New Trade Reality: Augmented EU Export Controls

The EU has not followed the strict approach adopted by the US following the 30 June implementation of the National Security Law for Hong Kong by tightening its export control rules. Instead, the bloc has left it up to its member states to determine the extent to which they wish to restrict exports of “specific sensitive equipment and technologies” to the city.

On 28 July 2020, the Council of the EU adopted conclusions expressing “grave concern over national security legislation for Hong Kong adopted by the Standing Committee of China’s National People’s Congress”. The conclusions call on the EU and its member states to take extra measures to scrutinise and limit exports of specific sensitive equipment and technologies for military or dual use [1] in Hong Kong, in particular where there are grounds to suspect undesirable use relating to internal repression, the interception of internal communications or cybersurveillance.

While the Council’s conclusions amount to a political statement that is not legally-binding and does not amend any existing EU export control rules, they reflect the intent of the EU and its member states to apply the existing export control rules in a uniform manner when it comes to exports of “specific sensitive equipment and technologies” to Hong Kong. However, since the precise scope and impact of the conclusions are unclear, Hong Kong traders will have to assess how the conclusions are interpreted by individual member states from which they want to source products and technologies.

The scope of “specific sensitive equipment and technologies” is likely to be interpreted broadly and differently by different member states. For instance, under heading ML15 of the EU Common Military List, certain cameras and sensors are already controlled as military goods under existing legislation if they constitute “imaging or countermeasure equipment [that is] specially designed for military use”. In addition, certain cameras and optical sensors are listed under heading 6A002 and 6A003 of Annex 1 of Council Regulation (EC) No 428/2009, from 5 May 2009. These regulations set up a Community regime to control the export, transfer, brokering and transit of dual use items (“Dual Use List”). A summary of the latest annual update to the Dual Use List, which will enter into force later this month, was published recently.

Furthermore, member states may require ad hoc export licences for cameras and sensors that are not listed as dual use goods, if there are considered to be public security or human rights reasons to do so. It is therefore not impossible that the council’s conclusions may prompt some member states to impose ad hoc licensing requirements on such goods as infrared cameras, facial recognition software and other surveillance cameras that may be used for crowd control and police surveillance. Furthermore, any goods that may be used for cybersurveillance will likely fall under an updated version of the Regulation, which is currently being amended by the EU.

When it comes to the council’s calls for the EU and its member states to “further scrutinise and limit” exports of “specific sensitive equipment and technologies”, it is believed that some member states will apply existing export controls more strictly with respect to Hong Kong. The export of controlled military goods or dual use goods from an EU member state to a third country may be authorised only if a licence is issued for such movements. The criteria to permit or deny a licence were harmonised at an EU level through the Council Common Position 2008/944/CFSP of 8 December 2008, which defines common rules governing control of exports of military technology and equipment.

Importantly, the criteria oblige member state authorities to “deny an export licence if there is a clear risk that the military technology or equipment to be exported might be used for internal repression.” The language in the conclusions regarding the risk of internal repression may lead individual member state authorities to deny relevant exports to Hong Kong. Also, member state authorities may revoke existing so-called “general licences” – a simplified way of exporting controlled goods without the need for individual export licences – for exports of certain dual use goods to Hong Kong.

In general, it is clear that the council’s conclusions make it harder for the products and technologies that fall under the EU’s existing export control regimes to be exported to Hong Kong. But even for goods that are not yet subject to controls, Hong Kong traders are advised to contact the relevant authorities in the member states from which they wish to source goods to check whether ad hoc licensing requirements and authorisations apply.

As a good point of departure, Hong Kong traders should check the Common Military List and Dual Use List to determine which goods require a licence, even though individual member states may decide to control additional goods. An indicative list providing the TARIC codes of controlled dual use items has been published by the European Commission. It would be prudent to confirm the control status of particular goods with the exporting member state’s competent authority prior to any transaction.

Export Licence Applications

Any application for an export licence must be submitted to the competent authority in the EU member state where the exporter is established. Applications include a declaration of the country of destination and end‑use as well as the specifications of the product, its applications, a technical memorandum and other relevant information. A list of the competent authorities in each member state has been made available by the Commission.

Registration of application for dual use export authorisation should take no more than ten working days. The period between registration and the receipt of a decision on the application is determined by national laws in each member state. Each authorisation to export an item on the Dual Use List is limited to the authorised transaction only, and if the goods cross the borders of more than one member state, multiple applications may be required.

In some EU member states, exporters have to be registered with a Special Register of Exporters of Defence material and Dual Use Items in order to apply for an export authorisation. In addition, exporters are subject to certain obligations, such as the obligation to preserve the documents and records of their exports, or the obligation to declare their exports every six months.

In addition, member states’ national authorities may require export controls on items that are not listed on the Dual Use List. Exporters should therefore refer to their relevant national rules and check the situation with regard to their own specific transactions. Furthermore, individual EU countries may maintain certain specific national rules. Such rules can also apply to additional items to be controlled.

In sum, traders wishing to source products from the EU are advised to verify the list of items subject to the dual use regime in order to obtain an export authorisation. Furthermore, since member states may prohibit or impose different requirements on the export of dual use items for reasons of public security, traders are also advised to contact the competent authorities in order to check whether the export of a particular product may require an export authorisation.

Violations and Penalties

Unlike the US Export Control Reform Act (ECRA), which stipulates penalties of up to 20 years imprisonment, as well as fines of up to US$1 million for every violation, the EU does not have harmonised penalties for infringements of export control legislation. Instead, the Dual Use Regulation requires each member state to impose effective, proportionate and dissuasive penalties. These are set out in the member states’ respective national laws.

In the Netherlands, for instance, unintentional export of dual use goods without the required authorisation is an offence punishable with a maximum one-year detention or a fine of up to €21,750. Doing so intentionally is punishable with fines up to €87,000 and a prison sentence of up to six years. In addition, the seized goods will be forfeited.

In Belgium, unintentionally exporting dual use goods without an authorisation is an offence that is punishable with a prison sentence of up to one year and fines of up to twice the value of the illegally exported goods. A prison sentence of up to five years applies, if the offence was intentional, in which case the seized goods will also be forfeited.

In Spain, if the value of the dual use goods illegally exported is under €50,000, an administrative penalty of between 200% and 350% of the value of the goods applies and the trader may be barred from exporting from the country for up to one year. If the value of the goods exceeds €50,000, a prison sentence of up to five years and a fine of up to six times the value of the illegally exported goods may be imposed.

These examples demonstrate that Hong Kong traders must be aware of the applicable penalties in each country of export. Pre-transactional due diligence should therefore become an integral part of the buying process. It is important that both EU sellers and Hong Kong buyers know what this process is for and what it entails as a de-risking strategy under the new trade realities.

[1] Dual use’ refers to items, including software and technology, which can be used for both civil and military purposes. Such items can also be for use in connection with the development, production, handling, operation, maintenance, storage, detection, identification or dissemination of chemical, biological or nuclear weapons; or the development, production, maintenance or storage of missiles capable of delivering such weapons.