In addition to enhanced FCPA and other anti-corruption law risks, companies in the Aerospace and Defense industry face a constantly changing array of international trade regulations.

This issue discusses a new EU export control regulation that would impact high specification “dual-use” products and technologies used in the A&D industry, outlines retaliatory sanctions guidance by the US State Department for transactions involving the Russian Defense and Intelligence Sectors, and highlights recent activity by a new anti-corruption committee in the Kingdom of Saudi Arabia that potentially impacts companies pursuing programs or under contract with the Saudi government and private entities.

In this issue:

On September 28, 2016 the EU Commission adopted a proposal for a Regulation for the modernization of the EU export control system of dual-use items (the "Regulation"), currently governed by Regulation EU No. 428/2009.

Dual-use export controls affect research and development, production and trade of typically high-tech, advanced products across a wide-range of industries, such as aerospace, defense, security, telecommunications and information, electronics, lasers and navigation. Dual-use products and technologies used by companies in the A&D industry are not specifically designed for a military purpose, but are utilized for such a purpose because of the high specification.

In this context, the Regulation aims at adjusting the existing EU export control regime to the evolution of security risks and threats and to rapid technological and scientific developments and transformations in global economic relations, with a view at increasing the protection of human rights and bringing benefits in terms of reduction of administrative burdens both for operators and public administrations.

Should the Regulation be approved substantially in its current version, it would introduce various innovations and changes to current EU export control regime for dual-use items, including the following:

Modernization of existing control provisions

Amendments to key export control notions:

  • The definition of "dual-use items" is extended to include: (i) items which can be used for the design, development, production or use of nuclear, chemical and biological weapons and their carriers; and (ii) cyber-surveillance technology, which can be used to violate human rights or international humanitarian laws, or can pose a threat to international security or the essential security interests of the EU and its Member States;
  • The definition of "exporter" is extended to "any natural person carrying the goods to be exported where these goods are contained in the person's personal baggage";
  • The definition of "export" is extended to export, re-export and the outward processing (i.e. the temporary export of goods to perform processing operations).

Technical assistance

The proposal makes the provision of technical assistance related to dual-use items subject to a prior authorization in cases where the items in question may be intended, in their entirety or in part, for:

  • Use in connection with the development, production, handling, operation, maintenance, storage and detection of chemical, biological or nuclear weapons or of missiles capable of delivering such weapons;
  • Use as parts or components of military items that have been exported from the territory of a Member State without authorization or in violation of an authorization prescribed by national legislation of that Member State;
  • A military end-use, if the purchasing country or country of destination is subject to an arms embargo;
  • Use by persons complicit in or responsible for violations of international human rights law or international humanitarian law; and
  • Use by persons, groups and entities involved in terrorist acts and subject to restrictive measures.

Strengthening of controls on brokering services

In order to reduce the risk that brokering controls are circumvented, the Regulation proposes to extend the definition of "broker" to include also subsidiaries of EU companies outside of the EU and brokering services supplied by third country nationals from within the EU territory. With respect to brokers resident or established outside of the EU, the proposal clarifies that the relevant export authorization shall be granted, alternatively, by the competent authority of the Member State where the broker's parent company is established, or from where the brokering services will be supplied.

Moreover, in order to ensure the consistency and effectiveness of brokering controls, the proposal harmonizes their application to non-listed items and military end-uses and extends such controls when there is a suspicion that the item under brokerage be used by terrorists or to violate human rights.

Strengthening of transit controls

The proposed Regulation extends the definition of transit to items which: (a) are placed under the external transit procedure and only pass through the customs territory of the EU; (b) are trans-shipped within, or directly re-exported from, a free zone; (c) are in temporary storage and are directly re-exported from a temporary storage facility; and (d) were brought into the customs territory of the EU on the same vessel or aircraft that will take them out of that territory without unloading.

In order to ensure the consistency of control and avoid distortions of competition and the risk of weak links in the chain of controls, the Regulation also harmonizes the application of transit controls to non-listed items and military end-uses, and extends controls to the risk of misuse for terrorist acts and human rights violations.

Amendments to the EU Licensing Framework

The Regulation revises licensing processes by providing common licensing parameters (e.g., validity period) and conditions for use of EU General Export Authorizations (registration, reporting requirements, etc.) and global licenses (requirement for an Internal Compliance Program).

The Regulation provides for introduction of a new “Large Project Authorization" -- a global export authorization granted to one specific exporter, in respect of a type or category of dual-use item which is valid for exports to one or more specified end users in one or more specified third countries for the duration of a specified project the realization of which exceeds one year.

New EU General Export Authorizations include:

  • Low Value Shipments," aimed at facilitating controls for shipments under a certain value provided that items and destinations are eligible and certain conditions are met;
  • Intra-company transmission of software and technology," aimed at facilitating transfers of dual-use technology within a company and its affiliates in non-sensitive countries (particularly for research and development purposes, as long as the technology remains under ownership or control of parent company); and
  • Encryption," aimed at ensuring a level-playing field due to license exceptions existing in certain non-EU countries also in light of the commercial importance and wide circulation of encryption items.

Controls on Cyber-Surveillance Technology

The proposal sets out new provisions for an effective control on the export of cyber-surveillance technologies, which are defined as items specially designed to enable the covert intrusion into information and telecommunication systems with a view to monitoring, extracting, collecting and analyzing data and/or incapacitating or damaging the targeted system.

To this end, the Regulation introduces an EU autonomous list of specific cyber-surveillance technologies of concern to be subject to controls (e.g. monitoring centers and data retention systems). These controls are complemented by a catch-all clause, which allows controlling the export of non listed cyber-surveillance technologies in certain situations where there is evidence that they may be misused by the proposed end-user for directing or implementing serious violations of human rights or international humanitarian law in situations of armed conflict or internal repression in the country of final destination.

Next steps

The Regulation has already been reviewed by the EU Parliament's Foreign Affairs and International Trade Committees which, on December 6, 2017, submitted the draft Regulation along with the relevant accompanying report to the EU Parliament for its vote in plenary sitting, scheduled for January 16, 2018.

After that vote, the Council may decide to accept the Parliament's position, thus resulting in the final adoption of the legislative act, or to amend the Parliament's position, in which case the proposal would be returned to the Parliament for a 2nd reading.

Based on the opinions and reports issued to date by the competent Committees, it is likely that the present version of the Regulation will not be subject to significant changes and that the approval process, which was initially intended to be concluded in 2017, will come to an end by the first quarter of 2018 with the Regulation entering into force on the ninetieth day following that of its publication in the Official Journal of the EU.

Additional information and material on the Regulation is available on the website of the EU Parliament at:

Implications for A&D Companies

Following approval of the Regulation, EU-based companies, including EU subsidiaries of foreign companies, whose products, technologies and activities fall within its scope, will be required to comply with the new regime, paying special attention to those provisions broadening the definition of "dual-use items" and "export," strengthening transit controls and controls on brokering services and making the supply of technical assistance related to dual-use items subject to prior authorization.

In particular, all companies affected by the Regulation will have to adopt effective and appropriate internal compliance programs setting forth specific protocols and procedures aimed at ensuring compliance with export control provisions and the terms and conditions of authorizations set out in the Regulation. Indeed, the adoption of said internal compliance programs not only represents a precondition for the granting of global export authorizations but also the most suitable instrument to avoid the application of potential penalties resulting from the violation of export control rules.

In this respect, it should be noted that, although the Regulation does not directly establish consequences for noncompliance, it requires Member States to take appropriate measures to ensure proper enforcement of all its provisions, including the identification of effective, proportionate and dissuasive penalties applicable to infringements.

In early November, a new anti-corruption committee in the Kingdom of Saudi Arabia (the “Committee”), headed by Crown Prince Mohammed bin Salman, reportedly detained 11 Saudi princes, four sitting ministers, and dozens of ex-ministers. According to press reports, a total of 320 people were subpoenaed to provide information about alleged graft and 159 people remain in detention in Riyadh’s Ritz Carlton Hotel. On December 5th, Reuters reported that according to a Saudi minister, the main wave of arrests is over and the government is preparing to channel $50-$100 billion of seized funds into economic development projects.

The list of prominent Saudi detainees reportedly includes:

  1. Former President of Meteorology and Environment Protection - Prince Turki Nasser;
  2. Former National Guard Minister– Prince Fahad Abdullah Mohammed;
  3. Current Minister of State and previous Minister of Finance – Ebrahim Al Assaf;
  4. Former Minister of Economy and Planning – Adel Faqeeh;
  5. Naval Forces Commander – Abdullah Sultan;
  6. Former Head of the Royal Diwan – Khaled Tuwaijri;
  7. Head of Royal Protocol at the Saudi Royal Court – Mohammed Al Tubaishi;
  8. Former Governor of the Investment Authortity – Omru Al Dabbagh;
  9. Former CEO of STC Group – Saud Al Daweesh;
  10. Chairman and founder of the Dallah Al Barakah Group – Saleh Kamel (and sons);
  11. Businessman and Chairman of Middle East Broadcasting - MBC - Waleed Al Ibrahim;
  12. Director General at Saudi Arabian Airlines – Khaled Al-Mulhim;
  13. Chairman of Jeddah-based Saudi Binladin Group – Bakr bin Laden;
  14. Businessman & Investor – Mohammed Al Ammoudi;
  15. National Guard Minister – Prince Miteb Abdullah Abdulaziz;
  16. Previous Riyadh Prince – Prince Turki bin Abdullah; and
  17. Director of Kingdom Holding Company – Prince Alwaleed bin Talal Al Saud

It is noteworthy that this list includes the Saudi Arabian National Guard (SANG) Minister, Prince Miteb Abdullah Abdulaziz, and Navy Commander, Admiral Abdullah Sultan, who both were replaced with no official explanation given. Prince Miteb reportedly was released from detention after agreeing to pay over $1 billion. The list also includes Prince Turki bin Abdullah, whose experience in the Royal Saudi Air Force (RSAF) made him an important advisor to a number of US and European defense contractors, and Prince Alwaleed, one of the world’s richest men whose investment firm, Kingdom Holding, owns shares in Twitter, Apple, Citigroup, the Four Seasons hotel chain, and Lyft.

While the full implications of the Committee’s reported actions are not yet clear, the change in leadership at the SANG and Navy and the detention of many prominent princes, current and former ministers, and businessmen for alleged corruption may impact aerospace and defense (A&D) companies who have been working with any of the detained individuals. The reported leadership changes and detentions also may impact companies that are currently pursuing programs or are under contract with the Saudi government, including the RSAF, SANG, Navy, and various ministries, departments and Saudi companies, including ARAMCO.

Given the corruption-related nature of the allegations, it would be prudent for companies to review their operations in Saudi Arabia to see whether they have been working with any of the reportedly detained individuals and, if so, to determine what the legal and business implications of the recent Saudi government actions may be. Through our offices in Riyadh and Jeddah, as well as in the United States, we are closely monitoring the ongoing developments in the Kingdom and are available to support clients doing business in Saudi Arabia in dealing with the effects and implications of these dramatic recent changes.

On October 27, 2017, the US State Department issued guidance regarding Section 231 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”; see our previous blog post on the CAATSA here). This provision requires that the President impose retaliatory sanctions on any individual or entity, regardless of nationality, that knowingly engages in a “significant transaction” with a person that is determined to be part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation. The State Department will not begin imposing retaliatory sanctions under Section 231 until January 29, 2018, but this guidance provides important information for US and non-US companies that do business in Russia with the entities targeted by entities.

CAATSA Section 231 and the Section 231 Lists and Guidance

Section 231(d) of CAATSA required that the Trump Administration issue guidance 60 days after the passage of CAATSA (i.e., by October 1, 2017) identifying the Russian entities determined to be part of or operating on behalf of Russia’s defense and intelligence sectors. After a delay of over three weeks, the State Department issued the following:

Section 231 does not impose new sanctions directly on the entities identified on the Section 231 Lists, although many of these entities have already been designated by the US Government on the US Specially Designated Nationals and Blocked Parties (“SDN”) or Sectoral Sanctions Identifications (“SSI”) Lists. Rather, Section 231 provides that any parties engaging in “significant transactions” with these entities could be subject to retaliatory sanctions. In this sense, Section 231 is similar to the “secondary sanctions” measures used to great effect in the past by the US Government as part of its Iran sanctions program.

Guidance on “Significant Transactions"

One of the biggest questions around Section 231 related to how the State Department would determine whether a transaction is a “significant transaction.” According to the Section 231 Guidance, the State Department will consider “the totality of the facts and circumstances surrounding the transaction and weigh various factors on a case-by-case basis.” The guidance does not provide a de minimis exception. Factors that the State Department says will weigh towards finding a transaction to be “significant” include:

  • Having a significant adverse impact on US national security and foreign policy interests;
  • The nature and magnitude of the transaction; and
  • The relation and significance of the transaction to the defense or intelligence sectors of the Russian government.

The State Department states that, in the initial stage of implementing Section 231, it will focus on transactions of a “defense or intelligence nature.” Thus, if a transaction has purely civilian end-uses and/or end-users and does not involve intelligence entities, the State Department advises that those factors will weigh heavily against finding a transaction to be “significant.” The Section 231 Guidance also provides that, if a transaction with the Federal Security Service (“FSS” or “FSB”) is necessary to comply with rules and regulations administered by that agency, including regulations involving the importation, distribution, or use of information technology products in Russia, that would weigh heavily against finding the transaction to be “significant.”

Potential Retaliatory Sanctions

If the State Department determines that a person has engaged in a “significant transaction” with an entity on the Section 231 Lists on or after January 29, 2018, it must impose five or more of the following sanctions on that person:

  • Denial of assistance by the US Export-Import Bank;
  • Denial of specific authorization to receive exports of controlled goods or technology from the United States;
  • Restrictions on receiving loans totaling more than USD 10 million over any 12-month period from US financial institutions;
  • A requirement that the United States oppose any loan from international financial institutions that would benefit a sanctioned person;
  • If the person is a financial institution, it may be prohibited from being designated as a primary dealer in US Government debt instruments or serving as an agent of the US Government or a repository for US Government funds;
  • Debarment from US Government contracting;
  • A prohibition on engaging in any transactions in foreign exchange that are subject to US jurisdiction;
  • Restrictions on banking transactions by the sanctioned person, including on transfers of credit or payments between, by, through, or to any financial institution;
  • A prohibition on transactions involving the property of the sanctioned person that is subject to US jurisdiction;
  • A ban on investment in the equity or debt of the sanctioned person;
  • Denial of entry visas to the United States for foreign officers, principals, and controlling shareholders of the sanctioned person; or
  • The application of any of the above sanctions on the principle executive officer(s) of the sanctioned person.


Despite this new guidance, it remains to be seen whether the State Department will be aggressive in its application of the Section 231 sanctions—particularly given the broad discretion that it has retained to determine whether a transaction is “significant.” Although the new sanctions require that a person “knowingly” engage in a significant transaction with an entity on the Section 231 Lists in order to be sanctioned, it is also unclear how the State Department will apply that provision. CAATSA defines “knowingly” by referencing the definition for that term in the Iran Sanctions Act of 1996, which provides that “knowingly,” “with respect to conduct, a circumstance, or a result, means that a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.”

Finally, it is possible that the Russian Government could retaliate against these steps by the Trump Administration. Baker McKenzie will continue to monitor the situation and provide updates on new developments.

The following resources may be of particular interest to those companies doing business in the Aerospace and Defense Industry. The publications may be accessed either directly through the links below, or will be emailed to you upon receipt of your request through the respective links.

  • Anti-Bribery Handbook Website (2017 edition)

    A dedicated website to enable our lawyers and clients to quickly access and cross-reference jurisdictions of interest.

  • Global Dawn Raid App (April 2017)

    A mobile application that, across 44 countries, provides clients with real-time, step-by-step guidance on their rights and obligations, as well as instant access to Baker McKenzie lawyers.

  • Global Trade Secrets Handbook

    A definitive reference that examines how trade secrets are protected, what businesses need to be aware of, the risk of employee misappropriation and cyber security breaches, and what to do if trade secrets get into the wrong hands.

  • Trade Secrets Checklist

    Practical steps and best practices to enable businesses to protect their trade secrets.
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