This alert was written by Urszula McCormack, Darren Roiser, Robert Edel, Evan Manolios and Jack Nelson.
The recent chemical weapon attack in Syria has shocked the world and will continue to have a significant reverberating geopolitical impact. How could such a devastating attack happen? Or, more to the point, how could it happen again?
This article describes the role of dual-use items and technologies (“dual-use goods”) in chemical weaponry and other weapons of mass destruction (“WMD”), which are regulated in all major markets. It highlights the key issues that you should be thinking about if you have a role in an industrial supply chain – as manufacturer, supplier, intermediary/broker or financier. This includes financial institutions, extractive industries, pharma/chemical companies, other industrial suppliers, shipping and telecommunications companies.
Why Syria is relevant to your business
Recall that in 2013 hundreds of Syrians were reportedly killed following an attack using the nerve agent Sarin. Various reports circled about the source of the ingredients, which allegedly included UK firms and other foreign nations. Following the attack, Syria signed the Chemical Weapons Convention and agreed to give up control of its chemical weapons.
Questions surrounding this recent attack and the source of the weapons are likely to remain in the near future. However, it brings into focus:
- dual-use goods – which are essential to manufacturing chemical and other weapons, but which also have a very wide variety of perfectly legitimate applications;
- the inherent difficulties with regulating such items;
- what regulatory controls and tools you have at your disposal; and
- why your dual-use goods controls are critical to the effort to curb terrorist financing and WMD proliferation.
Knowing how your business could be misused is the first step. Controls are then essential to avoid unintentionally becoming enmeshed in proliferation or sanctions breaches. Importantly, you can trigger dual-use controls not only in your home jurisdiction, but also in your other places of business and those of your counterparties and financiers, as well as jurisdictions of trans-shipment.
The following chart provides a snapshot of the requirements that apply to various sectors, subject to local variation. Increasingly, laws are crossing international borders, meaning that it’s not enough to consider domestic law only.
Dual-use goods in a nutshell
In short, dual-use goods refer to any item or technology that has both commercial and military applications. It can include the components of a weapon, and even the items used in the manufacture of a component of a weapon. Common examples of dual-use goods include radio navigation systems (such as GPS and GLONASS), and nuclear power technologies. At one stage, even margarine and the Playstation 2 console were briefly considered dual-use goods.
There were several dual-use goods that could have had a role in the Syrian attacks. The following chart identifies some of the key components and some of their (legitimate) civilian applications.
Challenges in regulating dual-use goods
Three key issues arise when attempting to regulated dual-use goods.
Dual-use goods can have perfectly legitimate uses
First, the very nature of these items makes regulation and policy difficult to formulate: they have the ability to promote technological, human development and strengthen economic ties, yet they also pose a potential risk to international security objectives and the promote proliferation of WMDs. Chlorine for example, is a cheap, commercial solvent with a wide variety of industrial applications. However, when used for military purposes, it becomes a devastating chemical weapon.
Chemical weapons give rise to particular issues associated in their relative ease of manufacturing – on face value, many of the precursors are both innocuous and nefarious. It has been suggested that in many cases, it would be next to impossible to ensure that the chemical weapons that had been used in the Syrian attacks could be completely eradicated, since any competent chemist could theoretically make Sarin or chlorine gas.
The chart above illustrates some of the key components of the attack that have perfectly legitimate uses.
Identification and assessment can be complex
The second problem arising from attempts to regulate dual-use goods is that those destined for proliferation are difficult to identify. This is often because specialised knowledge, information and advice is often needed to determine the use of the good and its legal and regulatory implications.
Indeed, in some instances it is only when an item or technology meets precise performance specifications that it is regarded as being a dual-use good. In addition, some items can be described generally (for example, as a ‘drill’ or ‘disinfectant’). Training is necessary to enable people to look behind the innocuous appearance of such items.
Context is king
One further significant element is context. That is, when chlorine is being shipped to a well-established pool cleaning chemical company in a low-risk jurisdiction, with no ports in sanctioned countries, that is a very different proposition to it being shipped to an unknown person in (or through) a high risk country.
This means that:
- it is typically the aggregation of information that gives rise to suspicion;
- only further information and expertise can resolve it; and
- managing the risk of dual-use goods can be expensive.
At a glance: key elements of dual-use regulation
Against the above difficulties and competing policy factors, governments and international bodies have sought to provide guidance and regulation. Below we provide a flavour of the regulation adopted in this space. In most jurisdictions, the unifying approach seeks to accord with international commitments to counter the proliferation of WMDs.
Dual-use export control regime
Dual-use goods are primarily regulated through an export control regime. Co-ordination of export control measures assist countries to fulfill their obligations under the Chemical Weapons Convention and the Biological Weapons Convention.
In most jurisdictions, including Hong Kong, United Kingdom, Australia, United States and the European Union, there are proscribed dual-use goods that require prior authorisation/licensing to export items outside the jurisdiction. In this way, government can identify and trace the movement of dual-use goods, and to the extent necessary, monitor and restrict the trade of such items.
The global nature of trade necessitates co-ordination and harmonisation of processes and approach. Each country has its own (often complex) set of prohibitions and licensing requirements, with differing scope and requirements. Appropriate analysis and professional advice are often needed to navigate these rules and to assess cross-border implications.
Product control lists
Most jurisdictions maintain a control list of dual-use goods. In many cases, these lists are very specific and reflect that, as described above, the devil is often in the detail. Broadly speaking, prescribed control products lists are divided into broad categories, including:
- nuclear materials
Recently, the EU updated its export list to include laser measuring systems, specified medical supplies and a number of biological agents.
Ultimately the success of a controls list is dependent on its adoption globally, and regular review to ensure the list remains up to date.
The effectiveness of any export control or control lists measures is dependent on an effective enforcement and sanctions regime. The enforcement regime often applies to all persons and companies who supply, sell or transfer sanctioned or proscribed goods without a licence. Often, dual-use goods form part of sanctioned goods, or are destined for a sanctioned country, which serves an additional means to control the trade or supply of such goods.
The key global sanctions program is effected through the United Nations Security Council and implemented into domestic law. Jurisdictions such as the United States and Europe also impose their own sanctions programs. The lists are dynamic. Monitoring them typically involves using third party service providers and implementing robust compliance plans, as we describe below.
Education of red flags/internal compliance programs
Training, monitoring and effective compliance controls are critical to identifying potential dual-use goods. An effective compliance program must:
- reflect the risk assessment of the organisation – for example, trading in, or financing, chemical products inherently involves significantly greater exposure to this issue than merely providing;
- make appropriate use of technology, which is rapidly developing and now integrating artificial intelligence, data analytics and machine learning;
- be nimble enough to respond to changes in export control laws and regulations and standardised procedures; and
- provide early warning of potential issues and screening of enquiries.
Many organisations with which we work refer to external sources of information (for example the European Commission’s TARIC database) to assess the risk of the particular dual-use good, or if there is a restriction placed on its export. Similarly, companies’ risk analysis may extend, not only to preliminary checks, but also after the event monitoring to check the legitimacy of any transaction. Realistically, all employees should have some level of awareness of the issue and be engaged with the policies and program to ensure compliance. Specialists are essential in areas such trade finance.
To this extent, guidance from government, regulators, independent bodies and professional advisors are invaluable sources of information, not only to ensure compliance with a regulator’s expectations, but also to provide practical guidance on the implementation of policies.
Where do financial institutions fit in?
Financial institutions play a fundamental role in the development, manufacturing, brokering, financing and trade of dual-use goods. It is easy to forget this because it is secondary in nature to primary production and physical trade. Examples of services that are relevant to dual-use goods include:
- issuing letters of credit
- financing under open account transactions
- documentary collections
- bank guarantees
- loans – import/export, pre-shipment, packing, warehouse etc
- trust receipts
- import/export discounting arrangements
- correspondent banking services
- bank accounts
- FX conversions
The following chart that we produced as part of our work on The Hong Kong Association of Banks’ Guidance Paper on Trade-based Money Laundering illustrates the plethora of parties that are involved even in a simple presentation and payment scenario. We include in orange some of the key compliance steps that are involved. Any one of these steps can pick up a potential red flag that needs to be addressed.
*Basic flow of a typical presentation and settlement process
Further information is set out in our alert on trade-based money laundering.
Other issues to consider
Sanctions controls and the rapidly developing area of supply chain transparency should also be on your agenda. Further details about supply chain transparency are set out in our alert about the APAC impacts of the UK Modern Slavery Act, as well as our 10 April 2017 alert about similar proposed rules for Australia.
Awareness and solutions
It is no surprise that trade and money are central elements to every effort to sidestep, subvert measures to obtain military components – it is here that effective regulation can help to minimise the risk and proliferation.
Importantly, if your business is of significant size and scope, you must:
- assess your risk exposure;
- understand your obligations; and
- develop effective tools and programs that are commensurate with those risks.
Information in this article is based on public information. We strongly recommend obtaining appropriate professional advice before implementing dual-use goods controls or assessing a potential sanctions matter. Note the authors only practice Hong Kong, Australian and English law.