline exported Italy had all agreed to take advantage (‘CBI’), using CISADA or other to the United States, while senator Jon of the special rule and cease prohibited authorities available to him. There is Tester (D-MO) has asked the activities involving Iran. A fifth growing frustration in the Congress administration to close a ‘loophole’ and company, INPEX of Japan, similarly over the administration’s lack of action consider enforcing the more general pledged to end its sanctionable with respect to the CBI. OFAC-administered IEEPA-based Iran activities in Iran in exchange for sanctions against foreign subsidiaries avoiding investigation. Increased enforcement and of U.S. companies, though such a Additionally, the State Department additional sanctions likely change would likely require legislation reports that several companies have The pressure on the Obama to amend IEEPA and such efforts have voluntarily decided to stop business administration is increasing with failed in the past. For its part, the administration is engaged in diplomatic efforts to persuade While CISADA has had an impact on Iran’s countries like China, Spain, Japan, ability to develop its petroleum industry, South Korea, India and Turkey to limit business with Iran’s energy sector. the impact has done little to assuage While CISADA has had an impact on Iran’s ability to develop its concerns in the United States about Iran’s petroleum industry, the impact has done little to assuage concerns in the efforts to develop a nuclear programme. United States about Iran’s efforts to develop a nuclear programme, its support for terrorist groups, and with Iran since implementation of respect to Iran, and frustration with the human rights abuses. Given the CISADA, including Turkish refiner Iranian regime is growing in continuing pressure on the Tupras, Kuwait’s Independent Washington, particularly following the administration, further actions under Petroleum Group, India’s Reliance, news of its alleged involvement in a CISADA against companies engaged in Malyasia’s Petronas, Russia’s Lukoil plot to assassinate the Saudi business related to Iran are expected, and Swiss energy traders Vitol, Ambassador. The Senate Committee and additional development or Glencore, and Trafigura. Repsol, BP, on Banking, Housing & Urban Affairs expansion of the overall U.S. sanctions South Korea’s GS Engineering & held a public hearing on 13 October regime remains a distinct possibility. Construction and the German firm 2011 to discuss implementation of the Linde have abandoned ongoing CISADA sanctions with Obama development projects or promised to administration officials. The House Jason Waite is a partner in the forego planned participation in future Foreign Affairs Committee followed law firm of Alston & Bird in projects, and Germany’s ThyssenKrupp suit on 14 October. During testimony Washington, DC. He counsels has gone a step further and offered to before both committees, David Cohen, clients on all aspects of export freeze all new business with Iran, even the Under Secretary of the Treasury for controls and economic sanctions, business outside the energy sector. Terrorism and Financial Intelligence, with an emphasis on compliance, Major insurers, such as Lloyd’s of indicated that ‘all options’ remain on transactional planning, and London, have stopped covering the table for increasing financial enforcement defense. shipments of refined petroleum to Iran. pressure on the Iranian regime, [email protected] Hong Kong shipping company NYK including the CBI sanctions requested Line Ltd. has decided to withdraw from by 92 senators. Members of Congress Diego Marquez is an associate in all trade with Iran. continue to press not only for sanctions the firm who specializes in Despite this flurry of activity over against the CBI but for an increase in international trade and the past year, pressure is increasing on the number of investigations of foreign regulatory compliance matters the Obama administration to do more. banks and companies, additional and represents clients’ public It is not clear that the sanctions have designations of Iranian human rights policy interests before Congress significantly disrupted the Iranian abusers, and further efforts to pressure and the administration. regime’s efforts to obtain nuclear the European Union and other allies to [email protected] weapons. Moreover, while certain stop purchases of Iranian crude oil.

19 World ECR www.worldecr.com China: encryption China: encryption

Casting a wide net: China’s encryption restrictions

While many governments are concerned about the exportation of high-level encryption technology and products and their subsequent use overseas, China’s focus is on the use of encryption within its borders. Christopher T. Cloutier and Jane Y. Cohen examine the PRC’s broad encryption controls.

hina’s web of encryption government statements that the also enforces China’s restrictions on regulations has the potential to Encryption Regulations are not the importation of encryption products C ensnare unsuspecting intended to address standard, mass- and technologies. foreigners using their laptops or mobile market products have all been issued As indicated above, the Encryption phones in country. Under the by entities subordinate to the State Regulations are extremely broad. They Regulations for the Administration of Council. Thus, these statements did not restrict the development, production, Commercial Encryption (‘Encryption amend the Encryption Regulations but sale, use, and even repair of Regulations’), adopted in 1999 by rather indicated how the government commercial encryption products. China’s State Council – the highest intends to enforce them. Such Moreover, the Encryption Regulations organ of the state – the manufacture, intentions can change quickly. In severely limit the sale of foreign-made use, sale, import, or export of any item addition, most of the statements are commercial encryption products in containing encryption without prior now more than a decade old and do not China. Specifically, the Encryption government approval may lead to necessarily reflect current conditions. Regulations mandate that only SCA- administrative fines, the seizure of The statements were, for example, authorized entities are allowed to sell equipment, confiscation of illegal issued well before the first SCA-approved encryption products in gains, and even criminal prosecution. smartphones hit the market, and China. Both the importation and exportation of commercial encryption The manufacture, use, sale, import, or export of products and equipment containing commercial encryption technologies any item containing encryption without prior must be approved by the SCA. Foreign government approval may lead to administrative organizations, non-Chinese foreign fines, the seizure of equipment, confiscation of nationals in China, including short- term visitors, are required to obtain a illegal gains, and even criminal prosecution. licence from the SCA before using any encryption product in China. The Encryption Regulations are before many companies began Diplomatic organizations are written broadly, covering essentially routinely adding specialized security specifically exempted. any encryption product or technology software to computers issued to Unlike U.S. export controls on used outside of official government employees. Many of the more advanced encryption, which are increasingly channels. Starting shortly after these features available in smart phones and streamlined to ensure that only regulations were issued, there have security software installed on modern sensitive types of high-level encryption been a series of statements by Chinese laptop computers would appear to be items are captured, China casts a much officials explaining that they are not the type of technology that the wider net. In fact, article 2 of the intended to capture mass-market Encryption Regulations seek to control. Encryption Regulations clarifies that products that have only ancillary all ‘encryption technologies and encryption functions, as opposed to China’s encryption controls encryption products used for dedicated encryption hardware or The State Cryptography encrypting protection or security software. A clarification issued by one Administration (‘SCA’), sometimes authentication of information’ are government agency in 2000, for referred to by its former name, the covered to the extent that they are not example, explained that mobile State Encryption Management Bureau used for national security purposes. phones, internet browsers, and (‘SEMB’), serves as the national Thus, the Encryption Regulations are Microsoft Windows software were not authority responsible for the regulation broad enough to cover virtually any within the ambit of the Encryption of encryption products and cryptographic technology or process, Regulations. technologies in China. The SCA regardless of encryption strength or Although thousands of individuals formulates, adjusts, and publishes prevalence of a product in international carry laptop computers and relevant rules and regulations. markets. smartphones in and out of China every Together with the General The SCA has published a number of day, it is not without risk. To begin, the Administration of Customs, the SCA rules outlining controls on encryption

20 World ECR www.worldecr.com China: encryption China: encryption

products in China. These rules include regulate the use of encryption Implementation of Commercial the following: products in China by foreign Encryption Administrative persons including natural persons Punishments (1 August 2007) n Rules on the Production of and ‘organizations established regulate the actions of Commercial Encryption Products under foreign laws outside the administrative authorities such as (11 December 2005) stipulate that territories of China’. Thus, these the SCA and relevant provincial and encryption products must only be rules apply to employees of local encryption administration manufactured by firms authorized companies visiting China who are authorities. by the SCA, and that the types and not Chinese citizens. The Foreign categories of encryption products to Organization Measures require n The Import Control Catalogue of be produced must be approved by foreign persons using essentially Encryption Products and the SCA. In addition, manufacturers any encryption products or Equipments Containing Encryption of encryption product that engage in technologies in China to obtain Technologies (10 December 2009) government procurement activities licences from the SCA. lists the following nine controlled must submit encryption keys to the encryption products and SCA. n Trial Measures on the equipment: n Rules on the Sale of Commercial Encryption Products (11 December Encryption licence application procedures 2005) require a seller to obtain a sales licence for commercial For Chinese persons encryption products prior to selling encryption products in China. Thus, Chinese persons including Foreign Invested Enterprises (‘FIEs’) may apply for a encryption products developed or licence for virtually all activities involving encryption products, including the manufactured outside of China sale, use, import, or export of encryption products at the State Cryptography must not be sold in China without Administration (‘SCA’) branch office nearest where the applicant is located. prior authorization from the SCA. The application packet must include a complete Registration Form For The Use Of Foreign-Produced Encryption Products and certain other documents such as n Rules on Scientific Research for business licences and a description of the encryption products to be licensed. Commercial Encryption Products Review by the local SCA office lasts for five business days, at the end of (11 December 2005) stipulate that which the application is either forwarded to the SCA in Beijing for further R&D activities related to encryption review or returned to the applicant for revisions. Review by the SCA in Beijing products must only be conducted by may last for up to 20 working days. If the application is approved, the SCA will entities authorized by the SCA. issue a Certificate For Using Foreign-Produced Encryption Products, which is valid for three years. If requested, the SCA will also issue an Import Licence For n Rules on the Use of Commercial Encryption Products, valid for 30 days. If the application is rejected, the SCA Encryption Products (24 March will provide the applicant with a statement of the reasons for the rejection. 2007) (the ‘Use Rules’ ) govern the use of encryption products by For non-Chinese persons Chinese persons including FIEs The application process for non-Chinese entities is similar to that for Chinese (‘foreign invested enterprises’, i.e . persons. Applications must be filed with a nearest branch office of the SCA. Chinese-incorporated branches of For example, a foreigner wishing to import or use an encryption product in foreign companies). The Use Rules Guangdong Province would file the application with the Guangdong SCA. An provide that Chinese citizens and application packet must also include a Registration Form For The Use Of enterprises may use SCA-approved Encryption Products By Foreign Organization And Individuals and certain encryption products made in China additional documents such as business licences and a description of the without a licence. These SCA- encryption products to be licensed. Furthermore, if a non-Chinese entity approved encryption products are, wishes to use an encryption product that needs to be imported, then the however, only available through importation of foreign encryption product requires a separate import licence, authorized channels, which allows the application for which appears at the bottom of the Registration Form For the Chinese government to control The Use Of Encryption Products By Foreign Organization And Individuals. their distribution. The Use Rules Notably, a frequent business traveller easily could fall foul of these provisions also provide that FIEs may apply for because each visit and importation into China of a particular encryption item a licence to use foreign-made (e.g. a laptop or a smartphone with encryption technology) could require a encryption technology or separate licence from the SCA. equipment given a demonstration of Time periods for review of the application are the same as those discussed necessity. above for Chinese persons. Also as above, if the application is approved, the SCA will issue a Certificate For Using Encryption Products By Foreign n Measures on the Use of Commercial Organizations And Individuals, which is valid for three years. If requested, the Encryption Products in China by SCA will also issue an Import Licence For Encryption Products valid for 30 Foreign Organizations and days. Rejected applications will be returned with a statement of reasons for Individuals (24 March 2007) (the the rejection. ‘Foreign Organization Measures’)

21 World ECR www.worldecr.com China: encryption China: encryption

l 8443311010: Electrostatic- password machines, fax Administration of Customs, Public sensitive multifunctional password machines, etc.), Security Bureau, State Security Bureau, in te grated encrypting fax password cards. Administration for Industry and machines (with automatic data Commerce, and the Administration for processing equipment or Importantly, importers must apply the Protection of State Secrets. Recent network connection); for an import licence when importing developments indicate that these l 8443319020: Other multi - into China any of the aforementioned agencies plan to take a more active role functional integrated encrypting products, as well as other products in enforcing China’s encryption fax machines (machines with the which the importer ‘knows or should controls. Thus, persons who engage in function of printing, copying or know’ contain ‘encryption activities in China involving encryption both); technologies’, including those not products ( e.g. the importation and use l 8443329010: Fax machines (can specifically enumerated in the of encryption products), without be connected to automatic data catalogue. complying with the existing rules processing facilities or internet); should focus on taking the necessary l 8517110010: Cordless encrypting Under some steps to bring themselves into telephones; compliance with China’s encryption l 8517180010: Other encrypting circumstances, leasing controls or face potential enforcement telephones; of encryption items in actions and penalties. l 8517622910: Optical To ease the licensing burden and communication encrypting China may be more reduce the risk of falling foul of Chinese routers; advantageous. encryption laws, persons that engage in l 8517623210: Non-optical activities in China should consider communication encrypted activities that involve unencrypted exchangers; laptops, smartphones, and other l 8517623610: Non-optical PRC encryption enforcement unencrypted electronic devices. communication encrypting The SCA itself does not have However, the obvious disadvantage to routers; and enforcement powers and must rely on this approach is the decreased data l 8543709950: Password other Chinese government agencies. security resulting from the lack of machines (including telephone Such agencies include the General encryption. Under some circumstances, leasing of encryption items in China may be more advantageous. Although this approach would avoid having to obtain, www.LearnExportCompliance.com for example an import licence in advance of each trip to China, a three- year ‘use’ licence would still be required. Obtaining a ‘use’ licence ...from the leader in export could be averted altogether if a company that leases encryption compliance training. products to third parties already has the necessary ‘use’ licences for its encryption items. Train ffromrom yyourour home or oocece comcomputer...puter... at YYOUROUR coconvenience.nvenience. Now it is easiereasier thanthan ever to get the best in export compliance training fforor yyourour compancompany.y. Special thanks to Michelle Yingjie Li, Easy to use e-Seminars include all of the content of our highlyhighly Use PromoPromo an international legal consultant praisedpraised lliveive seminars anandd comcombine:bine: CodeCode with King & Spalding’s Washington ECR-10ECR-10 office, for her assistance with this * VideoVideo iinstructionnstruction forfor 10%10% article. * SSlideslides highlightinghighlighting kkeyey concepts e-Seminare-Seminar * Searchable, comprehensivecomprehensive e-Manual discount!discount! Persons involved in the drafting this article are not licensed to practise US EXPORTEXPORT DEFENSEDEFENSE TTRADERADE COCONTROLSNTROLS E-SEMINARE-SEMINAR CONTROLSCONTROLS E-SEMINARE-SEMINAR law in China.

- EAREAR - ITAR ControlledControlled IItemstems - OFACOFAC - ITAR Controlled Activities Christopher T. Cloutier is a - Trade EmbargoesEmbargoes - ITARITAR LiLicensescenses - AntiboycottAntiboycott Issues - ITARITAR AAgreementsgreements partner and Jane Y. Cohen an - MuchMuch more... - MuchMuch more...more... associate in the Washington, DC office of King & Spalding LLP. [email protected] VisitVisit www.LearnExportCompliance.com/e-Seminarswww LearnEx rtCompliance com/e-Seminars oror call +1 540 433 3977 (USA) fforor details or registration. [email protected]

22 World ECR www.worldecr.com Poland Poland

Pole position

Businesses trading in Poland are obliged to follow national permitting procedures or incur criminal or administrative penalties. Emilia Stępień and Krzysztof Korwin-Kossakowski provide an introduction to Poland’s export control regime.

s a Member State of the Economic Affairs of 2 October 2002 The Minister of Economic Affairs is European Union, Poland is on the list of items of strategic appointed as the authority responsible A subject to the provisions of EU importance. The list reflects the list for controlling exports (the ‘Control Regulation No 428/2009 on setting up of items in attachment No. I of the Authority’). The Control Authority is a Community regime for the control of Regulation; authorized to appoint a team (the exports, transfer, brokering and transit l as regards military items in the ‘Team’) to which certain export- of dual-use items (the ‘Regulation’). regulation of the Minister of controlling task are delegated. The The Regulation provides for its Economic Affairs of 1 February 2011 customs control of Items is conducted implementation in the Member States. on the list of military items, of which only by specified custom offices. In Poland it is implemented by the Act trading is subject to a permit. of 29 November 2000 on foreign Permits exchange in goods, technologies and Trade under the Act covers export, Trade with Items may be subject to a services of strategic importance for agent services, technical support, permit. The permit to trade with the national security and for maintaining import, transit (the ‘trade’). Thus, the Items is granted by the Control international peace and security (the Act regulates a wider scope of activities Authority. Exporters granted a permit ‘Act’) and related by-laws. The Act and than the Regulation. The trade is cannot assign it to another entity and related by-laws concern items of subject to exporters’ regulatory may only exercise the permit strategic importance (the ‘Items’). The obligations (including relevant permits themselves. The permit must indicate Items include: and notifications) and control. the scope of lawful trade and trading Import is understood as introducing with Items outside the scope of the l dual-use items as defined in the Items into Poland or transmitting permit is unlawful. Applying for the Regulation, and information, documentation or permit as well as its issue is free of l military items that are not covered software with the use of electronic charge. by the Regulation. means of communication, from a third country to Poland. Dual-use items Dual-use items are items, including Technical support is understood as A permit governing trade in dual-use software and technology, which can be any technical support connected with items is required for: used for both civil and military amending, developing, producing, l export, The Act of 29 November 2000 on foreign exchange l other services (i.e., brokering services, transit, forwarding, and in goods, technologies and services of strategic technical services). importance for national security and for There are three types of national maintaining international peace and security permits for trade with dual-use items: regulates a wider scope of activities than EU a) individual Regulation No 428/2009. b) general; and c) global. purposes. They include all goods which testing, maintaining and other can be used for both non-explosive technical services concerning Items. In addition, exporters from Poland uses and which in any way assist in the The Act applies to all individuals, may trade with dual-use items on the manufacture of nuclear weapons or legal persons or partnerships wishing basis of a general permit covered by the other nuclear explosive devices. to trade with Items. Natural and legal Regulation. The Act does not define the Military items are weapons, persons localized in Poland who wish scope of permits so the Regulation is ammunitions, explosives and to export Items to a third country are directly applicable. technologies that are specified on a further called the ‘exporter’, and military items list. The Items are listed natural and legal persons localized in General permits Poland who wish to import Items from The general permit is granted by l as regards dual-use items in the third countries are further called the statute and may be used by all regulation of the Minister of ‘importer’. exporters who meet the requirements

23 World ECR www.worldecr.com Poland Poland

therein. Exports based on these permits can only be made to states Penalties listed in the statute, and include listed An exporter may be liable to criminal or administrative sanctions for breach of items. Exporters may use the general Polish export control law. permits when they: Criminal penalties may be imposed: l can prove compliance with internal trade control standards for a period (i) for exporting Items without an appropriate permit. The exporter (the of at least three years prior to having exporter being a natural person as well as being a legal person, and its relied on the general permit; and managing directors) may be liable to a fine, restriction of freedom or l notify the Control Authority that imprisonment of up to ten years. If the exporter’s acts were unintentional, they would like to start trading with the exporter may be subject to a fine, restriction of freedom, or Items covered by the permit. imprisonment up to two years. (ii) on an exporter (that is individual or managing director of exporter being Individual and global permits legal person) who: The individual permit is for a specific exporter who intends to export one or a. does not apply for a Customs Certificate, more Items to one specific end-user. b. obstructs control, or The global permit is for a specific c. fails to notify the import in dual-use items. exporter who intends to export Items to one or more specified end-users in In such a case, the exporter may be liable to a fine. one or more specified third country. Individual and global permits are Administrative penalties that may be imposed on exporters (except where they granted by the Control Authority, upon are natural persons) include: application by the exporter. The permits are granted to exporters (i) for trading with Items without a proper permit, a penalty of up to 200.000 complying with the conditions PLN (approx. 45,00.00 EUR); described below. (ii) for importing Items without notifying the Monitoring Authorities, a penalty of In the application for an individual up to 100.000 PLN (approx. 22,500.00 EUR); or a global permit, the exporter must (iii) for trading with Items beyond the scope of the permit, a penalty of up to provide certain information such as the 100.000 (approx. 22,500.00 EUR); destination of the Items, the end-user (iv) for not applying for a Customs Certificate, a penalty of 50.000 (approx. and so on. Exporters should also attach 11,250.00 EUR). to the application the import certificates (with a sworn translation) Penalties should be paid within 30 days from the date when they were imposed from the respective authorities of the and will be. Such penalties are void after five years. end-user’s country. Exporters are obliged to investigate how the end-user intends to use the Items and ensure that the end-user Authority’) of the envisaged import. l other services (that is brokering does not intend to use the Items for: That notification should be services, transit or forwarding, submitted 14 days prior to the technical services). (i) suppression or violation of human envisaged import, and should include: rights In order to obtain an individual (ii) threatening world peace or (i) the importer’s details permit to trade with military items, the destabilising a certain part of the (ii) details of the person who is exporter needs to meet the same world supposed to receive the imported conditions as those required to obtain (iii) supporting terrorism; or items an individual permit to trade with dual- (iv) any use other than one justified by (iii) details of the producer of the Items use items as listed above. the need to maintain the safety and (iv) information as to how the Items security of a state. are going to be used (v) details of the end-user’s country Controls Import of dual-use items (vi) the declaration that the Polish Controls may cover all activities that Although the importing of dual-use importer ensures the Items will fall under the definition of trade. items to Poland is not subject to import reach the declared end-user. Control activities are undertaken both permit as such, some dual-use items by the exporters and the Control are monitored. This is the case with any Military items Authority. dual-use items used in Trade in military items may only be telecommunications and information conducted based on an individual Control before granting the security. In practice, it means that the permit which may be granted for: permit importer of such dual-use items must Internal control system notify the Director of the Internal l export Exporters are obliged to set up an Security Agency (the ‘Monitoring l import internal control system prior to

24 World ECR www.worldecr.com Poland Poland

applying for a permit. The internal performed by the Team, which is respective Polish customs office control system should cover: entitled to enter the exporter’s certifying that the Items have been in premises, demand oral or written fact and lawfully imported into Poland l internal processes explanations, documents, data files and (‘Customs Certificate’). l the structure of the exporter’s other information related to the Items enterprise, the employees and the and transactions. The control is Refusing/revoking the permit management. undertaken in the presence of the The Control Authority must refuse the exporter. grant of a permit if: The internal control system is If the control reveals any violations subject to certification by the respective of the Act, the exporter has a month to (i) it is a requirement of national national certifying authorities. It is comply with the Polish export control safety and defence of Poland controlled by the Control Authority law and the terms of the permit. If the (ii) such are obligations of Poland before the permit is granted. exporter fails to comply, the Control deriving from international treaties Authority may revoke the permit (in (iii) the exporter applying for permit Catch-all rule the case of individual and global does not give a guarantee that he Exporters trading with Items are permits) or prohibit the use of a will observe Polish law obliged to verify the destination and general permit. The exporter may only (iv) the Items are destined to be used use of the military items (the so-called apply for a new permit three years after for illegal purposes or purposes ‘Catch-all’ rule). This means that the having the permit revoked. contradictory to Polish reason exporter should always take utmost d’état. care when undertaking the trade and, Other control measures itself, check: The Act obliges exporters to obtain The Control Authority may refuse to permits for any exports which, though grant a permit if: l what the destination of Items really not listed as Items, are to the exporter’s is best knowledge, destined to be used as (i) it is possible that the destination of l whether the use of Items can be a part of a weapon. the Items may be changed or threat to national peace (ii) the exporter has already violated l whether the end-user’s country the law on trade in Items. supports terrorism etc. If the exporter is unable to appropriately Exporters must at all times observe If the exporter is unable to Polish export control law. Where the appropriately verify the real verify the real Control Authority discovers that an destination of Items and their use, the destination of Items exporter has failed to observe his exporter can request a binding obligations, the Control Authority must opinion from the Control Authority as and their use, the refuse to grant the permit or may to whether the trade is a threat the exporter can request a revoke it. The reasons for revoking the peace. binding opinion from permit are analogous to those for refusing to grant it. Records the Control Authority The Control Authority is authorized Exporters are obliged to keep records as to whether the trade to revoke the permit only after of their trade in Items. Additionally, acquiring the opinions of the Minister exporters using a general permit are is a threat the peace. of the Foreign Affairs, the Minister of obliged to notify the Control Authority, Defence, the Minister of Internal at least every six months, of trade Affairs, the Director of the Internal undertaken and the country of Security Agency, the Head of the destination. Import certificates Intelligence Agency, and the Minister Under the Act, the Control Authority of Finance. Controls after the granting the may, upon an exporter’s application, permit issue an import certificate or confirm Exporters are subject to controls after the importer’s statement that Items the permit has been granted. This have a specific destination. A certificate includes: or statement may be required by the third parties’ authorities. l verification of transactions It is worth noting that Polish law subsequent to their conclusion (and requires the exporter of the Items to Emilia Stępień is a senior to their compliance with the scope provide an import certificate issued by associate and Krzysztof Korwin- of the permit) the foreign country’s authorities or a Kossakowski a junior lawyer at l verification of the internal control statement of the end-user confirmed by Bird & Bird LLP’s Warsaw office. system those authorities. [email protected] l verification of the record of After the release of Items from transactions. Polish customs, foreign exporters krzysztof.korwin- granted an import certificate must [email protected] This verification control may be acquire confirmation from the

25 World ECR www.worldecr.com SMi present their inaugural....

1st and 2nd February 2012 Grand Copthorne Waterfront Hotel, Singapore

KEY SPEAKERS INCLUDE;

Ambassador Sune Danielsson, Head of Secretariat, Wassenaar Arrangement Angelina Gurunathan, Principal Assistant Director, Ministry of International Trade and Industry (MITI), Malaysia Ian Stewart, Advisor to the British Government’s Export Control Process on the role of the Private Sector in Countering Proliferation, King’s College London James Hursch, Director of the Defence Technology Security Administration (DTSA), U.S. Department of Defense JUST ANNOUNCED: James Yang, Deputy Executive Secretary, Export Control Task Force, MASTERCLASS: Bureau of Foreign Trade, Taiwan Tuesday 31st January 2012, Kevin Wolf, Assistant Secretary for Export Administration, 13.30-17.00 U.S. Department of Commerce Mohamed Shahabar Abdul Kareem, Strategic Trade Controller, Strategic Trade Critical Success Factors in the Secretariat, Ministry of International Trade and Industry (MITI), Malaysia development of an Offset Naeem Azid, Director, Licensing and Regulations, Strategic Export Control Division, programme Ministry of Foreign Affairs, Pakistan Led by: David Hew, Lawyer, Robert. S. Kovac, Managing Director, Directorate of Defence Trade Controls, APCA U.S. Department of State Tran Ba Cuong, Director of Origin and Control Division, Ministry of Industry and Trade, Vietnam

REASONS TO ATTEND: Sponsored by • MEET senior policy makers from the • LEARN which new treaties have Asia-Pacific region been introduced in the Asian • DISCUSS the latest regulations and market export controls across Asia • REACH OUT to senior representatives from the U.S. • ANALYSE the most recent reforms Departments of Commerce, to the ITAR and EAR Defense and State • ASSESS the latest regulations in the • NETWORK with senior policy Asia-Pacific region makers

PLUS 2 HALF-DAY POST-CONFERENCE WORKSHOPS Friday 3rd February 2012, Grand Copthorne Waterfront Hotel, Singapore

In association with: Export Controls in Europe In association with: IT Challenges in Effective 08.30 – 12.30 Export Control Compliance? Workshop Leader: David Hayes, Director, 13.30 – 17.30 David Hayes Export Controls Workshop Leader: Gary Stanley, President, Global Legal Services

Register online at www.defence-exportsasia.com Alternatively call +65 664 990 95/96 or +44 (0) 870 9090 711 Germany: dual-use controls Germany: dual-use controls

German regulations governing the export of dual-use items

While Germany’s national trade legislation mainly serves to implement European provisions and to create correspondent rules of procedure, it does provide scope for specific national law. Holger Schmitz examines the key elements of the country’s national legislation controlling the export of dual-use items.

ermany’s national legislation regardless of the origin of a licensing or German catch-all clauses. Article 4 dealing with foreign trade is requirement (from European or REG stipulates a licensing requirement G predominantly laid down in the German law). The competent German if items to be exported Foreign Trade and Payments Act licensing authority is the Federal Office (Außenwirtschaftsgesetz – hereinafter of Economics and Export Control l are or may be used for sensitive referred to as ‘AWG’); the German (Bundesamt für Wirtschaft und purposes associated with ABC Regulation Implementing the Foreign Ausfuhrkontrolle – ‘BAFA’) which weapons (article 4(1) REG), Trade and Payments Act reports to the Federal Ministry of l are or may be intended for a (Außenwirtschaftsverordnung – Economics and Technology military end-use of any kind if the ‘AWV’); and the German Export List (Bundesministerium für Wirtschaft country of destination is subject to (Ausfuhrliste – ‘AL’) as an annex to und Technologie ). an arms embargo (article 4(2) AWV. However, section 1(2) AWG REG), or explicitly stipulates that European law Germany’s national l are or may be intended for use as on foreign trade takes precedence over legislation sets out the components of military items listed respective national legislation. Since in the national military list exported Council Regulation (EC) No 428/2009 sanctions which apply without authorization (article 4(3) on dual-use items (‘REG’) establishes a when ‘dual-use REG). comprehensive foreign trade regime for dual-use items, most provisions provisions’ In Germany, article 4(3) REG which govern the foreign trade of dual- are violated. applies to items listed in AL part I use items in Germany originate at section A. In addition to article 4 REG, European level. Thus, Germany’s Germany has established catch-all national legislation mainly serves to Most licensing requirements for the clauses in sections 5c and 5d AWV. implement the European provisions shipment of dual-use items in Section 5c AWV applies if military end- and to create correspondent rules of Germany result from their entry in use is or may be intended (identical to procedure. In addition, it uses the annex I REG since, according to article Article 4(1) REG) and the country of (small) leeway allowed by REG to 3(1) REG, every export of a dual-use destination is contained in Country create rules applicable only at national item controlled by annex I in principle List K ( Länderliste K – at present, this level. Furthermore, Germany’s requires authorization. Annex I can be includes Cuba and Syria). Section 5d national legislation sets out the found in identical form in part I section AWV applies if the items are or may be sanctions which apply when ‘dual-use C of the German AL. The latter intended for the setting-up, operation provisions’ are violated. This article therefore does not for the most part of, or incorporation into, a nuclear mainly concentrates on the special establish any further licensing plant and if the purchasing country or features of Germany’s national requirements. Only numbers 901 to country of destination is Algeria, India, legislation in this area. 999 of part I section C AL, to some Iran, Iraq, Israel, Jordan, Libya, North extent, comprise additional national Korea, Pakistan or Syria. Licensing requirements items with a possible use for military With the exception of data- According to article 9(2) REG, export purposes (such as land vehicles, processing programmes (software) and authorizations are to be granted by the transmitters or helicopters). As far as technology, sections 5c and 5d AWV competent authorities of the Member these items are concerned, section 5(2) only apply for items with a value State where the exporter is established. AWV establishes a licensing exceeding 2,500 euros (cf. section 5c Authorizations for intra-Union requirement for items with a value (4) and section 5d (4) AWV). Both the transfers must be applied for in the exceeding 2,500 euros (cf. 5(3) AWV). licensing requirements under article 4 Member State from which the dual-use The export of items not controlled REG and sections 5c and 5d AWV are items are to be transferred (article by annex I REG/AL may nevertheless triggered either by notice from BAFA 22(3) REG). As a consequence, in all require authorization if the items are or stating that a sensitive purpose may be these cases the German authorities are may be intended for sensitive purposes intended or the corresponding responsible for licensing – i.e. and are therefore covered by European awareness of the exporter who has to

27 World ECR www.worldecr.com Germany: dual-use controls Germany: dual-use controls

inform BAFA of such on the licence application form. BAFA then decides whether a licence is required. Applying for licences According to article 22(1) REG, Applications for licences need to be their listing (cf. Section 21 AWV). intra-Union transfer of dual-use items filed with the Federal Office of End-Use Certificates are divided only requires authorization if such are Economics and Export Control into Private End-Use certificates listed in annex IV REG. However, (’BAFA’). In cases of doubt regarding (Private Endverbleibserklärung ); article 22(2) REG stipulates the the classification of items (and the Official End-Use certificates ( Amtliche possibility for Member States to corresponding licencing requirement), Endverbleibserklärung ); and impose an authorization requirement exporters may file a preliminary International Import Certificates ( cf. for the transfer of other dual-use items enquiry ( Voranfrage ) to clarify Bekanntmachung über Endverbleibs- if at the time of the transfer the whether an export requires, and is dokumente nach § 17 Absatz 2 der operator knows that the final eligible for, a licence. Außenwirtschaftsverordnung – visit destination of the items concerned is The product-related advice on the www.ausfuhrkontrolle.info). outside the European Union. Germany list of goods ( Auskunft zur Güterliste – The Private End-Use Certificate has made use of this option in section ‘AZG’) verifies to customs authorities contains the statement of a private 7(2) AWV. Furthermore, sections 7(3) that a certain item is not listed. BAFA end-user giving information about the and 7(4) AWV establish licensing maintains an electronic licensing items to be delivered, the final requirements if the direct export to the system called ELAN-K2. Thus, the destination and the designated use of country outside the European Union whole licensing process, as well as the items. The Official End-Use would be subject to article 4(2) REG or many parts of the related certificate contains a similar sections 5c and 5d AWV (i.e. the communication, is paperless. For statement of a governmental end- transferor is informed by BAFA about every shipment requiring an user. An international import a sensitive purpose or aware of such). application, exporters/transferors certificate is issued by certain According to article 5(1) REG, must enter their customs number countries and contains the trafficking and brokering transactions (assigned by the Federal Customs declaration of the recipient country related to dual-use items listed in Service – Bundeszollverwaltung ) in that the exported/transferred items annex I may require licensing if the the application form. In addition, most and a potential re-export are subject broker has been informed or is aware exports require the nomination of a to the recipient country’s export that the items in question ‘are or may person responsible for exports and control law after border crossing. If be intended, in their entirety or in part, compliance with the corresponding general authorizations apply, no End- for any of the uses referred to in article regulations. Furthermore, end-use Use Certificates need to be provided. 4(1)’ REG. At German level, section 41 documents must be enclosed with the To allow BAFA the technical AWV establishes a corresponding rule application (cf. Section 17(2) AWV) for assessment (and classification) of the for items listed in AL part C numbers the export of items listed in Annex I item to be exported/transferred, all 900 to 999 (dual-use items not listed in REG/AL. The same is true for relevant technical data has to be annex I to REG) ‘that are located in a transfers subject to approval due to provided with the application. third country or the economic territory and have not been subjected to import clearance yet, and that are to be to one customer up to the approved authorization. Community General exported to another third country’. maximum amount. A collective export Export Authorization (‘CGEA’) No Section 41a AWV establishes a similar licence (section 2 AWV – EU001 (as stated in annex II REG) licensing requirement for trafficking Sammelgenehmigung ) may be granted covers the export to Australia, Canada, and brokering transactions related to to reliable exporters heavily involved in Japan, New Zealand, Norway, dual-use items listed in annex IV. foreign trade. It is limited in time and Switzerland and the USA of all dual-use Regarding technical assistance permits several exports or transfers to items specified in any entry in annex I related to dual-use items, licensing several customers at several except those listed in part 2 of CGEA requirements may result from sections destinations as indicated in the licence. EU No EU001. Part 2 most notably 45ff AWV, which apply under the The applicant has to provide evidence mentions all items specified in annex conditions stated in article 4 REG, and of the reliability of the customers and IV. CGEA EU001 stipulates that 5c and 5d AWV (see above). must maintain an internal export exporters must notify the competent control system (cf. Collective Export authorities of the Member State where Types of licences Licence Information Leaflet (Merkblatt they are established of their first use of If a shipment licence is required, Sammelausfuhrgenehmigungsverfahr the CGEA no later than 30 days after Germany offers several types. The en ) – at www.ausfuhrkontrolle.info). the date on which the first export takes (basic) individual licence permits A further type of licence of growing place. Furthermore, it stipulates that shipment on the basis of one order to importance is the general export Member States may define further one consignee. authorization. General authorizations requirements regarding registration As a special form of individual exist at European and national level and reporting duties. Germany has licence, the maximum amount licence and exempt exporters/transferors from made use of this option with the (Höchstbetragsgenehmigung ) permits applying for individual approval as Announcement on the use of shipment based on several contracts long as the envisaged transaction falls Community General Export (e.g., within a framework agreement) under the scope of the general Authorization No EU001. After the

28 World ECR www.worldecr.com Germany: dual-use controls Germany: dual-use controls

exceeding a certain value. This NGA consignee is the military, paramilitary Guidance permits the export of most items forces, the police, intelligence service listed in Annex I REG if the export or a civil administration acting for such BAFA (the Federal Office of does not exceed a value of 5,000 institutions. If several NGAs apply, the Economics and Export Control), as euros. exporter/transferor may choose the central licensing authority, l General Authorization no 13 on the between them. provides guidance in several ways export of certain dual-use items in Since many Member States do not to facilitate the licensing process. certain cases. This NGA covers the have NGAs in force, European On its website, export of items which serve exporters face unequal conditions. To www.ausfuhrkontrolle.info, BAFA predefined purposes. align and simplify the current system, publishes important regulations as l General Authorization no 16 on the Commission proposed a council well as announcements and telecommunications and info - regulation setting up six new CGEAs explanatory notes providing rmation security (nos EU002 to EU007 – cf. COM information about recent (2008) 854 final). In its recently developments and guidance on the Since article 9(2) REG stipulates published Green Paper, ‘The dual-use practical appliance of export that all national ‘authorizations shall be export control system of the European regulations. valid throughout the Community’ the Union: ensuring security and A comprehensive commentary above-mentioned NGAs may be used competitiveness in a changing world’ on German export control including even if the items are not located in (COM(2011) 393 final), the all relevant texts and forms can be Germany but in another Member State. Commission endorsed this initiative. found in the Handbook of German The NGAs do not apply to exports to The new CGEAs (currently being Export Control (Handbuch der Australia, Japan, Canada, New negotiated) would be geared to existing Deutschen Exportkontrolle – Zealand, Norway, Switzerland and the NGAs and in some cases replace them HADDEX ) published and regularly updated by BAFA in four loose-leaf U.S.A. since export to these countries (since the existence of CGEAs excludes volumes. Furthermore, the is covered by CGEA EU001. the possibility of NGAs in the scope of handbook Export Control Practice Furthermore, they do not apply to the respective CGEA). This would (Praxis der Exportkontrolle ) exports to countries subject to an arms notably be true for most German NGAs provides guidance on in-house embargo under article 4(2) REG and covering dual-use items. CGEA no compliance with export control law. countries explicitly designated in the EU002 on ‘Low Value Shipments’ The English version of BAFA’s particular NGA. would in some parts replace NGA no website contains brief guidelines on As for CGEA EU006, notification of 12; CGEA no EU003 on ‘Export after German export control and first use within 30 days is required. Repair / Replacement’ would replace translations of key regulations Furthermore, NGA no 9 requires parts of NGA no 13; CGEA no EU005 (bafa.export_control/index.html). notification of the exports carried out. on ‘Computers and related equipment’ NGAs nos 12 and 13 require would replace most parts of NGA no notification only for some of the 10; and CGEA no EU006 on notification of first use, exporters are covered items and NGAs nos 10 and 16 ‘Telecommunications and Information assigned a registration number. From require no notification at all. However, Security’ would in most parts replace then on, every January and June every if no notification is required, a report NGA no 16. export in the previous six months has on the exported items has to be to be reported unless the export is furnished on request (all documents Sanctions covered by a specific German general relating to the usage of the general Voluntary or negligent infringements export authorization (see below). An authorizations have to be kept for three of licensing requirements are appropriate statement has to be issued years). considered as administrative offences if no exports are carried out. (section 33 AWG) or criminal offences Article 9(2) REG gives Member Since no fewer than (section 34 AWG) and may result in States the possibility to establish severe punishments in the shape of general authorizations on their part, if seven Member States fines or jail sentences. no European general authorization have NGAs in force, exists. Germany has made use of this possibility and has established 13 European exporters national general authorizations face unequal (‘NGAs’). NGAs covering dual-use conditions. items are (details available at www.ausfuhrkontrolle.info): Dr Holger Schmitz is a partner in No NGAs apply in the cases of the Berlin office of Noerr LLP. l General Authorization No 9 on article 4 REG or sections 5c and 5d Holger co-heads the Regulatory certain graphites AWV (i.e. the exporter is informed by and Governmental Affairs l General Authorization No 10 on BAFA about a sensitive purpose or is department of the firm. Computers and related items aware of it). NGAs nos 10 and 16 do not l General Authorization No 12 on the apply for certain encryption items if the [email protected] export of certain dual-use items not exporter is aware that the purchaser or

29 World ECR www.worldecr.com ITAR ITAR

ITAR rule change guidance for the UK

In October, the U.S. published a Q&A matrix on the implementation of ITAR rule change (76 FED REG 28174) concerning dual and third country national as guidance for the United Kingdom. We reprint the guidance with accompanying notes below.

Below we print a list of questions ‘put to and answered by ITAR-controlled material only? What then is the position in the US Department of State (DoS) (Director of Policy, relation to the export of classified material? Directorate of Defense Trade Controls) by HM The ITAR 126.18 exemption is only available for Government (HMG) and UK industry, concerning this UNCLASSIFIED US ITAR-controlled exports (below US rule change which alters the way in which access by Dual CONFIDENTIAL). The US-UK Exchange of Notes (EoN) makes it and Third Country Nationals (DTCN) employees of clear that classified exports are to be dealt with separately importing (non-US) entities to ITAR-controlled material under the UK-US General Security Agreement. is controlled. The effective date of the rule was 15th August 2011. 5. Does the new rule extend to all ITAR-controlled exports, or only to those governed by TAAs and MLAs? ‘This UK-specific Questions and Answers Matrix has been The new rule applies to the export of all ITAR-controlled agreed by DoS to help UK End Users and Consignees material and hence all forms of US arms export licence. DoS comply with the rule change requirements and has recently published guidance on how to implement the complements the Technology Security Plan (TSP) that new rule for licenses and Warehouse and Distribution HMG has also agreed with DoS. The information Agreements. suggested in this document is for guidance only and made without any endorsement, representation or warranty. It 6. Why does the scope of the new rule include technical data is not intended to provide legal or professional advice, but exclude “defense services”, even though both are and any party seeking to rely on it should ensure that it encompassed by TAA/MLA? has obtained its own legal advice to ensure that it is applied in accordance with UK law.’ “Defense services” cannot be retransferred as such. “Defense services” do however remain a feature of retained ITAR 124.16 (amended) for MLA/TAA. Key: Clarification Question 7. How does the new rule treat sub-licensees and how do sub- licensing provisions work in relation to hardware licensing? DoS Clarification The new rule applies equally to sub-licensees as it does to 1. Is ITAR 124.16 still available for use as an alternative to licensees. It has no bearing on formal applications for re- ITAR 126.18 in TAA and MLA? transfer. For hardware licensing see 5 above. Yes ITAR 124.16 is still available. 8. Does conflict exist between ITAR 126.18 and ITAR 126.1(a), if so how will this be dealt with? 2. Does the new rule change offer two genuine alternatives to compliance by foreign consignees/end users; as employers No conflict exists, because of the insertion of the phrase they either obtain formal Government security clearance for “notwithstanding any other provision of this part” into ITAR their affected employees, or subject them to bespoke 126.18. “Part” here means Part 126. Hence the exemption screening? applies to 126.1(a) nationals and dual nationals who have undergone the UK’s Baseline Personnel Security Standard There are two genuine alternatives, ITAR 126.18(c)(1) and (BPSS). ITAR 124.18 (c)(2). The screening procedures and associated requirement only apply to the second, and not the first which 9. How does the new rule apply to end users and foreign is solely concerned with security clearance of employees. consignees? Is there a distinction? 3. What level of a formal Government Security clearance will The new rule applies equally to end users and foreign suffice to meet the requirements of ITAR 126.18(c)(1)? consignees wherever they operate. Any security clearance approved by the host Government of 10. Does the ITAR 126.18 requirement for NDAs (for the end user/consignee is sufficient to meet these employers with non-security cleared employees) apply to requirements. In the UK, Security Check (SC) clearance meets employers, employees or both? these requirements. How will this requirement work in relation to foreign governments and international organisations (NATO, EDA etc?) 4. Does the new rule apply to the export of UNCLASSIFIED

30 World ECR www.worldecr.com ITAR ITAR

Only the employer itself needs to enter into an NDA on a self- 17. What about current employees who don’t have Baseline certification basis. Individual employees need not do so. This Personnel Security Standard (BPSS) clearance? does not prohibit use of employee NDAs to support employer Those affected employees already handling ITAR controlled NDAs, but this is not an ITAR requirement and is a matter for materiel should already be covered under existing licences. the end user/consignee. Other employees will be covered when the consignee has a End users and consignees should note that the NDA BPSS process in place. required for the purpose of this rule change is not the same as the NDA referred to under existing Dept of State/DDTC 18. Under ITAR 127.1(b), compliance obligations fall to the Agreements Guidelines (Tab 11 refers). licensor. Is this still the case with ITAR 126.18? HMG may follow the same process. This is not specifically addressed in the final rule change, but The NDA requirement does not apply to international the answer is no. DoS guidance on their website makes it organisations such as NATO and EDA. clear that licensors have no obligation to obtain written statements or certifications from foreign companies with 11. What form should the NDA take? regard to 126.18. A model NDA is to be found in the TSP and has been endorsed by DoS. This forms part of the agreed TSP for the 19. What about supply chains? How are UK primes to ensure UK and meets the NDA requirements for all exports. DoS have compliance by their sub-contractors, including those across also confirmed that the NDA process will involve self- the EU? certification without any need for delivery to DoS. There is no requirement to flow down ITAR 126.18 requirements to suppliers (sub-licensees). Each supplier must 12. Does the new rule permit transfers to employees outside take responsibility for complying with ITAR 126.18 etc. Prior of “the physical territories of the country where the end-user DDTC consent is still required for retransfers to third country is located or the consignee operates”? suppliers. The transfer of defense articles pursuant to this section must take place completely within the physical territory of the 20. To what extent, if any, could S 2(3)(B) of the Protection of country where the end-user is located, where the Trading Interests Act 1980 render any discovery type activity governmental entity or international organization conducts by US authorities inadmissible? official business, or where the consignee operates, and be There is no restriction on the UK Secretary of State’s powers within the scope of an approved export license, other export under the 1980 Act. The EoN makes it clear that exchange of authorization, or license exemption. information must adhere to applicable agreed bilateral US UK protocols. It will not therefore be necessary to invoke the PTIA. 13. How does the rule apply to personnel within the UK’s Armed Forces? Are these to be treated as “bona fide, regular 21. Is HMG content there are no conflicts with national employees, directly employed by the….foreign government regulations on employment law, privacy law etc? entity” (ITAR 126.18 (a) refers)? It is for each end user/consignee to ensure that their HM Armed Forces personnel are to be treated by the rule in implementation of the rule change is effected in a manner the same way as other employees. which complies with UK law. The TSP, model NDA and this Q&A Matrix are provided as guidance to assist end 14. Will the new rule require or imply the use of certification users/consignees in this exercise, but in the event of specific by end users/foreign consignees to exporters, that they have issues end users/consignees should obtain their own legal screened their affected employees for risk of diversion? advice. No certification is required. Indeed certification should not be requested by exporters. 22. Will Non-Disclosure Agreements (NDAs) still be required even if a company has BPSS in place? 15. Does the rule require the disclosure of personnel records Yes. A model NDA can be found in the TSP. of employees of UK employers to DoS? DoS understands that any disclosure must be in accordance 23. Will there be legal conflicts if employers have to screen with UK law. The EoN between the US and UK Governments certain employees for substantive contacts with ITAR recognises this and acknowledges the existence of previously prohibited nations (for e.g. Syria)? agreed bilateral arrangements between the two Governments. Dept of State has confirmed that adopting the BPSS will meet Any disclosure requests by DoS or its agents will be made via the screening requirements. Those UK end users/consignees HMG. who decide not to adopt the BPSS will have to introduce their own screening arrangements in order to comply with the rule 16. ITAR 126.1 cross-reference – Is it accepted that change. employees can travel for business, family and personal reasons? 24. Will employers have to disclose private information to the Yes. US Dept of State about employees who are deemed as ‘diversion risks’?

31 World ECR www.worldecr.com ITAR ITAR

If an end user/consignee decides not to use BPSS to meet request of the Dept of State or DDTC or its agents for civil and the screening requirements of the rule change then they may criminal law enforcement purposes? follow the guidance issued by DoS on their website dated 31 If a company uses the standard UK TSP agreed with DoS, August 2011. there is no requirement in the new rule to have an individual company’s security plan endorsed by DoS. Guidance is 25. Will employers need to refuse or remove an employee to provided by DoS if a company wishes to pursue or develop its work on a project on the basis of a risk of diversion? own TSP. The TSP only needs to be provided for civil and The end user/foreign consignee must assess the risk and act criminal law enforcement purposes and DoS understands any reasonably and proportionately in accordance UK law. disclosure must be in accordance with UK law.

26. Currently the use of 124.16 permits the exchange of 32. Do the screening results need to be provided to the US defence articles with DTCN employees of the approved sub- agreement holder? licensees provided they are nationals of countries that are No. members of NATO, the European Union, Australia, Japan, New Zealand, and Switzerland, without the need to sign a personal 33. Is there any requirement for the foreign consignee to Non-Disclosure Agreement. Where this does not apply or maintain records of its sub-licensee DN/TCN approvals? cannot be used 126.18 to provide a mechanism for approval No. for DTCNs outside of the exempt 124.16 countries. Currently this approval is satisfied using 124.8(5) which must be 34. What responsibility does the foreign consignee have specifically approved within the MLA/TAA agreement. towards its sub-licensees? Subsequently approved individuals are obliged to sign personal NDA’s before access to defence articles is permitted. None. The sub-licensee must ensure that it is compliant with The issue with the current approach, with many European the rule change. The foreign consignee may report its sub- countries, is the conflict with anti-discrimination, human licensees’ compliance preferences to the UK exporter. rights and data protection laws when requesting an employee’s place of birth or nationality. 35. ‘Regular Employees’ as defined in new 120.39 – that is permanent direct employees plus individuals ‘in a long term The new rule provides additional flexibility which avoids the contractual relationship’ with the employer. issues pertaining to the current approach. It is potentially a simpler process provided risks of diversion are accounted for. (i) Please confirm that sublicensees and contract employees, It provides a choice – end users/foreign consignees could use except those meeting the above criteria are not covered? either approach. Whether adoption of 126.18 clearance or (ii) What does “long term” mean? screening procedures in other countries is practical or consistent with their domestic law is a matter for them. (i) This is correct. (ii) Per 120.39, Dept of State has confirmed that a regular 27. Section 124.8(5) will now direct DTCN approvals through employee generally includes individuals working under the 124.16 and 126.18. Does this mean 124.8(5) can no longer direction and control of the company, working full time and be used to approve nationals from countries outside of exclusively for the company and where the staffing agency 124.16? has no role in the work the individual performs. This excludes No. Licensing can still be used pursuant sub-licensees and those working under short term contracts less than a year in length. 28. Will existing agreements remain valid but require amendment to incorporate the appropriate 126.18 wording? 36. Can ‘temporary staff’ be taken to be ‘contract employees’ DoS have issued updated guidance on this transitional matter as defined in para 3.9b of the DDTC’s Agreement Guidelines, through their website. i.e. will contract employees with a UK Government BPSS clearance be covered by the 126.18 (c) (2) exemption? 29. As agreements are amended for other reasons will it be Probably, but HMG is awaiting final guidance from DoS. mandatory for the new 124.8(5) clause to be incorporated in place of the old one? 37 The provisions of this rule apply explicitly to governments / Yes. end users. Is it the intention of government end users to comply with them? 30. Can the use of 124.16 and 124.8(5) still be used to Dept of State understands HM Government will follow the TSP approve employees access to defence articles in new guidance, at its discretion and in accordance with UK law. agreements or must the provision at 126.18 be used? DoS have confirmed that end users/consignees have a 38. Do the four key elements of the BPSS fully meet the choice. screening requirements of 126.18 (c) (2)? Yes – the EoN agreed between the US Government and HMG 31. Who determines if a end user/consignees screening on 11 August states that the BPSS meets the screening process is robust enough to meet the rule change requirements of the rule change. requirements? Will the TSP only need to be provided at the

32 World ECR www.worldecr.com World ECR The journal of export controls and compliance

Contributors in this issue WorldECR Editorial Board Jason M. Waite and Diego S. Marquez , Alston & Bird Dalton Albrecht, Miller Thomson, Toronto. www.alston.com [email protected] Christopher T. Cloutier and Jane Y. Cohen, Larry E. Christensen, Miller & Chevalier, Washington DC. King & Spalding [email protected] www.kslaw.com Iain Macvay, Bird & Bird LLP, London/Brussels. Emilia Stępień and Krzysztof Korwin-Kossakowski, [email protected] Bird & Bird LLP Susan Ning, King & Wood, Beijing/New York. www.twobirds.com [email protected] Holger Schmitz, Noerr Carolina Saldanha, Uno trade consultants, Sao Paolo. www.noerr.com [email protected] Iain Sandford, Minter Ellison, Canberra. [email protected] Edmund Sim, Appleton Luff, Singapore. [email protected] Stacey Winters, Deloitte, London. [email protected]

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