EXPORT OF DUAL-USE ITEMS: ARE YOU IN CONTROL OR WILL YOU BE CAUGHT OUT?

The government is preparing to enforce export controls on dual-use items — goods that have both a commercial and military use — starting on Jan 1, 2018, based on a Commerce Ministry notification regarding criteria and licensing requirements issued in October 2015. Consequently, companies will need to check whether their exports are covered under two lists:

List I, based on European Union regulations with some exceptions, is the list of Export Control Classification Numbers (ECCN). The goods on this list require a licence (on a shipment-by-shipment basis) before they can be exported.

List II is a wider list based on HS (harmonised system) classification codes. Companies that export goods covered on this list do not require an export licence but must follow certain procedures before export, including registering with the Foreign Trade Department and self-certifying that the goods are not dual-use items.

It is expected that many industries will be affected by the new rules, but those most likely to be affected include the following: electronics, semiconductors, computers, chemicals and pharmaceuticals, medical equipment, automotive, steel and telecommunications.

Non-compliance with the export control regime could lead to delays in shipments, reputational damage, financial loss and significant penalties and fines, or even imprisonment.

While enforcement is planned to begin by Jan 1 next year, the government is also working on a draft bill to further expand the scope of the export control regime to include both tangible and intangible exports (technology, know-how, software, etc) as well as other trade-related activities such as re-export, transit, transshipment and brokering services.

Moreover, it is expected that under the draft bill, companies will be allowed to apply for bulk licences to cover multiple shipments, rather than on a shipment-byshipment basis under the current notification. Bulk licence applications will be allowed provided that a company has a proper internal compliance programme to manage exports of dual-use items.

This draft bill (officially called the Trade Controls on Weapons of Mass Destruction Act (TCWMD Act) is currently being considered by the Council of State but is expected to pass the legislative process by the end of this year. It will take effect 180 days after it has been published in the Royal Gazette.

What do companies need to do to next? The dilemma that companies may be facing now is whether they should start preparing for the export control regime under the Commerce Ministry notification or should wait until the TCWMD Act has been approved. Clearly, this depends on whether the government will start enforcing the notification by Jan 1, or whether it will delay doing so until the TCWMD Act takes effect.

However, taking a “wait and see” approach could be very risky and is certainly not recommended, as the consequences of non-compliance could be significant. Regardless of whether the export control regime will be enforced based on the notification or the TCWMD Act, it is important for companies to start now with the work of checking and verifying whether their products are considered dual-use items (List I) and/or listed as products that require self-certification (List II).

Particularly for the items on List II, it is important to make sure that you are using the correct customs HS classification codes that are internationally recognised. Using incorrect HS codes may lead to a dangerous assumption that the product may not be subject to the export control regime, whereas in reality it might actually be controlled based on the correct HS code. As such, companies should start reviewing the HS classification codes currently applied to their exports.

Companies should also start thinking about establishing operating procedures and guidelines for export control checks, and should ensure that their staff are familiar with the list of controlled goods. These internal controls and guidelines could eventually be part of an internal control plan which would be required for bulk licensing once the TCWMD Act is in force.

There are certainly still a lot of pending questions before the export control regime is implemented. For example, will there be separate settlement criteria and penalties for non-compliance issues? How will e-licensing work out in practice? What role will the Customs Department ultimately play in the enforcement of the export control regime? What licence would apply to goods in transit and transshipment?

Nevertheless, companies should start planning and preparing now, or else they risk being caught out once the new export control regime takes effect.

Written by Yossatorn Wattanapituksaku, Manager of Customs and International Trade Consultant, PwC Thailand. We welcome your comments at leadingtheway@th.pwc.com