Breakfast Briefing on U.S. and E.U. Export/Customs Issues

December 9, 2010, Washington DC

EU Export Controls & Sanctions Update

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Agenda

– Proposals to amend the EU’s Dual Use Regime

– Update on EU Dual Use transit & brokering controls

– The new EU sanctions regarding Iran

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EU Dual Use proposals

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EU Export Controls Overview

– Dual Use Goods & Technology

– Common EU Rules

– National Additions

– Military Goods & Technology

– Defence Policy is not EU authority

– National Rules

– Common EU Policy (Military List, Licensing Code)

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EU Dual Use regime

– International Arrangements– Wassenaar Arrangement

– Missile Technology Control Regime (“ MTCR”)

– Nuclear Suppliers Group

– Australia Group (non-proliferation of chemical & biological weapons)

– Organisation for the Prohibition of Chemical Weapons (Chemical Weapons Convention)

– Membership: mainly EU countries individually (e.g. EU has observer status in Wassenaar Arrangement)

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EU Dual Use regime

– Regulation 428/2009 – applies directly in all 27 EU Member States

– EU-wide rules (including common dual-use list)

– Military items dealt with under separate national regimes

– National implementation by EU Member States, particularly in respect of licensing and enforcement

– Outcome: common regime with 27 flavours

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Pending Proposals

– Proposal for amending Annex I to 428/2009– COM (2010) 509

http://trade.ec.europa.eu/doclib/docs/2010/november/tradoc_146860.pdf

http://trade.ec.europa.eu/doclib/docs/2010/november/tradoc_146861.pdf

– Proposal for adding additional Community General Export Authorisations to 428/2009– COM (2008) 854

http://trade.ec.europa.eu/doclib/docs/2009/january/tradoc_142038.pdf

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Amendment of Annex I 428/2009

– Last revision of Annex I dates back to 5 May 2009

– Proposal seeks to implement subsequent changes of Control Lists under international arrangements– MCTR: 10 November 2009

http://www.mtcr.info/english/annex.html

– Wassenaar Arrangement: 3 December 2009 http://www.wassenaar.org/controllists/2009/WA-LIST%20%2809%29%201/WA-LIST%20%2809%29%201.pdf

– Australia Group: December 2009 http://www.australiagroup.net/en/whatsnew.html

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Amendment of Annex I 428/2009

– New Crypto Note 4 conforms to WA Control List

Category 5 – Part 2 does not control items incorporating or using “cryptography” and meeting all of the following:a. The primary function or set of functions is not any of the following:

– “Information security”;– A computer, including operating systems, parts and components therefore;– Sending, receiving or storing information (except in support of entertainment, mass

commercial broadcasts, digital rights management or medical records management); or

– Networking (includes operation, administration, management and provisioning);b. The cryptographic functionality is limited to supporting their primary function or set of functions; andc. When necessary, details of the items are accessible and will be provided, upon request, to the appropriate authority in the exporter’s country in order to ascertain compliance with conditions described in paragraphs a. and b. above.

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Licensing under 428/2009

– ‘Administered’ at EU level

– Covers all items listed in Annex I, with certain exceptions

– Valid throughout the Community (EU27)

– Covers exports to Australia, Canada, Japan, New Zealand, Norway, Switzerland, and the US

– The EU does not issue export licences (other than CGEA)

– Member States may grant or refuse an export licence (other than CGEA)

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Additional CGEAs– ANNEX IIb CGEA No EU002 - LOW VALUE SHIPMENTS

– Valid for exports to the following destinations:– Argentina, Brazil, Iceland, South Africa, South Korea and Turkey

– ANNEX IIc CGEA No EU003 – EXPORT AFTER REPAIR/REPLACEMENT– Valid throughout the European Union for exports to the following destinations:

– Argentina, Albania, Bosnia and Herzegovina, Brazil, Chile, China (including Hong Kong and Macao), Croatia, Former Yugoslav Republic of Macedonia, French Overseas Territories, Iceland, India, Israel, Kazakhstan, Republic of Korea, Mexico, Montenegro, Morocco, Russia, Serbia, Singapore, South Africa, Tunisia, Turkey, Ukraine and United Arab Emirates

– ANNEX IId CGEA No EU004 – TEMPORARY EXPORT FOR EXHIBITION OR FAIR– Valid throughout the European Union for exports to the following destinations:

– Argentina, Albania, Croatia, Bosnia and Herzegovina, Brazil, Chile, China (including Hong Kong and Macao), Former Yugoslav Republic of Macedonia, French Overseas Territories, Republic of Korea, Iceland, India, Israel, Kazakhstan, Mexico, Montenegro, Morocco, Russia, Serbia, Singapore, South Africa, Tunisia, Turkey, Ukraine and United Arab Emirates

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– ANNEX IIe CGEA No EU005 – COMPUTERS AND RELATED EQUIPMENT– This has been deleted in the Draft Report of the European Parliament because of

the view that computers and related equipment are sensitive items and therefore cannot be included in the EU general export authorisations

– ANNEX IIf CGEA No EU006 – TELECOMMUNICATIONS AND INFORMATION SECURITY

– Valid throughout the European Community for exports to the following destinations:– Argentina, China (including Hong Kong and Macao), Croatia, Iceland, India,

Republic of Korea, Russia, South Africa, Turkey and Ukraine

– ANNEX IIg CGEA No EU007 – CHEMICALS– Valid throughout the European Union for exports to the following destinations:– Argentina, Croatia, Iceland, India, Republic of Korea, Mexico, Turkey, Ukraine.

Additional GCEAs

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EU Dual Use

transfer, transit and brokering

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Intra-Community transfers

– No licence required for transfer to another Member State of significant majority of Annex I items (but must keep records)

– Licence is required for transfer of most sensitive items listed in Annex IV (e.g. switching devices, pressure sensors and cryptanalytic software)

– Member States may under national law require licence if known final destination outside EU and no processing or working to be performed

– Licence may be required for intra-Community transfer where item ultimately intended for WMD end-use outside EU

– All relevant commercial documents for all Annex I items must clearly indicate that the items are subject to controls if exported from the Community

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Transit rules

– Transit of Annex I items through EU (i.e. simply passing through EU territory) can be prohibited if items are/may be intended for WMD end-use

– Member States can extend this prohibitions under national law to:

– all items (not just Annex I items)

– military end-use in embargoed countries

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Brokering activities

– Brokering:

– negotiation or arrangement of purchase, sale or supply of items between two non-EU countries

– selling or buying items between two non-EU countries

– Licence required if broker aware or informed Annex I item intended for WMD end-use

– Member States may under national law extend to:

– non-Annex I items

– grounds for suspecting WMD end use

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EU Iran Sanctions

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Overview

– EU Sanctions Policy

– Product Controls

– Investment Restrictions

– Financial Services

– Designated Parties

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EU Sanctions Policy

–EU follows so-called “smart” sanctions policy

–Mostly follows UN multilateral regime

–Some unilateral regimes, including Iran

–EU sanctions regulations directly applicable in all 27 EU Member States

–Licensing, penalties and enforcement left to Member States

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Whom do EU sanctions apply to?

– Any entity incorporated in an EU Member State and its EU and non-EU branches

– Any entity incorporated outside the EU, but only in respect of any business conducted in the EU

– Any directors, officers, employees, agents etc. located in the EU (irrespective of nationality)

– Any directors, officers, employees, agents etc that are nationals of EU Member States (even if located outside the EU)

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Historic EU Sanctions Against Iran

– Designated Parties, including a number of banks (e.g. Bank Melli and Bank Sepah)

– Product controls on proliferation sensitive goods and technology

– Arms embargo

– Enhanced due diligence requirements for EU financial institutions in dealings with Iranian banks

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Scope of New Regime

– Sanctions applicable to dealings with Iranian Persons and other supplies of goods for use in Iran

– Scope of sanctions significantly extended through broad definition of Iranian Person, including:

– Iranian government or public bodies;

– natural persons in Iran;

– companies incorporated in Iran; and

– any legal person owned or controlled directly or indirectly by any of the above.

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Product Controls – Oil and Gas– New list of controlled oil and gas equipment set out in Annex VI,

focussed on following sectors:

– exploration and production of crude oil and natural gas;

– refining; and

– liquefaction of natural gas

– Prohibition on supply of Annex VI equipment and technology directly or indirectly to Iranian Persons or for use in Iran

– Prohibition on provision of supporting ancillary services

– Exemption for pre-existing contracts

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Product Controls – Dual-Use

– Applicable to all Dual-Use items under the EU Dual-Use regime (exceptions for telecommunication and encryptions items)

– Prohibition on supply of Dual-Use equipment and technology directly or indirectly to Iranian Person or for use in Iran

– Prohibition on provision of supporting ancillary services

– Authorisation available in limited circumstances where end-use guarantees in place from both end-customer and Iran

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Product Controls – Proliferation Sensitive Items

– Previous lists of controlled items superseded by amended lists, set out in Annexes II and IV

– Annex II

– Prohibition on supply of equipment and technology to Iranian Persons or for use in Iran

– Prohibition on provision of supporting ancillary services

– Authorisation available in limited circumstances where end-use guarantees in place

– Annex IV – prior authorisation required for supply of equipment and technology, together with supporting ancillary services

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Product Controls – Internal Repression

– Applicable to certain equipment and technology used in internal repression of civilian population

– Prohibition on supply to Iranian Persons or for use in Iran

– Prohibition on provision of supporting ancillary services

– No exemptions or carve-outs

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Arms Embargo

– Separate to sanctions regime – implemented at Member State level

– Supply of arms to or for use in Iran prohibited

– Supply of supporting ancillary services prohibited

– Applicable to all military items, as defined at Member State level

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Investment Restrictions

– Restriction on investment in Iranian Persons engaged in the oil and gas sector, as well in the manufacture of controlled goods

– The following investment activities are prohibited:

i) Provision of loans or credit to Iranian Persons

ii) Acquisition or extension of participation in Iranian Persons

iii) Creation of joint ventures with Iranian Persons

– Exemption for pre-existing contracts

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Funds Transfer Controls– Transfers to or from any Iranian Person of €10,000 or

above must be notified– Transfers to or from any Iranian Person of €40,000 or

above are subject to authorisation– Authorisation requests to be submitted to relevant EU

Member State, which will have 4 weeks to assess– Member State obliged to grant authorisation unless

transfer relates to proliferation sensitive activities or prohibited activities in the oil and gas sector

– Certain exemptions for food and healthcare related transfers

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Financial Services Restrictions

– EU financial institutions prohibited from establishing branches in Iran or entering into correspondent relationships with Iranian banks

– Iranian banks prohibited from doing same in respect of EU

– Continuing enhanced vigilance obligations on EU financial institutions for all Iranian transactions

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Insurance Controls

– Provision of insurance or re-insurance to Iranian Persons is prohibited

– Certain exemptions for natural persons

– General exemption for compliance with pre-existing agreements

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Designated Persons

– Freeze funds and economic resources belonging to, owned, held or controlled by DPs

– Prohibitions on making funds or economic resources available, directly or indirectly, to or for the benefit of DPs → defence “if did not know, and had no reasonable cause to suspect”

– Concepts of funds and economic resources broadly defined

– List of DPs expanded to include additional financial institution, Islamic Republic of Iran Shipping Line (IRISL) and other companies related to Iran’s proliferation and military activities

Breakfast Briefing on U.S. and E.U. Export/Customs Issues

December 9, 2010, Washington DC

EU Export Controls & Sanctions Update