UK Export Controls and sanctions: Look ahead to 2016

Transcription

1 UK Export Controls and sanctions: Look ahead to 2016 By Richard Tauwhare, Senior Director, 2016 promises to be yet another eventful year for trade controls in the UK. This article picks out four likely themes: structural changes amongst the regulators, procedural changes for exporters, changes in the risks in major export destinations, and potential changes in the EU including the possibility of a UK vote to leave. Structural Changes Export Control Unit It was announced in the UK s Strategic Defence and Security Review 2015 that, in the context of a wider restructuring of the UK s national security structures to promote a more coherent, whole-of-government approach, 7 new Joint Units will be established in One of these will be a new Exports Controls Unit, to be hosted by the Department for Business, Innovation and Skills, and to provide coordinated cross-government operation of export controls. The Unit will combine the existing staff and resources of the Export Control Organisation (ECO) with those of the export licensing casework teams from the Foreign and Commonwealth Office and the Ministry of Defence, who are currently the main advisers to the ECO in assessing licence applications. The Unit will report jointly to the Business, Defence and Foreign Secretaries. This restructuring is not likely to lead to significant changes in the export controls system, at least in the short term. But it should help ensure a more coherent approach to challenging issues. Office for Financial Sanctions Implementation In parallel, the Financial Sanctions Unit in the Treasury will turn itself into the new Office for Financial Sanctions Implementation (OFSI) in April/May 2016, following the announcement in the Chancellor s Budget earlier this year. Although the scale of the original ambitions for the new Office have apparently been scaled back, it is expected nonetheless to have greater resources than the current Financial Sanctions Unit and the aims remain to provide high quality service in licence processing, improved information on sanctions rules, and more effective enforcement. While it is unlikely that the UK will seek to impose fines for breaches of financial sanctions prohibitions on the scale of the US regulators, the penalties available to OFSI will, we understand, be expanded to align them more closely with those currently wielded by HM Revenue and Customs for breaches of trade sanctions and other export control regulations, in particular raising the maximum imprisonment from 2 to possibly as much as 10 years, and creating the option of unlimited compound penalties, thereby enabling OFSI to settle serious cases without criminal prosecution. OFSI will work more closely with the National Crime Agency and HM Revenue and Customs to detect violations and pursue enforcement actions.

2 It remains to be seen whether the promised delivery of a high quality service to business will translate into greater clarity in the interpretation of the often imprecise language used in EU sanctions regulations, particularly since this requires EU-wide coordination. Process Changes SPIRE The long-awaited design of a replacement for the ECO s current online licence application system, SPIRE, has just been launched. The project is an integral and early part of the wider programme, One Government at the Border being led by HM Revenue and Customs to deliver a single, coherent service for the movement of goods across the UK border. The ECO is reviewing from first principles the service that it currently provides, to identify what its customer organisations want, in order to deliver improvements. It is intended to progress by designing and publicly testing small, discrete sections of the new system before rolling them out more widely in it is hoped The new system should be a radical improvement, providing an open interface that will enable licence applications to be completed largely automatically by exporters logistics systems, and reducing the administrative burden and frustrations of the current system. End-User Undertakings The ECO s current review of the requirements for signed, hard-copy undertakings should lead to substantial simplifications, although their full introduction may have to wait until the new SPIRE system rolls out. In the short term, there seems to be a fair prospect of soft-copy undertakings, based on a simpler template, becoming acceptable, and that no new requirements for undertakings as a condition of Open General Export Licences will be introduced. Open General Export Licences If 2015 has been the year in which the ECO pushed for much greater use of Open Individual Export Licences (with some but not overwhelming success), 2016 looks like being the year for OGELs. At least three new ones are being drafted, on low risk military and dual use electronics (e.g. printed circuit boards), and on cryptographic products. A key to their usefulness will be whether they include China and Taiwan among their permitted destinations, which would help level the playing field with the US less restrictive approach in these areas, but this remains to be seen. Consolidation of other OGELs is also in prospect (e.g. for those covering repairs), together with possible new EU General Export Authorisations under consideration by the European Commission for Low Value Shipments, Encryption, Intra-EU transfers of Annex IV items, Intracompany technology transfers, Large Projects and for some specific dual-use goods such as frequency changers. Some of the new licences may become available early in 2016, subject to Ministers risk appetite and other dependencies. Classification Advice Service This service, providing official classifications of potentially controlled items at the request of exporters, was suspended last year due to a lack of resources in the ECO. Exporters have lobbied hard for its reinstatement as there is currently no means in the UK to secure a definitive ruling on whether an item requires an export licence and, if so, which Control Entry applies to the item, other than by submitting an application for a licence. While it remains to be confirmed, it looks likely to be re-instated in Spring 2016.

3 Guidance Working in collaboration with the main trade associations, the ECO is overhauling the guidance material it provides for exporters, particularly on the gov.uk website. The intention is to rationalise the information available, ensure that it is kept up-to-date, and to provide more guidance on the potential for licence applications to be refused, for example on the grounds that the exports might be diverted to an undesirable end-use or might be used to violate human rights. Access to controlled data stored overseas Prompted in part by US government moves towards defining the conditions under which storing controlled data on a server in a foreign country would not require a licence, there are growing calls on the UK authorities and the European Commission to provide guidance, particularly on the standards of encryption required. To date, the authorities have been disinclined to define how access to the data should be controlled. There remains concern that, in attempting to do so, the constraints imposed on businesses risk becoming more restrictive. Export Destinations Saudi Arabia As the market for around a half of the UK s total defence exports, even a minor shift in licensing policy towards Saudi Arabia would have serious repercussions, not only for UK exports but for the longstanding strategic relationship between the two countries, at a critical time given developments elsewhere in the Middle East. Critics concerns, previously focused on Saudi Arabia s human rights record, have broadened to include its airstrikes in Yemen. If Saudi actions there were to breach international humanitarian law, the UK government would be obliged to deny export licences for equipment that might be used in the campaign, including aircraft, aircraft components, bombs and missiles. Peace talks were due to begin mid-december. More than peace in Yemen is riding on a successful outcome. Iran When most EU sanctions are lifted on Implementation Day (now expected in early 2016), export licensing for most dual use goods will restart (while military goods, and missile-related dual use goods, will remain embargoed for at least 5 years). Licence applications for nuclear-related dual use goods and services - including many items used, for example, in the petrochemical and aerospace sectors - will have to be processed through the new Procurement Channel. This involves each of the 6 participating states besides Iran (UK, US, France, Germany, Russia and China), forwarding relevant applications for consideration by a Procurement Working Group; if any participant objects, the application must be denied. Managing the potentially substantial new workload on export licensing officials will be high among the challenges of implementing the system for the ECO and its counterparts in the other participating states. The agreement with Iran carved out the sale of commercial passenger aircraft and related parts and services for exclusively civil aviation as one of the limited areas where US primary sanctions will be lifted (other notable areas for import into the US including carpets, pistachios and caviar). In the UK, such sales, except for dual use aircraft components, have not been subject to sanctions but they have required licensing under national controls (category PL9009). These national controls are under review and it seems likely that, when or soon after sanctions are lifted, this licensing requirement may also be dropped.

4 Turkey and Brazil UK exports to these countries are raising a relatively new challenge. Hitherto, exports of UK military components went primarily to close partners in collaborative defence projects or to countries requiring the parts for their own national defence needs. But Brazil and Turkey, in particular, are increasingly importing UK components for incorporation into platforms for export to a range of potential customers who cannot all be known at the time that the UK export is licensed. Short of imposing US-style re-export controls (not in prospect), the UK authorities need to find ways to manage these unquantifiable risks. One potential answer lies in the Arms Trade Treaty: since States Parties commit to exercising robust export controls, membership of the Treaty would give some assurance that re-exports of components would be conducted responsibly. To date, both Brazil and Turkey have signed but not ratified the Treaty. It is hoped that they, and others like them (notably India), will recognise that ratification of the ATT will support rather than hinder the development of their domestic defence industries by providing reassurance to exporters of components, like the UK, that the export of the final product will be conducted responsibly. China, India and the Gulf Government Ministers are more active than ever in promoting UK exports to these key markets and will be keen to avoid licensing issues interfering with this. But concerns over the potential misuse of UK exports by the military, police or security forces persist and there remains a constant risk of disruption to licence approvals should incidents occur. Argentina The recent Argentinian elections have resulted in a significant change of regime, with the swearing-in of centre-right President Macri on 10 December. His foreign policy chief has said that the new government will work to defrost relations with the UK, and there are real hopes of a less aggressive stance towards the Falklands (though Argentina s claim to the islands will remain). This holds out the prospect of a possible softening of the UK s national embargo on all military and dual-use goods for military end-users in Argentina. But, given the persisting sensitivities involved, this is likely to take time. European Union The European Commission is continuing its review of EU controls on dual-use items, launched in The results of a public consultation and of a data collection study (conducted for the Commission by SIPRI) have recently been published, while a consultation on companies use of Internal Compliance Programmes is still underway. The Commission is expected to publish its proposals for both regulatory and non-regulatory changes in Spring 2016, although the timetable may continue to slip. While some of the proposals are likely to be welcome improvements (e.g. the new EU General Export Authorisations referred to above, plus greater consultation with industry and academia, and clarifications of definitions), there will be serious concerns in the UK government and industry over likely proposals to harmonise and in practice to increase regulation. The shape of the argument remains unclear but it begins to look like a significant storm is brewing on the horizon. And so, finally, to the issue of possible UK exit from the EU. If the result of the referendum was that the UK should leave, the Treaty on European Union provides for a period of 2 years (extendable by mutual consent) to negotiate the terms of a withdrawal agreement, including a framework for the UK s future relationship with the EU.

5 What could be the impact on trade controls? This will depend heavily on the character of the withdrawal agreement. But it seems reasonable to assume that the importance of UK companies being able to continue in a wide range of defence, aerospace and other close partnerships with EU companies will be given high priority, however that may be achieved. It also seems improbable that the UK would not want to mirror EU sanctions and export control measures closely. The UK would be unlikely to impose greater restrictions since to do so would place UK businesses at a competitive disadvantage. Equally, the UK is unlikely to impose less restrictive measures, given that it is consistently one of the most robust Member States in arguing for tough and effective sanctions and export controls. (Without the UK at the table, there may be a risk of future EU measures being more modest than they would otherwise be.) In short, to borrow Zhou Enlai s phrase, it is too early to say. But not too soon to conclude that 2016 looks set to be an unusually significant year for developments in trade controls, not solely in relation to Iran. The need for exporters to look ahead and constantly assess the shifting risks and opportunities shows no signs of waning.