Export Basics, Specificities and Consequences for Industry: How an International Group Can Manage Its Business with Sanctioned Countries

Abstract

This article presents the Governmental character of Export Control which made its sensitivity and complexity. Industrial companies must comply with numerous national specificities of laws and regulations (extraterritorial for the USA) that apply in a moving international context of geopolitical and foreign policy interests. Moreover, the control of ‘intangible transfers’ has been put under the responsibility of exporters when at the same time export control has to face more and more powerful communication systems and networks. As of today, private companies make their best efforts to mitigate the export control risk, the practical Airbus process is presented. The conclusion proposes to trigger a common action of industry experts and academics to select and educate the future national elites of export control that faces a chronic shortfall in human resources.

1 Export Control Basics, Specificities, and Related Consequences for Industry

Export control laws and regulations can be traced back to distant times, at least on a domestic level. For instance, the Frankish swords’ alloy and their tempering process brought a real ascendancy to the Frankish armies. For that reason, around the year 800, Emperor Carolus Magnus pronounced a ban on selling these swords outside of the empire and King Charles the Bald confirmed this with the ‘Edict of Pistre in 864! However, major international regulations appeared only during the 20th century. To give a rough order of magnitude, today about $150 billion a year is the average amount of licences delivered worldwide for exports of controlled goods and technology . The implementation of export control laws and regulations is increasingly heavy for both government agencies and exporting companies.

Technology improves more and more quickly, and due to its dematerialisation, it spreads like wildfire, faster and easier in more and more intangible forms. To face the increasing threats resulting in particular from asymmetric conflicts and terrorism and the soaring international trade, the harmonisation of export control is more and more important for ensuring a peaceful world. It is therefore of essence for exporting companies to ensure that they are compliant in their daily business and that the entire supply chain they work with is equally compliant as well. For non-compliant companies, damages can indeed be dramatic. In addition to the criminal sanctions and imprisonment of the executives, high fines are not unusual and the consequences for corporate image may be fatal.

From a legal standpoint, export control laws and regulations are an exception to the free trade principles that govern international commercial exchanges. Companies offering controlled goods or services need to comply with such rather complex and moving areas of the law wherever they are operating. Moreover, for export compliance purposes, companies need to consider more than export control laws and regulations, as they must also know about related or connected domains such as the following: (a) bribery in international commerce;¹ (b) arms brokering;² (c) allies’ sanctions participation;³ (d) exchange control and/or currency regulations; (e) tax and customs duties; (f) foreign investments; (g) disclosure of classified information (i.e., information which, if it is disclosed to a foreign person, may endanger national security);⁴ and (h) anti-trust. All or part of the above mentioned domains may have to be considered for export control compliance purposes; in general, they are to be looked at more carefully in the context of military or dual-use goods exports. Especially, considerations about classified information and foreign investment laws and regulations have to be investigated since they are directly connected to the control of exports of military or dual-use goods.

As export control matters are quite complex and, very often, of difficult implementation, they are subject to a number of misconceptions.

First, a paradox is that export control laws and regulations (such an important matter that concerns numerous goods and services in vast sectors of the economy directly impacting nations and citizen security) are not identified as an academic matter; this skill is not taught in law schools and accordingly is rather unpublicised. Indeed, a few publications exist that describe what export control is,⁵ but very few law firms (US excepted) have it as a practice and can offer significant experience in this field. Therefore, it becomes more and more difficult to keep up to date and aware of how texts are interpreted and implemented. Constant changes induce a relative lack of jurisprudence due to few court judgements or published administrative decisions on these matters. Yet, as export control laws and regulations are very complex and are constantly evolving, they require experts to provide daily business with reliable guidelines and references. For companies, this increasing complexity necessitates more investments, which heightens the compliance costs. In particular, they have to appoint internal or external experts to advise them and guarantee mandatory export control compliance. This new requirement to secure the business is widening the gap between the companies that can afford to pay for such compliance and those that cannot. Finally, this impairs the competitiveness of small and medium-sized enterprises. A vast majority of SMEs cannot afford the risk of severe sanctions for non-compliance and accordingly are forced to withdraw from international competition and choose not to export controlled items.

Although the use of weapons is framed by the law and may be banned by certain texts, exports of weapons are less rarely forbidden in a general way in international treaties. Such is the case, for instance, in the United Nations Charter that prohibits the recourse to force⁶ but does not address, per se, the issue of weapons commerce.⁷ A frequent misconception about export controls is that they apply only to lethal war weapons and pieces of equipment. In fact, they could apply equally to a whole array of goods, technology, software, and services that sometimes are only indirectly related to military purposes. For example, civil planes may be subject to export control regulations because they may be used ultimately for military transport missions or because they may contain some potentially ‘dual use’ military and/or civilian equipment or technology. Indeed, breaches of laws and regulations can happen without the conscious knowledge of companies that do not pay sufficient attention to the export control question and heavy sanctions (even criminal) could apply whether or not the breach is made on purpose. Additionally, there is always a dramatic risk of degradation to a company’s reputation.

A further public misconception is that, given the international scope of controls, applicable laws and regulations are primarily international. In fact, they are not. One of the most important issues relates to the fact that very few harmonised rules exist with respect to the export of military goods or services, and the number of examples of fully and exclusively transposed common rules in domestic legislation is very low. Additionally, national laws and regulations are very often adapted to the economic stakes and weight of national champions (nuclear, chemical, biological, military, dual-use, etc.). Due to the strong leveraging power of the arms trade in diplomatic negotiations, every country wants to maintain the highest level of sovereignty; all governments create and maintain purely national specificities. In spite of numerous attempts, the control of the commerce of weapons has never found a true base in international or regional treaties. Controls of weapons have always been the exclusive domain of states because such control provides them with one of the major attributes of their sovereignty . Surprisingly, the shortfall in human resources and governmental competencies is a quasi-constant reality that contributes to confounding the export control of sensitive products.

Nevertheless, for years nations worked together to harmonise the basics of control through International Groups such as the Wassenaar Arrangement (WA—1993-41 members today) or the Missile Technology Control Regime (MTCR—1987-35 partners today). These communities publish common export control lists, non-binding directives, licensing recommendations, and so forth. With the EU Intra-Community Transfer Directive published in 2009⁸ http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:146:0001:0036:en:PDF. and more recently the UN Arms Trade Treaty (ATT) ,⁹ international institutions took a step forward in the harmonisation. The implementation of these two fundamental texts is very recent and of course, it is too early to make a global assessment of their real direct and indirect effects. Impacts are both for governments carrying out control and companies that are being controlled at the international level. With respect to dual-use goods and services harmonisation, even if globally more progress has been made, there is still a long way to go to achieve international harmonisation. It is worth mentioning here that major actors such as China, India and Israel are not members (yet) of the Wassenaar Arrangement that embraces 41 countries all over the world. Moreover, the most important international fora rely on each government’s good will, not on legally binding commitments; their interest is to provide common lists of controlled goods and technologies. Even inside the European Union, despite some harmonisation that has been achieved, there are still many enforcement discrepancies between the various member states that periodic reviews and updates have not totally ended, yet. This situation generates a lot of extra costs and administrative burdens for companies which need, whatever the price to be paid, to totally comply with export control laws in all countries.

Indeed, the complexity of export laws and regulations results not from the principles themselves but, much more, from the way the rules are set up and enforced. Export control is made of a high degree of sovereignty and other political considerations together with an important amount of diplomacy, reciprocity obligations, and from certain states, extra-territorial commitments. Export control applies to a very large number of situations. One example is information shared through electronic networks (e.g., computer servers and IT collaboration rooms [i.e., dedicated software] allowing teamwork from distant places, using the Internet or intranet technologies). As soon as such collaboration may involve controlled technical data and is accessible from persons located in foreign countries (or even foreign persons on national territory), an export license is required. Due to the evolution of networks, electronic work environments allowing engineering offices to be located in several countries, to guaranty full compliance with all of the applicable export control laws and regulations, in various countries is very difficult, and a careful assessment of the potential issues has to be made daily. Technology is constantly evolving, and the increasing number of intangible transfers makes the efficiency of controls more and more difficult. The questions to be answered are basically the following: how is access to the environment controlled? How are the rights of the individuals who are supposed to access the technology granted and protected? How is it guaranteed that a person accessing the system is actually the right individual whose right of access has been regularly granted? How can communications be protected from the server to the user against surreptitious interceptions? How can integrity of information be guaranteed?

Additionally, in respect to the commerce in arms, dual-use goods, and services,¹⁰ there are growing transparency concerns and demands. Governments are first interested; however, an increasing number of requests come from companies’ stakeholders (rating agencies, shareholders, investors such as pension funds having ethical inclinations, non-governmental organisations, etc.).

Today, given the state of the development of technology in the context of rising international terrorism, export controls have become extremely complex to face the immense possibilities and related risks for ‘intangibles’ to be disseminated speedily and anonymously through the Internet in particular. In parallel, official services face great difficulties to properly carry out their controls and efficiently master constantly evolving technology, information networks, and communication means that are more and more difficult to monitor efficiently. Governments face difficulties to implement streamlined and fully compliant export control systems that do not impair companies’ competitiveness. This is probably one of the unsaid reasons why, some years ago, governmental export control authorities agreed without too many difficulties and even promoted, ‘ex post’ controls . Accordingly, today, industry is fully responsible for the full compliance of exports, and companies must manage the related risks. In practice, exporters have to guarantee the full traceability of their operations, from the procurement of foreign components to be integrated in sale products, up to the ultimate end use of the exported systems.

Such a heavy responsibility imposes the obligation for exporting companies to organise close management of the compliance to export control laws and regulations on their suppliers or partners. Integrators, in particular, must ensure that the entire business chain is immune from any risks that would jeopardise their international activities and/or reputation. In addition to the classical scrutiny of governmental agencies through the public procurement rules, the soundness of the compliance and the compliance organisation of the supplier, especially in export control laws and regulations have become decisive selection criteria for a huge number of companies. Companies need to be sure that they do not expose themselves to fines and criminal sanctions but, above all, that they have, daily, no risk of delayed shipments, leading possibly to face heavy contractual damages. Particular attention is more and more often paid to contractual provisions throughout the supply chain (which is in general long and complex in the international context), in order for contractors to be protected as much a possible vis-à-vis their suppliers as well as their clients.

In respect of foreign investment, for instance, to incorporate a subsidiary or to create a joint venture company with a local partner) in military or dual-use sectors, the buyer must clearly know and understand the constraints on the national laws and regulations in respect of goods and technologies exports and re-export control issues. Prior to any binding operation, the investing company has to understand the specific provisions and related business risks of the local laws limiting, as the case may be, foreign investments in sectors related to military or dual-use goods. In particular, when the purchased company has some military or dual-use activities, to determine the value of the company and the potential liabilities, the buyer carries out a ‘due diligence’ on the company to be purchased. The assessment of the value and possible risks of the targeted company are managed by the buying company. A usual practice is to check and assess the targeted company’s military and/or dual-use licenses. This, in particular, ensures that the targeted company is authorised to deliver all contemplated controlled equipment to its customers in authorised countries and, accordingly, can benefit from the revenues flowing from the related sale contracts.

To add to that complexity of official laws and regulations, in recent years ‘soft laws’ have come into play. As a result, this new ‘fashion’ sometimes makes certain stakeholders go beyond the provisions of governmental laws and attempts to influence companies in making certain decisions (up to sale restrictions). In that respect, ‘civil society’, in particular NGOs, lead increasingly public actions through mass media, while traditional economic stakeholders such as regulatory bodies and ratings agencies or so-called ‘ethical investment funds’ make their own soft laws that are more and more over-compliant with the governmental legal demands. Therefore, increasingly, companies are obliged to develop general compliance and ethical programs. When implemented, new compliance rules first affect the most operational functions, that is, production, marketing, and sale of goods and services, and then the product supply chain follows up with the procurement and even mergers and acquisition activities and investment markets.

Due to the need to trace all military items once they are exported to ensure that they are not re-exported in infringement of any laws or regulations, the US and the UK governments, in particular, have developed an extensive notion of jurisdiction. Such an approach results from the idea that domestic jurisdiction applies wherever related domestic components should be exported. It conflicts with other countries’ sovereignty and traditional rules of international public laws. Of course, this approach is only possible for countries of significant international importance from economical and/or political perspectives. This is why, fortunately, no other countries have adopted this attitude, which indeed is officially condemned by the EU.¹¹ Nevertheless, the US extraterritoriality must be underlined. Given the reach of US export control laws and regulations, and the weight of US technologies in today’s world, it is very likely that there will be US content in many goods or services exported, and that the exporter will have to ensure compliance (as well as that of his suppliers or sub-contractors) with US laws and regulations. For companies, it is of essence to take that into account particularly, and it makes for strong awareness (information, training, education, and so forth) about the American control export requirements, both in the military (ITAR) and commercial (EAR) domains. This compliance with the US rules demands that industry takes particular care of supplies, storage, integration, and sales (specific management of end-uses and end-users) as the Americans refer to their own national (black) lists of products, countries, and persons. Of course, non-US companies can try to escape the US laws and regulations and refrain from buying any American product. However, such a strategy has never been very realistic, and this is all the more so that such companies should have assets or interests in the US.¹² The complexity, for a company wishing to comply with the relevant applicable export control laws and regulations is obviously very important. Such an exporting company must take into account its domestic laws (i.e., the laws of the country from which exports are made) but also the laws of the supply chain (suppliers/sub-contractors, business partners, logistics, and so forth). Exporting companies must, in most cases, ensure up to 100% that the final exported product will be shipped to the country of final destination and will be well received by the designated end-user. Moreover, sometimes the laws of the country of destination are to be considered; it could append for instance in the case of local import particularities. Lastly, in certain complex operations, additional specific laws and regulations from other jurisdictions need to be taken into account. This could be the case when experiments or tests need to be done on equipment in the development and/or manufacturing phases in countries that are different from the country of manufacturing, final assembly, or final destination. The addition of layers upon layers of legislation increases dramatically, of course, the cost of the compliance that could be, at the end, very high. One can note here that, at this particular point, (also linked to security of supply issue) was the subject of many debates within the European Community Member states during the preparation of the ICT Directive (EC 43/2009) set up for Intra-Community Transfers of ‘defence related products .’

2 How an International Group Can Manage Its Business with Sanctions Countries: The Airbus Group Case

From its origin, Airbus Group has been in charge of military projects but, for many years, 80% of the company’s products were civil passenger aircraft. Activities are essentially shared between five ‘home countries’: France, Germany, Spain, the UK, and the US. The company is oriented towards cutting-edge technologies and high value added products.

Airbus Group treats military and dual use exports in full compliance with the specific regulations and related controls of the different countries where it develops its business. Indeed, Airbus Group has customers and suppliers all over the world. In addition, this multinational activity is made even more complex by the native structure of the company tailored to work within a collaborative business model.

It is in this general context that Airbus Group is naturally looking very closely at all export compliance issues. The first mission of the Group’s Export Control Compliance organisation is to support and give the best objective and consistent solutions, throughout its top executives, project managers, sales teams, and of course customers. Our banking partners are probably the most challenging to reach!... Indeed, within the company, we are able to convince everyone, since we all work towards the same goal. However, when we need to talk to governmental services or financial partners, we increasingly need to justify our decisions. This is why, as soon as 2005, following the particularly difficult sale of a purely civilian (A 321 model) passenger aircraft to the Iranian presidency, the Group decided to set up a very clear and practical policy, as well as useful guidelines to assess, recommend, and finally accept or not accept each and every contemplated business with ‘sensitive countries.’

Regarding exports, we pay attention to the three pillars of sensitive product control: (1) the product functions and performances, (2) the end user, and (3) the end use. At Airbus Group, we use traditional tools. Before signing the sale contract, we set recommendations based on official published lists, independent studies, due diligences, and of course common sense—what Americans call ‘red flags’; e.g.: customers who want to pay in cash, customers who do not ask for after sale support and maintenance conditions, and so forth... Before shipping products or delivering services or disclosing controlled information, we ask for official compliance agreements and/or certifications. We also often demand end-user and/or end-use commitments and international importation certificates; we may add contractual re-export clauses; we take particular care of exchanges of ‘Controlled Unclassified Information’ (CUI); finally, we do not hesitate to consult (formally or not…) and ask for the assistance of our respective national official services. Indeed we know that we can rely on national official services, we consider as a duty to be very fair and transparent, giving and justifying our respective authorities the reasons why we want to go ahead and offer them guarantees to ensure a full compliance in our operations.

The export control challenge is the following: how can we reduce the risks lying within the products and/or destination sensitivity and mitigate them? As soon as one explains people managing sales why it is forbidden to sell sophisticated products to particular customers, they can accept not to do it, considering the business sake and the company’s reputation. Hence, instead of always acting like firemen, we naturally reduce the risks well beforehand by sensitisation, training, and support. A particularly complex domain is R&D. It is not, today, too much difficult to tag and trace “tangible goods” , moreover it is increasingly easy to achieve it very well with the efficient support of IT systems. However at the same time, such IT tool could certainly be the worst enemy of export control compliance. People, traditionally at all times, were used to carry information and share, “physically”, even their most sensitive knowledge with their foreign counterparts in meetings and seminars. Today, in an international company, engineers and technicians need permanent links to exchange on their projects with their counterparts worldwide. Collaboration, teamwork, multi-parallel experiments, and so forth make the best of our engineering and creativity power! Computers, networks, workflows, and electronics for more powerful communications, mean having no frontiers, and make it nearly impossible to efficiently control such intangible transfers.

From an organisational perspective, the export control function of the Airbus Group, (a 134,000-employee company), is structured around 130 full time specialists. We are not able to fully control by ourselves all the international business and exchanges. Accordingly, we have no other choice than to be efficient and aware, to educate and train our colleagues, on each and every service of the Group, about export risks and export control laws and regulations commitments. The main message is indeed quite simple: Think export control and ask, your export compliance officer.

To address the export control compliance risk at the earliest possible stage of the process, we set up, since 2005, the so-called ‘CEO’s Sanctioned Countries Procedure’ . At the beginning, we tried to list the ‘sensitive’ countries from a business point of view (i.e. the ones for which we had trouble obtaining licences from our export control authorities (e.g.: Taiwan). We chose, very early on, not to tackle the most ‘sensitive’ countries but rather the ‘officially sanctioned’ ones. The rational of that decision is quite easy to understand, as one can find its origin in the very nature of industrial companies. On the one hand, Industry must comply with national and international laws and regulations made to ensure the security of nations, that governments set up and enforce in the framework of their respective foreign policy. On the other hand, the companies’ have to produce, sell, and possibly export but, for sure, not to interfere in governmental foreign policy. Moreover, for international or transnational groups such as Airbus, it is extremely difficult to find a general agreement between five countries that have five different foreign policies, and it is properly impossible to even define any internal ‘soft law,’ because following all political restrictions of each ‘home country’ should lead to dramatically impair the business and even totally block it. Accordingly, we figured out that for some of our customers, being rated ‘sensitive’ and ending up next to countries like North Korea, Sudan, or Syria could be very problematic businesswise, and moreover should possibly be detrimental for side diplomatic efforts. Accordingly, to prevent debates we decided to publish a list strictly limited to officially sanctioned countries only. Finally, and above all, we totally comply with the fundamental Group’s position, which is to, strictly and only, comply with governmental demands, not to make any own foreign policy. As an industrial company, we consider clearly that it is not our responsibility to self-decide whether a country is, or not, politically correct or what could be its diplomatic relations with the Group’s home countries. Whereas when we speak of sanctioned countries there is no doubt left: we take into account UN and EU sanctions lists and, when necessary, those of our home countries. For each customer country, we calculate a score by simple addition of sanctions made by international institutions and our home countries governments.

Practically, as of the Sanctioned Country Process, the compliance system relies on two pillars. The first one is constituted of a quarterly updated list of sanctioned countries. This list is distributed to all our project managers to make them unambiguously aware to which countries it will be difficult to eventually export. To compile the ‘Sanctioned Country List’, we consult only the official Internet sites. We take much care to remain strictly factual. Based on this list, we established the following single commitment for exporters: ‘you must report the Group CEO, as soon as you contemplate business with one listed country’. The most difficult export compliance assessments concern countries that are not officially sanctioned; for these countries, we have elaborated on a ‘sensitivity indicator.’ This is the second pillar of the Sanctioned Country Process. It takes into account economics, human rights, and social development factors that can jeopardise the image of the Group vis-à-vis media and shareholders. Those are basic and standard export control principles that all governments use to rely on to grant export licenses. A prior assessment of these criteria allows Airbus Group to secure business by anticipating difficulties to eventually get the governmental shipment authorisation. More precisely, we consider two socio-economic indicators (the economic stability of the customer’s country and its social development), and two ethical indicators (corruption level and human rights compliance).

Thanks to the ‘SCP’, Airbus assesses and documents with a sound, rational, and consistent methodology all its most sensitive business cases. Accordingly the Group is in the position, to face in good conditions any possible audit, inquiry or charge and advocate for export decisions made by its divisions, affiliates, and subsidiaries.

3 Conclusion

Export control matters are very complex. This complexity increases more and more and, due to governments “ex-post control” policy, companies are totally responsible for full compliance in this area of law. Mitigating that risk requires companies to appoint experts in order to implement, manage, and develop sound internal export compliance organisation. Accordingly, industry experts and academics should address as soon as possible this new challenge together and organise the best answer to each government’s international expectations by selecting and educating their future national elites of export control.