Export Licencing- The Silent Business Killer

Most UK exporters routinely carry on their export trade.  Whether they are exporting the goods that they have manufactured or selling on other companies’ products, the company directors generally believe that they are operating in accordance with HMRC regulations.

All of that can change when the company receives a letter from HMRC.

Most UK companies are operating in a fully compliant manner. However, it has been our experience that many businesses, including the senior leaders in that business, may be unaware of the fact that the products they are moving around the world may require additional paperwork.

We are, of course, referring to export licencing. Export Licencing is a subject that is viewed with dread by many businesses and as unnecessary “red tape” by others. There have been several high-profile cases where companies have been penalised for export licencing breaches. In addition, another area that is high on the agenda is where sanctions, such as the well-publicised Russian sanctions, are violated. With a lot of misinformation on the internet, those responsible for export processes may find themselves making incorrect decisions based on flawed information.

At AAB, we have customs professional that have been in the industry for over 30 years. It is our experience that by engaging with the process as early as possible and obtaining the right professional support, implementing export licencing can be a very straight forward and painless experience.

Export Licence for “Dual Use” goods

Businesses firstly need to establish if their goods do in fact require an export licence and, more importantly, what type of licence. The requirement for an export licence may be product, specification, or end use dependent.

In this blog we will be looking at products that fall under the category of ‘Dual-Use.’  Dual-use in this context refers to an “item” that can be used for routine commercial purposes, for a military purpose, or could be used as part of a WMD (Weapons of Mass Destruction) program. The “item” can either be a physical product, a technological solution, or be information based such as software. Importantly, where you act as an intermediary, agent, or a broker, you may still have a requirement to apply for an export licence, even if those goods never enter the UK.

As soon as ‘WMD’ is mentioned, businesses will instantly say ‘I have nothing to do with WMDs.”  With WMDs covering nuclear, biological, and chemical processes, even innocuous businesses can find themselves subject to Dual-Use restrictions. For example, in the cider industry, depending upon the materials used to make the equipment, vats, vessels, etc. that are used to ferment the apples into cider will qualify for export licencing. The same equipment could be used in the process to manufacture agents for biological warfare programs.

Even if the equipment itself cannot be used in the creation of WMDs, businesses can still find themselves subject to significant fines. In a recent case involving the tobacco industry, a company was fined $629m. Whilst the equipment involved could not be used in WMD, the UK/US company sold the equipment to North Korea (a sanctioned country), who in turn used the equipment to manufacture and sell cigarettes, the proceeds from which was then used to fund the country’s nuclear research program.

At AAB, we have many clients in the offshore energy industry. Again, although, this is a non-contentious industry, it is highly controlled. Equipment such as Hydrophones used in the exploratory phase, the equipment used in installation, on-site repair and maintenance equipment, through to ROVs and autonomous robots will all be subject to export licencing where they can be put to a Dual-Use.

Understanding the Supply Chain

In addition to the capabilities and specifications of the equipment, another critical factor in deciding whether a licence is required is the identity and status of the ultimate end-user. A typical supply chain could be that you sell your product to an overseas reseller. This company in turn sell the goods to an overseas commercial defence company, who then sell the equipment to an overseas military or government. However, it is you, as the original exporter of the goods, who is responsible for the destination of your goods, and consequently the export licence.

Whilst there will always be issues in such cases with client confidentiality, you can get a better understanding of the supply chain by asking more broad questions as part of the due-diligence process. For example, by asking “is the ultimate end-user military?” or “what country is the end user in?” and such.

A refrain often heard from companies is: “It’s okay, we sell EXW (Ex works) and so it’s not our responsibility, the licence application falls upon our customer!”  Unfortunately, it is not as simple as that. If we consider the Incoterms’ guidelines, they do state that export licencing is the responsibility of the Buyer. However, if the buyer is an overseas entity, they are not permitted to apply for an export licence. This leaves them with the requirement to use an EOR (Exporter of Record) service which can be a costly process.

It should be noted that the UK authorities (HMRC & ECJU) take the alternative viewpoint that it is the UK exporter’s responsibility to apply for the export licence. In this case, whose viewpoint would you challenge; HMRC or Incoterms? We will let you decide on that.

The key take-away message is that many products, technologies, or information could be unexpectedly classified as Dual-Use where they could be used for a purpose for which they were not meant.

Applications for Export Licences

Export licencing applications are split into two areas: Military and Dual-Use. Surprisingly, the Military licencing is more straight forward, while the Dual-Use licensing is a more technical process. As a result, the support of an experienced professional with the necessary technical knowledge to guide you through the application procedure can be extremely useful.

Please note that licence applications are just one part of the compliance picture. Submission of the licence application alone will not make you compliant.

Internal Compliance

When it comes to compliance, the authorities do insist that companies conduct their own due-diligence checks and have some form of compliance structure in place. This can be made up of several elements such as initial checks at point of enquiry (due diligence), Red Flags, Sanction & embargo checks, Denied part screening, Classification checks, Licencing checks, etc. This can sound very overwhelming; however, when implemented correctly, it works smoothly and can be implemented with little inconvenience to your business.

Putting these elements in place across the company is the building blocks for an ICP (Internal Compliance Program). Having a robust ICP in place and operating it diligently will mean that you should easily pass an export licencing audit.

Non-Compliance

The remarks from former U.S Deputy Attorney General, Paul McNulty certainly ring true for export licencing: “If you think compliance is expensive – try non-compliance.”

The penalties for export licencing violations can vary depending upon which jurisdiction across the world you are operating in. For example, the U.S authorities will impose a penalty of £250k per violation. Whilst you may not be located in the US, if you supply a US customer or are part of larger manufacturing US supply chain, then these US penalties can extend to your business.

In the UK, HMRC can take a more pragmatic view. For example, HMRC take into consideration any mitigating factors, the frequency of the violation, and the severity of any offence. There is no minimum financial penalty in the UK.

However, financial penalties are not the only recourse for the authorities across the world. It can be standard practice for your products to be recalled back to the UK. In addition, the company may be instructed to stop exporting until the authorities are satisfied you are operating compliantly, and the risk of a repeat non-compliance incident has been minimised. Regardless of what financial or operational sanctions are put in place, the company reputation and image will be tarnished.

Furthermore, a non-compliance incident is a criminal offence. Consequently, in the most severe of cases, HMRC has been known to take the matter to the courts seeking appropriate sentences. Any individual with a criminal record will be unable to hold a directorship in the UK and the red tape and restrictions placed on the company will strangle future opportunities. This can be a business killer!

With the right support and advice, export licencing procedures can be straight forward. If you would like to find out more about AAB’s export licencing services, or if you need any help please do not hesitate to contact Alan Campbell, a member of our customs team or your usual AAB contact.