Malcolm Budd BSc (Law) MCIPS

Senior Export Control Manager (Corporate)

Rolls-Royce plc

16th August 2011

Why have Export Controls?

Structure and Incorporation

Penalties for Non-Compliance

Military & Dual-Use Control Lists

Overview of UK Export Control Regulations

Overview of US Export Control Regulations

Other Significant Regimes

How Export Controls Impact Purchasing

Question & Answer Session

Summary

Christopher Tappin, 64, of Orpington, Kent

Accused of conspiring to sell parts for

Iranian missiles, and is fighting extradition

to the USA

Mr Tappin said he believed he was

exporting batteries for the car industry in

the Netherlands.

If convicted, he faces 35 years in prison.

The Iraqi Supergun and Matrix-Churchill

Arms-to-Iraq affair concerned the uncovering of

the government-endorsed sale of arms by British

companies to Iraq..

Four directors of the British machine tools

manufacturer Matrix Churchill were put on trial for

supplying equipment and knowledge to Iraq.

In 1992 the trial collapsed, as it was revealed that

the company had been advised by the government

on how to sell arms to Iraq. Several of the directors

were eventually paid compensation

As one of the other directors claimed to have been working for the British intelligence services, the

Ministry of Defence advised Matrix Churchill on how to apply for export licences of materials that

could be used to make munitions in such a way that would not attract attention.

Tools used by NATO and ‘friendly’ countries to ensure trade is conducted securely ◦ i.e. to prevent certain equipment and technology ending up in the wrong hands

and contributing to acts of aggression, cruelty or proliferation of WMD

The means by which governments control the movement of strategic goods and technology between countries and people which affect the security interests of national or international objectives of the country

All products and technologies are subject to: ◦ National export controls of the countries in which you operate; AND

◦ ‘Extra-territorial’ Export Controls of the USA.

Controls apply to: ◦ Conventional Arms & Weapons; and

◦ Vehicles & components that carry them; and

◦ Other equipment that could have Military use; and

◦ Otherwise ‘civil’ items in relation to specified End Users; and

◦ The flow of money

Rolls-Royce data-strictly private

It is the Law !

Penalties for non-compliance are extremely serious:

◦ Loss of licences or ability to use Open Licences

◦ Hardware seized

◦ Unfavourable press & damage to reputation;

◦ US Denied Parties list – company, company director and individual

◦ Financial – fines

Loss of trade

impact on profit margins;

◦ Personal imprisonment.

Rolls-Royce data-strictly private

• WHAT is being exported?

• WHERE it is being exported between?

• WHO it is being exported between?

• WHY it is being exported?

• HOW it is being exported?

• WHEN and FOR WHAT it is being exported?

• HOW MUCH/MANY is being exported?

International Agreements govern lists of Military & Dual Use items subject to Control: e.g. ◦ Wassanaar Arrangement

◦ Australia Group (Chemical Weapons)

◦ Nuclear Weapons Group

◦ Missile Technology Control Regime

◦ Chemical Weapons Convention

EU and National Governments incorporate these into law ◦ Military Lists

◦ Dual Use Control Lists

◦ End Use Controls

National variations in application of Regulations

National variations in perception of different destination countries

Company policy may enforce additional restrictions

Governments produce lists

◦ Lists of controlled goods and technology

◦ Lists of countries

◦ Lists of companies and individuals

◦ Lists of controlled purposes

◦ Lists of export processes

Exports that meet certain combinations of these lists must be authorised by the regulatory bodies prior to the export taking place

Exports that require approval are illegal if there is no approval or if they do not comply with the approval.

• Goods and technology designed or modified by fit, form or function for military applications

• ML6 – Ground vehicles

• ML7 – Chemical or biological toxic agents

• ML9 – Vessels of War

• ML10 – “Aircraft” & Aero-Engines

• ML11 – Electronic Equipment

• ML16 – Forgings, castings and other unfinished “goods”...

• ML18 – Production equipment and components

• ML20 – Cryogenic and “superconductive” equipment

• ML21 – Software

• ML22 – “Technology” ...which is required for the development,

production or use of goods or software elsewhere in ML

Items designed originally for commercial use but which could have a military application (but not modified for military use) and as defined by specific performance criteria in the Control Lists

Does not mean ‘goods that are used in both Civil and Military’

PLUS

Any item or technology which you believe or know may be used for or associated with Weapons of Mass Destruction (WMD – chemical, biological or nuclear) purposes

Category

0 –Nuclear Materials,

Facilities &

Equipment

1 –Special Materials and

Related Equipment

2 –Materials Processing

3 –Electronics

4 –Computers

5 –Telecommunications

& Information

Security

6 –Sensors & Lasers

7 –Navigation &

Avionics

8 –Marine

9 –Aerospace &

Propulsion

Sub-Category

A – Systems, Equipment & Components

B – Test, Inspection & Production Equipment

C – Materials

D – Software

E – Technology

Regime Origin

0 –Wassenaar Arrangement

1– Missile Technology Control Regime

2– Nuclear Suppliers Group

3– Australia Group

4– Chemical Weapons Convention

6A203a

Mechanical rotating mirror cameras, as follows, and specially

designed components therefor: 1. Framing cameras with

recording rates greater than 225000 frames per second. 2.

Streak cameras with writing speeds greater than 0.5 mm …..

Item’s individual entry code

‘DUAL-USE’ ITEMS – CONTROL ENTRY EXAMPLE

Exports meeting criteria on Control Lists require authorisation through an Export Licence by the regulatory body prior to the export taking place

Controlled exports are illegal if there is no Export Licence or if they do not comply with the terms of the Export Licence

Specific information necessary for the development, production or use of goods or software. This information takes the form of:

◦ ‘Technical Data’

◦ ‘Technical Assistance’

So an RFQ with a Technical Specification for a component, (or a casting/forging for a component), is likely to contain technology and would therefore need to be rated and highlighted as such if ‘controlled’

US laws also control bill-of-material information

Examples of Technical Data

Blueprints

Specifications

Test data

Operation / use manuals

Plant tours

Performance data

Overhaul manuals

Instructions

CAD files

Software

Maintenance manuals

Photographs

Service bulletins

Source code

CDs – Data Disks

Export Control Organisation (ECO) in the Department for Business, Innovation and Skills (BIS)

Advised by: ◦ Foreign and Commonwealth Office

◦ Ministry of Defence

Further information is available on the ECO pages of ‘BusinessLink’

Due Diligence

It is the responsibility of the exporting party to ensure that all export regulations are followed. This includes:

Controlled items are exported legally against a valid license, agreement, exemption or exception.

The exporting party has performed reasonable care to ensure that the customer is legally entitled to receive the exported goods.

SIEL = Standard Individual Export Licence ◦ Nominated Recipient in One Nominated Country

◦ Capped by Value & Volume

◦ Valid for 2 years maximum

◦ Requires EUU revalidated annually

OIEL = Open Individual Export Licence ◦ Multiple Recipients in Multiple Countries

◦ No cap on Value or Volume

◦ Valid for 5 years maximum

◦ Requires EUU revalidated annually

OGEL = Open General Export Licence ◦ Around 40 in circulation

◦ Used for Military Goods & Technology

◦ Each OGEL lists countries valid for export

◦ ‘Open’ – need to register not apply each time

◦ Subject to detailed annual audit by BIS ECO

◦ Mandatory Record Keeping Requirements

◦ Requires current EUU revalidated annually

◦ OGEL: Technology for Military Goods

◦ OGEL: Dual Use Goods

◦ Customs Free/Special Economic Zones

Exports of Dual Use Goods & Technology not licensable within EU

Community General Export Authorisation EU001 ◦ Australia : Canada : Japan : New Zealand : Norway

Switzerland : USA

‘Brokering’

‘End Use’ Trade Controls

Iran and other countries

Licences may be amended, suspended or revoked by the UK Secretary of State or EU Commission at any time

Governments require EUU to support all Licence applications ◦ Renewable annually

◦ Mandatory Record-keeping

◦ Export Rating on all exports of Goods and Technology

◦ Goods: Logistics/Shipping responsibility?

◦ Technology: Personal responsibility?

◦ Corporate, team or personal record keeping systems

Suppliers & Customers becoming more aware!

UK PHYSICAL MOVEMENT OF DATA

ELECTRONIC TRANSFER OF DATA

EXPORT

EXPORT

PHYSICAL MOVEMENT OF GOODS

EXPORT

UK Accessing technology

relating to military

goods

EXPORT

EU UK

PHYSICAL MOVEMENT OF GOODS

PHYSICAL MOVEMENT OF DATA

ELECTRONIC TRANSFER OF DATA

NOT AN EXPORT

(generally)

PHYSICAL MOVEMENT OF GOODS

PHYSICAL MOVEMENT OF DATA

ELECTRONIC TRANSFER OF DATA

EXPORT

EU UK

Accessing

technology relating to

dual-use goods

Accessing

technology relating to

dual-use goods

NOT AN EXPORT

(generally)

EXPORT

Department of State

Arms Export Control Act

International Traffic In Arms Regs

(ITAR)

U.S. Munitions List

(USML)

Governs: Military / Defense Items, Data

& Services

Department of Commerce

Export Administration Act

Export Administration Regulations

(EAR)

Commerce Control List

(CCL)

Governs: Everything Else

(non-military & dual use)

Department of StateDepartment of State

Arms Export Control Act

International Traffic In Arms Regs

(ITAR)

U.S. Munitions List

(USML)

Governs: Military / Defense Items, Data

& Services

Department of CommerceDepartment of Commerce

Export Administration Act

Export Administration Regulations

(EAR)

Commerce Control List

(CCL)

Governs: Everything Else

(non-military & dual use)

Controls the transfer of Goods, Technology, Software and Defence Services designed, developed and/or modified for military use from a US Person to a Foreign Person wherever in the world

Controls items on the US Military List (USML)

Advised by the Department of Defence

Principle types of US ITAR Export Authorisations: • DSP-5 - ITAR-controlled Goods or limited ‘Technology’

• TAA - Technical Assistance Agreement authorised by the US DoS

• MLA - Manufacturing Licence Agreements

• WDA - Warehouse Distribution Agreements

Controls the transfer of ‘Dual-Use’ and ‘Civil’ goods and technology

Controlled by the Export Administration Regulations (EAR)

• The listed controlled goods and technology require a Department of Commerce licence prior to export

• Non-controlled goods or technology rated NLR per EAR99

Countries Under Presumption of Denial

Case-by Case

Afghanistan

Cyprus

Iraq

Yemen

Zimbabwe

Dem Rep of the

Congo

Denial

Belarus Iran Somalia

Burma Ivory Coast Sri Lanka

China Lebanon Sudan

Cuba Liberia Syria

Cyprus Libya Venezuela

Eritrea North Korea Vietnam

Haiti Sierra Leone

* Red denotes nations known to be supporting terrorism.

US Export Controls are “extra-territorial”

ITAR and EAR licences list the companies and organisations who may access the goods and/or the technical information ◦ TAA Sub-Licensees

ITAR and EAR licences often specify whether technical information can be accessed by permanent employees only (i.e. not ‘contract labour’)

‘Nationality’ issues ◦ Differences between ITAR and EAR

◦ Licences often specify the nationalities of the people authorised to access technical information

◦ Conflict with EU Anti-discrimination Law

The concept of “Deemed Export” and “Re-export”:

Principle of De Minimis in EAR

USA

PHYSICAL MOVEMENT GOODS/DATA

ELECTRONIC TRANSFER DATA

EXPORT

EXPORT

TECHNICAL ASSISTANCE

EXPORT

USA

US Person

(US Entity)

US Person

(US Entity)

US Person

(US Entity)

Foreign Person

(Non-US Entity)

Foreign Person

(Non-US Entity)

Foreign Person

(Non-US Entity) (Known as Sublicensing)

NOT AN EXPORT

EXPORT

RE-EXPORT

France

Singapore

China

Malaysia

Japan

US Embargoed Countries ◦ US Citizens cannot deal with them

◦ Any US-sourced products cannot be sold into these countries

◦ Affects Military & Dual-Use

China (IPR issues)

Armenia (diversion)

Mexico (leakage to highest bidder)

Dubai/Arab Free Ports

Customs Free / Special Economic Zones

Does the supplier understand Export Control?

◦ Compliance organisation

◦ Clear management responsibility

◦ Awareness Education vs Liability

Audit the supplier’s compliance processes

◦ Can they control US-controlled Technology to authorised persons?

◦ Compliance with Government Audits

What is the sub-tier supply chain

◦ Who are they? (Denied parties?)

◦ Where are they? (Authorised countries?)

◦ Do they need to be added to Licences?

2-speed supply chain?

Corporate Services (IT, Reprographics, Document Management)

What countries are you planning to source from?

Know your Customer Chain: ◦ Who are you selling on to?

◦ Who are the intermediaries/consignees?

Screening: Denied Countries, Companies or Persons

What Supplier Export Licence restrictions may you be subject to? ◦ Embargoed countries

◦ Nationality restrictions

◦ ‘Flow through’ restrictions

What Licences do you need to send Technical Data under RFQ to prospective Suppliers?

What End User Undertakings may need to be obtained and provided to Suppliers?

Provide the Supplier with the ‘Export Rating’ for the Goods you are sourcing or product it will be used on (End Use)

Determine the ‘Export Rating’ of the associated Technology

Supplier to provide the ‘Export Rating’ of Goods/Technology under their jurisdiction (if different)

Every document issued should state the ‘Export Rating’ of the system/component (even if NLR)

Request Export Rating of proprietary products from Suppliers.

Systems & repositories for collating ‘Export Rating’ data

Manufacturing Plans, Quality Plans, Concessions, etc are all potentially controlled

Lead Time & Planning

Management of Licence Conditions

Outbound Logistics ◦ What Licences do you need to ship goods

◦ Is there an exemption available

◦ Is a Licence already available

◦ Lead time for Licence applications

◦ ‘Stop shipment’ conditions

Inbound Logistics ◦ Security bonding

◦ Communication of Licence restrictions

Customer 3PL Providers???

Business Travel

All technology, regardless of medium

Ensure that you take only the technology required for the business trip

Ensure that the required authorisations are in place to cover the export of controlled technology prior to the trip

In the case of US ITAR-controlled technology, ensure all parties involved are included in a TAA before sharing technical information

Laptops and other media devices

IT security policy (China)

Comply with local procedures before taking such equipment out of the country

Accessing controlled data held on a server from an overseas destination is classed as an export.

Export compliance is business critical

Export compliance is mandatory and embodied in law

◦ Compliance is legal requirement

◦ Compliance is both personal and company responsibility

Impact of US Export Controls

All Purchasing staff are “Gatekeepers” to the supply chain

Be aware when you making an export of hardware, specifications and data

Be aware when you are talking to suppliers and contractors

Always err on the side of caution

Increasing compliance sought by Governments, customers and Suppliers

If you think you may need authorisation, STOP and ASK

What are you buying?

Is it subject to Export Controls?

Where is it going?

Who will receive it?

What will they do with it?

What else could they do with it?