Legal developments within dual-use export controls

New developments to the legal framework for export of dual-use items are taking place at EU and national level. The EU legislative bodies have reached a provisional agreement on new rules under the EU Dual-use Regulation, while the Danish Business Authority has presented a draft act introducing i.a. screening of foreign direct investments in Danish companies active within sensitive sectors, including Danish companies that produce dual-use items. This newsletter covers the main points of the updates to the legal framework and is relevant to Danish exporters and Danish companies involved in the manufacture and sale of dual-use items.

Modernisation of EU export controls

On 9 November 2020, the European Parliament and the Council reached an agreement on the Commission’s proposal for a modernization of EU export controls on sensitive dual-use items, i.e. goods, software and technology that can be used for both civilian and military applications.[1]

The proposal to modernize EU export controls was initially adopted by the Commission in 2016. It brings about a wide range of amendments to Regulation (EC) No 428/2009 (”Dual-use Regulation”) and the goal is to make the EU export control system more effective.

The agreement seeks to achieve this goal through various new measures, including:

1. A common EU approach on a wider range of emerging dual-use technologies through enhanced coordination of controls between the Commission and the Member States. This includes further harmonisation of licensing conditions and requirements in order to ensure consistent and effective application of controls within the EU.
2. Stricter controls on cyber-surveillance technology, i.e. items designed to enable surveillance of information and telecommunication systems with a view to monitoring, collecting and analysing data. Moreover, an EU-level coordination mechanism which allows for greater exchange between the EU Member States concerning the export of cyber-surveillance items will be established.
3. Limiting the administrative burden for exporters and the competent authorities of the EU Member States by introducing general EU export authorisations for two new groups of dual-use items: One for export of intra-group technology transfers and one for cryptographic items.
4. Requiring exporters using global export authorisations to implement an internal compliance programme (“ICP”), where requested by the competent national authority. For the purpose of this requirement, a definition is added, whereby an ICP means “ongoing effective, appropriate and proportionate” policies and procedures adopted to facilitate compliance with the Regulation and the terms and conditions of the relevant global export authorisation.
5. Expanding the notion of “broker” under EU export control rules to include legal persons not resident or established in an EU Member State which carry out brokering services from the customs territory of the EU.
6. Introducing new reporting requirements for licensing authorities. The idea is to increase transparency of licensing decisions by requiring licensing authorities to provide the Commission with reports on the licenses granted.

The agreement now needs to be endorsed by the Member States’ ambassadors sitting on the Permanent Representatives Committee (Coreper). Parliament and Council will then be called on to adopt the proposed regulation at first reading.

New Danish rules on foreign direct investments

The Danish Business Authority has submitted for consultation a draft act which introduces a screening mechanism for certain foreign direct investments (the “Proposal”). If adopted, the Proposal is expected to enter into force on 1 July 2021.

The Proposal introduces a mandatory screening mechanism for all foreign direct investments in Danish companies within certain sectors which are considered sensitive in relation to national security and public order, including Danish companies which produce dual-use items. In addition, a voluntary screening mechanism is proposed for foreign direct investments across sectors by non-EU/EFTA investors. If an investment subject to screening is deemed a potential threat to national security, the Danish Business Authority may decide to block the transaction or require certain commitments by the investor.[2]

Next steps

As the scope of the products considered dual-use items is expanded with the updates to the Dual-use Regulation, Danish companies which have not previously been subject to the Dual-use Regulation may find that this will now change.

If a Danish company is manufacturing products encompassed by Annex I to the Dual-use Regulation,[3] the company will be seen as operating within a sensitive sector for the purpose of the proposed Danish investment screening rules. Accordingly, should the Proposal be adopted, a foreign investor wishing to invest in the Danish company may be subject to requirements on prior screening and approval by the Danish Business Authority.

It is Gorrissen Federspiel’s recommendation that Danish exporters, including specifically Danish companies involved in the production or export of dual-use items pay close attention to the legal developments described above. For Danish companies within the cyber-surveillance technology business, it is recommended to carry out a review of whether they will be encompassed by the Dual-use Regulation as a result of the proposed amendments.

Gorrissen Federspiel monitors the adoption of the amendments to the Dual-use Regulation as well as the adoption of the Proposal closely.