International Law Advisory - EU Publishes New Dual-Use Export Controls Regulation

Introduction

On 5 May 2009, the Council of Ministers has adopted a new Dual-Use Regulation (Council Regulation (EC) No. 428/2009),[1] which will replace, as of 27 August 2009, the current Dual-Use Regulation (Council Regulation (EC) No. 1334/2000,[2] as amended). With regard to applications for export authorizations filed before 27 August 2009, these will remain subject to the provisions of Regulation 1334/2000.  The final version of the new Dual-Use Regulation was published in the Official Journal of the EU on 29 May.[3]

By way of background, since 1994 the European Union (“EU”) has had a regime in place regarding the control of exports of “dual-use” items (including software and technology).[4] Those rules are laid down in the EU Dual-Use Regulation, which requires exporters to obtain an authorization for exports of certain listed dual-use items, which are identified in Annexes I and IV to the Regulation. Under certain circumstances, export authorizations also may be required to all or certain destinations of certain non-listed dual-use items based on certain restricted end uses (such as nuclear weapons development).  The Dual-use Regulation is directly applicable law throughout the EU and is enforced by its 27 Member States.

With the adoption of the new Dual-Use Regulation, the EU has pursued the following primary objectives:

• to align the EU regime with United Nations Security Council Resolution 1540 (28 April 2004), in particular with regard to brokering services and transit of dual-use items.

• to reduce national divergences in the application and enforcement of the Dual-Use Regulation. In that regard, to provide for greater transparency of national authorization procedures.

• to create a level playing field for EU exporters.

• to strike a balance between the increased scope of controls and proportionate trade facilitation.

• to ensure quick adjustment to new international developments.

The new regulation retains much of the substance and structure of  Regulation 1334/2000 (including, for instance, the Dual-Use List). However, in light of the above stated objectives, the new Dual-Use Regulation has reorganized and clarified some of the old provisions and has added the following new elements:

• provisions on brokering services;

• provisions on transit of dual-use items;

• provisions on increased transparency on processing times and enhance the exchange of information between Member States; and

• a reference to internal compliance programs in the context of assessments of applications for authorizations.

Brokering services

The new rules on brokering services originate from UN Security Council Resolution 1540. This Resolution stipulates that all States have to take and enforce effective measures to establish domestic controls to prevent the proliferation of nuclear, chemical or biological weapons and their means of delivery, including by establishing appropriate controls over related materials. To this end, the Resolution requires that controls on brokering services have to be established.

The new Regulation defines “brokering services” as:

• “the negotiation or arrangement of transactions for the purchase, sale or supply of dual-use items from a third country to any other third country, or 

• the selling or buying of dual-use items that are located in third countries for their transfer to another third country.” 

However, the provision of ancillary services is excluded from the definition of brokering services. Ancillary services are transportation, financial services, insurance or re-insurance or general advertising or promotion.

As a result, brokering services, by persons resident or established in the EU, are now subject to the control under the new Dual-Use Regulation and require authorizations (for items listed in its Annex I), when the broker was informed by competent national authorities that such provision might lead to production or delivery of weapons of mass destruction in a third country.

If a broker is aware that the provision of dual-use items listed in Annex I might lead to production or delivery of weapons of mass destruction in a third country, he must notify the competent authorities, which then will decide whether or not it is expedient to make such brokering services subject to authorization.

Member States may extend the application of “catch-all” provisions to brokering services for non-listed items for weapons of mass destruction use and for dual-use items for military end-use in a country subject to an arms embargo.  Furthermore, Member States are also allowed to require that brokers who have “grounds for suspecting” weapons of mass destruction use of dual-use items must obtain an authorization.

Transit

UN Security Council Resolution 1540 also requires controls on transit of items. Consequently, the new Regulation has introduced new provisions on the transit control of non-EU dual-use items, i.e. items which only pass through the territory of the EU. The new provisions cover items which are not assigned a customs-approved treatment or use other than the external transit procedure or which are merely placed in a free zone or free warehouse and where no record of them has to be kept in an approved stock record.

The new provisions provide for the possibility for Member States’ authorities to prohibit on a case-by-case basis the transit of non-EU dual-use items, where they have reasonable grounds for suspecting from intelligence or other sources that the items are or may be intended in their entirety or in part for proliferation of weapons of mass destruction or of their means of delivery.

Member States may extend the application of “catch-all” provisions to transit for non-listed items for weapons of mass destruction use and for dual-use items for military end-use in a country subject to an arms embargo. 

Transparency and exchange of information

The new Regulation requires Member States to process applications for individual or global authorizations within a period to be determined by national law or practice.  Although it is up to the Member States to set their own deadlines for decisions, the obligation to determine such periods at national level may increase transparency and allow an applicant more clarity as to when to expect a decision on an export authorization application.

The new Regulation contains enhanced provisions on the exchange of information between Member States and on the secure electronic systems to be used for this purpose. The new Regulation explicitly requires Member States to check the denials database for essentially identical transactions before granting an application.  Additionally, Member States are encouraged to exchange “data on sensitive end users, actors involved in suspicious procurement activities, and where available, routes taken.”

Compliance programs

Member States must take into account internal compliance programs when assessing applications for a global export authorization. This suggests that internal compliance programs are to be strongly recommended if this type of authorization is applied for.

Summary

The new EU Dual-Use Regulation received some criticism from EU business for the discrepancy between the initial objectives it pursued, namely to achieve a uniform and consistent application of controls throughout the EU and to provide a level playing field for EU exporters, and the results it finally produced.  However, many of the new provisions should contributed to increased transparency and coordination among agencies.  In terms of the substance of the changes, companies should review the Regulation carefully – including in particular the brokering and transit provisions, which could capture a wide range of activities that previously went unregulated.  In addition, the Regulation’s focus on compliance programs, combined with an expected increase in coordination among Member States on enforcement matters, should encourage companies to review existing compliance programs more generally and ensure that internal processes are operating effectively.

If you would like to discuss the new Regulation, please contact Michael Sanchez Rydelski (msanchez@steptoe.com; +32 2 626 0543) or Guy Soussan (gsoussan@steptoe.com; +32 2 626 0535) in Steptoe’s Brussels office, or David Lorello (dlorello@steptoe.com; +44 20 7367 8007) in Steptoe’s London office.

[1]       Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items.

[2]       OJ 2000 L 159, page 1.

[3]       OJ 2009 L 134, page 1. Link:  http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:134:0001:0269:EN:PDF  

[4]       Dual-use items are defined as items (including software and technology), which can be used for both civil and military purposes, and includes all goods which can be used for both non-explosive uses and assisting in any way in the manufacture of nuclear weapons or other nuclear explosive devices.