National Security and Export Control Regulations Affecting Israeli Companies Doing Business with the US and EU : National Security and Export Control Regulations Affecting Israeli Companies Doing Business with the US and EU January 9, 2007
David Marchick
Corinne Goldstein
Bob Stankey
Foreign Investment In The United States Opportunities and Challenges For Israeli Companies : David Marchick Foreign Investment In The United States Opportunities and Challenges For Israeli Companies
Outline of Presentation : Outline of Presentation Attitudes and Trends
Why Backlash Against Foreign Investment?
Foreign Investment in the U.S.
Implications and Strategies for Israeli Companies
Attitudes and Trends : Attitudes and Trends
Global Foreign Investment Continued to Grow in 2006 : Global Foreign Investment Continued to Grow in 2006 Global M&A grew 38% in value terms to $3.8 trillion in 2006
Foreign acquisitions of U.S. companies grew 63% to $207 billion
Still well below record of $324 billion in 2000
Private equity funds accounted for 19% of total cross-border M&A in 2005
Outward FDI from developing countries grew 3x between 2003-5 to $133 billion
Source: Thompson Financial; UNCTAD
But FDI Now Faces a Growing Backlash : But FDI Now Faces a Growing Backlash U.S. received the greatest attention due to Dubai Ports and CNOOC, but other countries have acted as well
Europe – creation of national energy champions
France/Russia/China – new regulations requiring reviews/protecting sectors
Latin America – nationalization/retrenchment
Korea/Germany – opposition to private equity
UNCTAD – reports that 2005 saw the highest number of “unfavorable” policy changes re: FDI ever recorded
U.S. Attitudes toward FDI : U.S. Attitudes toward FDI 53% of Americans currently believe foreign ownership of U.S. companies is “bad for America”
58% of Americans support Congress blocking Dubai Ports World’s acquisition of 6 port terminal operations in U.S.
41% of Americans followed DPW controversy “closely”
43% of Americans follow the Iraq war “closely” Source: Pew Research Center for the People and the Press, March 2006
Slide8 : Americans Believe It Is Too Easy for Foreign Companies to Buy U.S. Companies Source: Brunswick Group Opinion Leader Survey June/July 2006
American Public Opinion Varies Between Countries : American Public Opinion Varies Between Countries Source: Brunswick Group Opinion Leader Survey June/July 2006
European Attitudes Toward FDI : European Attitudes Toward FDI Is it too easy for foreign companies to take over businesses in your country?
UK 70% yes; 12% no
France 50% yes; 22% no
Italy 50% yes; 18% no
Spain 50% yes; 22% no
Germany 55% yes; 20% no Source: Harris/Financial Times Poll, June 2006
Why the Backlash? : Why the Backlash? Growing investments from new players (China, Arab countries) with high levels of government ownership
Greater tension over energy
Unease with globalization
Investments flowing to more sensitive sectors (energy, telecom, infrastructure)
Growing Investment from New Players : Growing Investment from New Players US current account deficit + growing energy dependence + petrodollars + Chinese surplus = a new investment equation
FDI from developing and transition economies has tripled in three years and now accounts for 17% of total global FDI
Outward FDI from China grew 600% in 2005 to $11 billion
Outward FDI from West Asia (UAE) doubled in 2005 to $16 billion
High incidence of state-ownership from new players
Of top 100 global MNCs, only 5 are majority state-owned
Yet almost 25% of top 100 developing nation MNCs and 5 of top 10 non-financial developing nation MNCs are majority state-owned
High level of investments from state-owned MNCs in sensitive sectors (energy, telecommunications, infrastructure)
Heightened Concern Over Energy : Heightened Concern Over Energy Energy prices reached record levels in nominal terms in 2006
Chinese acquisitions viewed as attempts to “lock-up” energy supplies
Russian actions re: Ukraine and Georgia created uncertainties over reliability of supply
France, Spain efforts to create national energy champions at expense of intra-EU investment
Shift in power from consuming to producing nations
Globalization : Globalization Growing discomfort with globalization is creating more protectionist pressures
Doha Round negotiations collapsed
Democratic Congress unlikely to renew President Bush’s Trade Negotiating Authority
Growing pressure in U.S. to take tough line with China (currency, textiles, IP)
Aggravated Income Inequality in U.S. Threatens Support for Trade & Investment : Aggravated Income Inequality in U.S. Threatens Support for Trade & Investment Group Employment Share Earnings Growth
HSDO 9.9% - 4.6%
HSG 29.8% - 0.2%
SC 27.9% - 2.5%
CG 21.1% - 3.1%
Masters 7.9% - 1.8%
Ph.D. 1.5% + 2.9%
MBA,JD,MD 1.9% +10.6% * Growth in mean real total money earnings, by educational group (2000 -2005). Source: U.S. Census
Public support for free trade increases with education levels
US Public Opinion Re: M&A by an Arab Company in Specific Sectors : US Public Opinion Re: M&A by an Arab Company in Specific Sectors Defense Aerospace Transport Fin Services Pharma Healthcare Hotels/resorts Retail Airports 91% 7% 70% 28% 65% 34% 72% 27% 79% 21% 85% 14% 50% 50% 77% 19% 42% 57% Very/somewhat Not very/not at all Source: Brunswick Group Opinion Leader Survey June/July 2006 (How concerned would you
be about an Arab company owning an American company in that sector?) -100% -80% -60% -40% -20% 0% 20% 40% 60% Somewhat concerned Very concerned Not very concerned Not at all concerned
Background on Exon-Florio : Background on Exon-Florio
History of Foreign Investment/National Security Linkages : History of Foreign Investment/National Security Linkages 1910s – 1920s – concerns about German and British investment led to Trading with the Enemy Act and sector specific bars of foreign investment (aviation, shipping, broadcasting)
1970s – investments from OPEC countries led to creation of Committee on Foreign Investment in the United States, an interagency Executive Branch committee
1980s – concerns about investment from Japan led to passage of Exon-Florio Amendment
Today – concerns about investments from China, Middle East and investments in “critical infrastructure” exist
Government-owned companies are perceived negatively in Congress and in parts of Executive Branch
“Exon-Florio” Basics : “Exon-Florio” Basics Authorizes President to block mergers, acquisitions and takeovers that threaten U.S. “national security”
Congress rejected broader formulation that included threats to “essential commerce” and “economic welfare”
Law does not define “national security”
No statute of limitations for Exon-Florio reviews
Exon-Florio’s Two-Part Test : Exon-Florio’s Two-Part Test Test 1: Is there credible evidence that the foreign interest exercising control might take action that threatens national security?
Test 2: If yes, do laws other than Exon-Florio and the International Emergency Economic Powers Act provide adequate and appropriate authority for the President to protect national security?
Recent Notable Acquisitions Reviewed by CFIUS : Recent Notable Acquisitions Reviewed by CFIUS Global Crossing by ST Telemedia and Hutchison Wampoa (Fall 2003)
IBM’s PC division by Lenovo (Winter 2004/Spring 2005)
Tyco Global Network by VSNL(Summer 2005)
P&O Navigation by Dubai Ports World (Winter 2005 – 6)
Westinghouse by Toshiba (Spring 2006)
Doncasters by Dubai Holdings (Spring 2006)
Check Point acquisition of NFR and proposed acquisition of Sourcefire (2006)
Audiocodes acquisitions of Nuera and Netrake (2006)
CFIUS Process : CFIUS Process Committee on Foreign Investment in the United States (CFIUS) conducts initial 30-day review of transaction
If consensus exists that no credible threat to national security exists, or threat has been mitigated, CFIUS decides – within 30 days – not to open an investigation
If threats exist, or agencies are divided, CFIUS conducts an investigation for an additional 45 days, followed by Presidential decision within 15 days
Presidential decision not subject to judicial review
Exon-Florio in Practice : Exon-Florio in Practice Filing is voluntary; most transactions never submit notice under E-F
Most transactions reviewed under E-F are approved within 30 days
Only 32 of approximately +/- 1700 E-F reviews since 1988 required investigation
Most transactions requiring an investigation are resolved among the agencies before the President is required to act
Only 14 of 32 investigations went to Presidential decision
Post-11 Sept: Heightened Scrutiny : Post-11 Sept: Heightened Scrutiny Pre-11 Sept 2001, pro-investment policy was much stronger than security concerns
Post-11 Sept, national security concerns given greater weight
President added new Department of Homeland Security to CFIUS, increasing voice of security agencies
Statutory context suggests “national security” focus originally was on defense industrial base and technology transfer
However, post-11 Sept, agencies interpret “national security” more broadly and connect it with protection of all “critical infrastructure”
Slide25 : Agriculture/Food
Water
Public Health
Emergency Services
Defense
Telecom Energy
Transportation
Banking and Finance
Chemicals
Postal/Shipping
IT Source: National Strategy for the Physical Protection of Critical Infrastructure and
Key Assets, March 2003; HSPD-7
Broad Portion of U.S. Economy Now Deemed “Critical Infrastructure”
Post-DPW: Heightened Caution : Post-DPW: Heightened Caution Negative stigma associated with “investigations” eliminated
Already 7 investigations in 2006
Economic agencies reluctant to challenge security agencies
Transactions reviewed at much higher level within agencies
Tightened reading of Byrd amendment for state-owned companies
More restrictive conditions imposed
Broader consultation with and reporting to Congress
More focus on enforcement/monitoring
Post-DPW: Heightened Caution : Post-DPW: Heightened Caution
Post-DPW: Heightened Caution : Post-DPW: Heightened Caution
CFIUS Security Analysis : CFIUS Security Analysis Step 1: Assessment of Risk
Threat (focus on acquirer)
Vulnerability (focus on asset)
Consequence Step 2: Determine mitigation
strategy
Is mitigation of threat possible?
Are mitigation measures
enforceable?
If yes, proceed to Step 3
If no, President blocks transaction or parties withdraw
Step 3: Negotiate security conditions
Sensitivity of Target : Sensitivity of Target Political Sensitivity National Security Sensitivity Retail Real Estate Entertainment Telecom IT Security Aerospace IT (non-security related) Defense contracting Energy (Oil, Gas, Services, Electric) Transportation (ports/airports) Transportation (roads, rail) Banking Insurance Agriculture Chemicals Low High Low High Systems integration Healthcare Pharma
Options for Security Agreements : Options for Security Agreements Special Security Agreements or Proxy Agreements for classified contracts
SSAs require creation of separate U.S. subsidiary with majority of independent board members
Network Security Agreements
Provisions include screening of personnel; access to books, records and facilities; extensive reporting to U.S. government; audits; and security committees.
Assurance letters
Provisions typically include cooperation with USG on security matters; appointment of security committee and security officer; regular communication with USG
Congressional Outlook : Congressional Outlook Separate bills passed House and Senate in 2006 but were never reconciled
Senate bill more restrictive but both bills require mandatory second-stage reviews for state-owned companies
Senator Dodd, Chairman of Banking Committee, has indicated intent to pass CFIUS reform bill in 2007
Executive Order? : Executive Order? If legislation does not pass, Bush Administration will likely make changes to CFIUS through an EO
Possible elements of EO:
More scrutiny/time for state-owned companies
More Congressional notification and reporting
Enhanced authority to enforce security agreements
Higher level review
Requirement for advance consultations
Implications and Strategies : Implications and Strategies
Advantages for Israeli Companies : Advantages for Israeli Companies Executive Branch sees Israel as a strategic ally
Extraordinary public and Congressional support for Israel as a trusted ally
Israel is a significant investor in the U.S. and a major participant on the NASDAQ
Challenges for Israeli Companies : Challenges for Israeli Companies Negative views about Israel in certain parts of USG on three issues
Perception of closeness between Israeli government and leading high-tech and defense companies
Concerns about Israeli government intelligence activities in the United States
Fallout from sales of sensitive products to China
Israeli companies tend to invest in sensitive sectors
Strategies for Success : Strategies for Success Choose acquisitions carefully; evaluate CFIUS and political risk
For Israeli companies with existing security agreements, strict compliance is absolutely essential
Communication about compliance efforts with USG equally important
Compliance problems may prove fatal for future acquisitions
Advance consultation with CFIUS agencies is a must
Communication with Congress now a core part of CFIUS process
Educate CFIUS, Congress on company before pursuing sensitive acquisition
Identify ways to cooperate with U.S. government
U.S. Foreign Trade Controls: : U.S. Foreign Trade Controls:
Corinne A. Goldstein
Who We Are : Who We Are Covington & Burling LLP: a law firm with a national and international practice
Offices in Washington, D.C.; New York; San Francisco; Brussels; and London
Overview of key U.S. foreign trade control programs : Overview of key U.S. foreign trade control programs
- Commerce Department
- State Department
- Treasury Department
Questions and Answers
Commerce Department: Bureau of Industry and Security (BIS) : Commerce Department: Bureau of Industry and Security (BIS)
Broad authority in Export Administration Regulations (“EAR”) to regulate nearly all U.S. exports other than defense or nuclear items
Products, software, and technology
Often called “dual use” because they have both commercial and military applications
Also regulates certain trade-related activities involving sensitive end-users or end-uses
15 CFR
Commerce Department: Bureau of Industry and Security (BIS) : Commerce Department: Bureau of Industry and Security (BIS) EAR have an extra-territorial application in some cases:
Authority to regulate “reexports” from one foreign country to another of U.S.-origin goods
Controls export of foreign-made goods with certain amount of U.S.-origin content or (in limited cases) goods that are the “direct product” of U.S. technology
Commerce – What Is An Export? : Commerce – What Is An Export? A physical shipment or transfer out of the United States of goods, software, or technology
Cross-border electronic transmissions of software or technology, such as by e-mail or downloading from a remote computer server
NOTE: An “export” is not always a sale. Exports include samples, intra-company transfers, and donations.
Commerce – What Is An Export? : Commerce – What Is An Export? Exports also include:
Visual inspection of technology by foreign person inside or outside the U.S.
Written or oral disclosure: i.e., sending an email containing controlled technology or discussing controlled technology at a conference or meeting
A disclosure of controlled technology in the United States to a foreign national is called a “deemed export.”
Foreign citizen employees on H1B visas or other temporary visa are still foreign nationals for this purpose
Commerce – Classifying Products and Technology : Commerce – Classifying Products and Technology
Whether an export license is required depends on
the product or technology and
its intended destination and end use.
Commerce – Classifying Products and Technology : Commerce – Classifying Products and Technology
The EAR contain the Commerce Control List (“CCL”).
The CCL includes certain items considered sensitive for reasons such as national security, weapons proliferation risk, or potential use in chemical weapons or chemical-biological attacks.
Items on the CCL require licenses before they can be exported to certain countries.
Commerce – Classifying Products and Technology; Encryption : Commerce – Classifying Products and Technology; Encryption ECCN 5A002
Systems, equipment, application specific “electronic assemblies”, modules and integrated circuits for “information security.”
ECCN 5D002
Software (1) for development, production or use of 5A002 equipment or (2) performing the functions or having the characteristics of 5A002 equipment.
ECCN 5E002
Technology for the development, production or use of 5A002 hardware or 5D002 software.
Commerce – Classifying Products and Technology; Encryption : Commerce – Classifying Products and Technology; Encryption 5A002 [Hardware] / 5D002 [Software] / 5E002 [Technical info]
Designed or modified to use “cryptography” employing digital techniques performing any cryptographic function other than authentication or digital signature having any of the following:
A “symmetric algorithm” employing a key length in excess of 56-bits; or
An “asymmetric algorithm” in excess of 512 bits (RSA, Diffie-Hellman) or 112 bits (elliptic curve) ”
(“Mass market” products may be essentially re-classified 5A992 under a review procedure)
Commerce – Classifying Products and Technology; Encryption : Commerce – Classifying Products and Technology; Encryption 5A002 [Hardware] / 5D002 [Software] / 5E002 [Technical info]
Default export controls 5A002/5D002/5E002 may not be exported to any destination other than Canada without either
(1) qualifying for License Exception ENC (Encryption Commodities) by submitting a technical report to the Commerce Department and to the National Security Agency (NSA) OR
(2) securing a specific license.
Commerce – Classifying Products and Technology; Encryption : Commerce – Classifying Products and Technology; Encryption 5A992 [Hardware] / 5D992 [Software] / 5E992 [Technical info]
Encryption that is not controlled by 5A002, 5D002 or 5E002, respectively
Default export controls 5A992/5D992/5E992 may be exported “no license required” (NLR) to all destinations and users other than Cuba, Sudan, Syria, North Korea, and Iran.
Commerce – Classifying Products and Technology; Encryption - Self-Classification : Commerce – Classifying Products and Technology; Encryption - Self-Classification 5A002/5D002 encryption does not include the following, which can be self-classified 5A992 or 5D992:
Non-cryptographic compression or coding
56-bit encryption or less (512-bit for asymmetric)
Encryption limited to digital signature or “authentication,” which includes all aspects of access control where there is no encryption of files or text except as directly related to the protection of passwords, Personal Identification Numbers (PINs) or similar data to prevent unauthorized access
Commerce – Classifying Products and Technology; Encryption - Self-Classification : Commerce – Classifying Products and Technology; Encryption - Self-Classification 5A002/5D002 encryption does not include specific limited-purpose applications, which can be self-classified as 5A992 or 5D992:
“Personalized smart cards”
Cable top boxes and similar devices
Access controls for defined copy-protected software or protection of IP rights
Specially designed and limited for banking use or money transactions
Portable or mobile radiotelephones for civil use not capable of end-to-end encryption
Cordless telephone equipment not capable of end-to-end encryption where the maximum effective range of unboosted cordless operation is less than 400 meters
Commerce – Classifying Products and Technology; Encryption : Commerce – Classifying Products and Technology; Encryption All other encryption hardware and software must be submitted to the Commerce Department for a technical review and classification to become qualified for export to any destination other than Canada
A technical report/classification request is submitted once for each product, typically by the vendor, and thereafter anyone (customers, users) may rely on the resulting classification decision as the basis for export/reexport of that product
The technical report is reviewed by NSA, and Commerce issues the classification ruling
Mass market products are eligible for classification as 5A992 or 5D992 and export NLR (but only after Commerce technical review)
Commerce – Classifying Products and Technology : Commerce – Classifying Products and Technology Commercial items not specifically listed on the CCL are classified “EAR99.”
“EAR99” items do not require licensing for export unless an EAR prohibition applies (e.g., embargoed countries such as Iran, Cuba, Sudan, and Syria).
Commerce – Consequences of Violations : Commerce – Consequences of Violations Maximum penalties per violation of EAR:
Criminal fines: $500,000 (corporations); $250,000 (individuals)
Jail time: 20 years
Civil fines: $50,000
Multiple violations often charged – even for single export
State Department – Directorate of Defense Trade Controls (DDTC) : State Department – Directorate of Defense Trade Controls (DDTC)
Controls export and reexport of defense articles (including technical data) and defense services and temporary import of defense articles Registration requirement for exporters, manufacturers, and brokers of defense articles/services
Regulatory scheme is the International Traffic in Arms Regulations (“ITAR”)
State – “Export” Definition : State – “Export” Definition Sending or taking a defense article out of the U.S. in any manner (other than personal knowledge via travel).
Disclosing or transferring technical data to a foreign person, whether in the United States or abroad.
A “foreign person” includes individuals who are not U.S. citizens or U.S. permanent residents, including individuals working in the U.S. pursuant to a visa.
Technology is “deemed” to have been exported to the country of which the foreign person is a national – even if the person does not share the technology with anyone in his or her home country.
State – “Export” Definition : State – “Export” Definition Performing a defense service on behalf of, or for the benefit of, a foreign person, whether in the United States or abroad
Transferring registration, control, or ownership to a foreign person of ITAR-controlled aircraft, vessels, or satellites
Note: A “reexport” or “retransfer” is a transfer of defense articles or defense services to an end use, end user, or destination not previously authorized. Retransfers are treated like – and regulated like – exports.
State – U.S. Munitions List (“USML") : State – U.S. Munitions List (“USML") Universe of ITAR-controlled articles and services is the U.S. Munitions List (“USML”). It includes:
Defense articles (hardware)
Technical data and defense services directly related to covered hardware
Specifically designed or modified components, parts, accessories, attachments or associated equipment
In some cases, tooling to manufacture a controlled item
State – U.S. Munitions List (USML) : State – U.S. Munitions List (USML) Very minor variations to commercial items for military purposes can lead to product being controlled by the ITAR.
Intended civilian use of the article is not determinative; conversely, intended use by military may not trigger ITAR controls for a predominantly commercial item (e.g., soap).
Consequences of ITAR Controls – Licensing : Consequences of ITAR Controls – Licensing Nearly all exports and reexports of defense articles (including data) or services require a license.
Much more restrictive than Commerce (EAR)
State – Consequences of Export Violations : State – Consequences of Export Violations Maximum penalties per violation of the ITAR or enacting statute (Arms Export Control Act):
Criminal fine: $1 million
Jail time: 10 years
Civil fine: $500,000
Debarment: No further conduct of defense trade; can have significant financial consequences and can impair ability to contract with U.S. government
Treasury Department: Office of Foreign Assets Control (“OFAC”) : Treasury Department: Office of Foreign Assets Control (“OFAC”) Cuba (1963) Sudan (1997) OFAC administers and enforces the following comprehensive embargoes, in addition to limited embargoes against other countries:
Iran (1995)
Sanctions – List-Based Sanctions : Sanctions – List-Based Sanctions Following 9/11, increased focus on “list-based” sanctions: i.e., new Specially Designated Global Terrorists list created
Key list is OFAC Specially Designated Nationals (“SDN”) List
Includes terrorists, drug traffickers, “blocked” persons and vessels (because Hamas is on the SDN list, dealings with the Palestinian Authority are restricted}
Listed parties located in various countries;
Treasury Department: OFAC : Treasury Department: OFAC
Sanctions – Key Elements of an Embargo : Sanctions – Key Elements of an Embargo No U.S. export/import trade with target country or SDN
With limited exceptions, no third-country export trade that involves:
Any U.S. person (broader for Cuba)
U.S.-origin products or technologies and foreign items with more than de minimis U.S. content
No investment in target country or SDN
No dealings in property of target country or SDN
Sanctions – Key Elements of an Embargo : Sanctions – Key Elements of an Embargo U.S. person cannot “facilitate” non-U.S. trade with target country
“Facilitation” includes:
Approving a transaction or participating in contract negotiation/performance
Furnishing any kind of transactional support
Allowing a U.S.-based computer server to provide substantive support to the transaction
Importance of Compliance: Penalties for Violations : Importance of Compliance: Penalties for Violations Criminal fines: Maximum $500,000 per violation for corporations, $250,000 per violation for individuals
Jail time: Maximum sentence of 20 years
Civil fines: Maximum $50,000 per violation
Higher fines for trade with Cuba or drug traffickers (e.g., criminal fines of $1 million for Cuba violations, $10 million for trade with drug kingpins)
Covington & Burling LLP www.cov.com : Covington & Burling LLP www.cov.com Brussels
London
New York
San Francisco
Washington Corinne Goldstein
cgoldstein@cov.com
202-662-5534
EU Export Controls : EU Export Controls
Bob Stankey
Outline : Outline Principal Areas of Regulation:
Member State Regulation of Military Items
EU Regulation of Dual-Use Items
Trade Embargoes applicable in the EU
Overview of Selected National Regimes
Proposed Changes in Dual-Use Controls
Regulation of Military Exports : Regulation of Military Exports No common EU regulation of the export of Military Items.
Military Items are regulated on a country-by-country basis.
Controls generally follow the Wassenaar Arrangement Munitions List.
Need to obtain licence from national authority for all destinations.
Export of Dual-Use Items : Export of Dual-Use Items Dual-Use Items have both commercial and military applications and include software and technology.
The export of Dual-Use Items is regulated at the EU level by Council Regulation 1334/2000.
List of controlled Dual-Use Items is based on the Wassenaar Arrangement List of Dual-Use Goods.
This Regulation is legally binding on all Member States.
Controls on Dual-Use Items : Controls on Dual-Use Items Items listed in Annex I of the Regulation require authorisation for export outside the EC.
Items listed in Annex IV of the Regulation are sensitive items for which intra-EU controls exist.
Member States are responsible for issuing licences and enforcement.
Meaning of “export” under Regulation : Meaning of “export” under Regulation Physical shipment or transfer of tangible goods.
Re-export of goods
Transmission of software and technology by electronic media, fax or telephone (e.g., the download of software from an EU website).
Annex I: Cryptographic Items : Annex I: Cryptographic Items Information security software meeting a set technical definition and any software connected with other items in Annex I are controlled, provided they are not generally available to the public.
Controls exports of software using a symmetric key length over 56 bits or listed asymmetric keys (e.g., RSA).
Annex I: Cryptographic Items : Annex I: Cryptographic Items No controls over export of software used solely for authentication or digital signatures.
No controls over export of mass-market, user-installed software designed for home, office and business use where cryptographic functionality cannot easily be changed by the user.
Specific exemptions for personalised smart cards, banking payment technology and certain civilian telephone technology.
WMD Catch-All Provision (Article 4 of the Regulation) : WMD Catch-All Provision (Article 4 of the Regulation) Authorisation will be required for exports of Dual-Use Items not listed in Annex I if the exporter “is informed” or is “aware” that:
the items may be intended for use in chemical, biological or nuclear weapons or other nuclear explosive devices or missiles capable of delivering such weapons;
the purchasing country is under an arms embargo and the items may be intended for military use;
the items are or may be intended for use in illegally exported military items that are included in national military lists.
Dual-Use Items: Licensing : Dual-Use Items: Licensing Regulation creates an EU-wide licence permitting export of most Dual-Use Items to a “white-list” of countries. These include: EU, Australia, Canada, Japan, New Zealand, Norway, Switzerland and US.
All other exports require authorisation from national regulators. Authorisations may be individual, global or general.
Exporters should keep detailed records of export transactions.
Penalties : Penalties Member States lay down penalties (both civil and criminal) for infringements of the Regulation.
Penalties are designed to be “effective, proportionate and dissuasive.”
Example: In the UK, up to 10 years (previously 7) imprisonment for serious offences.
EU Trade Sanctions : EU Trade Sanctions In addition to complying with national and EU regulations, exporters should be aware of international sanctions or embargoes that might affect their operations.
In most cases the requirements of international treaties will be incorporated into the general export control regimes of the individual countries and do not impose additional controls.
Principal sources of additional controls are the sanctions regimes of the UN, the OSCE and the EU.
Principal features of EU sanctions : Principal features of EU sanctions Outright prohibitions on exports of arms and related material
Prohibitions on the supply of technical assistance related to military activities
Example: Common Position and Regulation against Lebanon adopted in September 2006.
As a consequence of this embargo a number of general licences have been amended to remove Lebanon as an eligible destination.
Trade Embargoes : Trade Embargoes Burma (EU) – equipment used for internal repression
China (EU) – equipment used for internal repression
Congo (EU) – arms & related equipment
Cote d’Ivoire (EU) – equipment used for internal repression
Iran (UK) – arms & related equipment (note UN policy)
Lebanon (EU & UN) – arms & technical assistance
Liberia (UN) – arms & technical assistance
North Korea (UN) – equipment/technology used for WMD
Sierra Leone (EU) – arms & related equipment
Somalia (UN) – arms & technical assistance
Sudan (EU) – technical assistance for military activities
Uzbekistan (EU) – equipment used for internal repression
Zimbabwe (EU) – equipment used for internal repression
UK Export Regime Overview : UK Export Regime Overview Export Control Act 2002: implemented May 2004
Secondary Legislation:
Export of Goods, Transfer of Technology and Provision of Technical Assistance Control Order 2003.
Trade in Goods Control Order 2003.
Trade in Controlled Goods (Embargoed Destinations) Order 2004.
Dual-Use Items governed by Council Regulation 1334/2000 as amended.
Export Control Organisation (ECO) of UK Dept of Trade & Industry processes applications for licences.
Export of Goods, Transfer of Technology and Provision of Technical Assistance (Control Order) 2003 : Export of Goods, Transfer of Technology and Provision of Technical Assistance (Control Order) 2003 Brings together controls on:
the export of military and dual-use goods, software and technology;
goods, software and technology in relation to WMD; and
the provision of WMD-related technical assistance.
Applies to UK persons and, in respect of certain provisions, to UK persons anywhere in the world.
UK Export Licences : UK Export Licences Export Licence:
Covers the export of controlled goods and technology from the UK.
For transhipments (through the UK), either no licence required, or a general or specific transhipment licence required.
Trade Control Licence:
Covers the trading of controlled goods from one non-UK country to another.
Used by UK companies sourcing components from, for example, the US and moving them to another non-UK country.
UK Controls on Encryption Products (I) : UK Controls on Encryption Products (I) Consumer Cryptographic Items –
Licence not required if certain criteria are met:
Mass-market retail product,
Cryptographic functionality cannot easily be changed by the user,
Installation by the user without further substantial support, and
Information is available from vendor, upon request, to check compliance.
UK Controls on Encryption Products (II) : UK Controls on Encryption Products (II) Cryptographic Development Software –
Licence required but generally available for exports to most countries provided:
Development software does not perform cryptanalytic functions
(Open General Export Licence (Cryptography Development),
1 May 2004)
Export of Goods, Transfer of Technology and Provision of Technical Assistance (Control Order) 2003 : Export of Goods, Transfer of Technology and Provision of Technical Assistance (Control Order) 2003
“Technology” is a defined term.
Provision for “minimum technology necessary…”
Technology “in the public domain” does not require a licence.
Record-keeping obligations of UK regime.
Trade in Goods Control Order 2003 : Trade in Goods Control Order 2003 Controls trade between one overseas country and another of military and paramilitary goods (includes long range missiles and torture equipment).
Does not apply to software or technology or to activities connected to trade in controlled goods that are situated in the UK.
Prohibits any person within the UK or a UK person abroad supplying or delivering restricted goods without licence.
Trade in Controlled Goods (Embargoed Destinations Order) 2004 : Trade in Controlled Goods (Embargoed Destinations Order) 2004 Introduced extra territorial controls on trade (trafficking and brokering) in military goods from a country outside UK to destinations subject to EU, OSCE or UK national embargo.
Does not apply to software or technology or trade in controlled goods situated in UK.
Applies to transactions arranged from UK and also to transactions arranged by UK persons abroad.
Export Controls Overview - France : Export Controls Overview - France Exports of military equipment prohibited without government authorisation (Art. 13 of Legislative Decree of 18 April 1939).
Exports of Dual-Use items controlled by Decree 2001-1192 of 13 December 2001 (implements Council Regulation 1334/2000).
Exports of encryption products for ensuing confidentiality require authorisation regardless of length of encryption key.
Export Controls Overview - Germany : Export Controls Overview - Germany Exports of weapons and munitions controlled by War Weapons Control Act.
Exports of Dual-Use items and technologies and military related technology controlled by Foreign Trade and Payments Act of 28 April 1961 (implements Council Regulation 1334/2000).
The export of cryptographic hardware and software from Germany which is free from cryptanalytical functions is covered by a national general export authorisation, except for exports to certain embargoed countries.
Proposed Changes in Dual-Use Controls : Proposed Changes in Dual-Use Controls On December 18, 2006, the European Commission published a proposal to amend Council Regulation 1334/2000:
System of prior notifications for shipments within the EU (replacing prior authorisations).
Extension of controls to cover transit, transhipment, brokering and re-exports.
Clarification that transfers via the Internet are covered.
Seeking recognition that EU controls satisfy requirements of other countries regarding re-export within the EU & elsewhere.
Other measures (e.g., publishing implementation guidelines / best practices) also being discussed.
Questions? : Questions?
Thank you
Bob Stankey
BStankey@cov.com