Compliance or Consequences

Between January and September 2024, UK exporters received HMRC settlements totalling £4.7 million for violations such as unlicensed exports, non-compliance with license conditions, and breaches of Russian sanctions – breaching export controls can have significant financial and reputational costs for businesses.

Export controls are a critical aspect of international trade, ensuring that goods, technology, software, and knowledge transferred from the UK do not compromise national and global security, with the controls governed by a complex framework of laws and regulations.

Compliance with these controls is not just a legal obligation but a crucial component of responsible business practices. Recent cases brought by HMRC are a reminder that breaches of export controls can have severe consequences for businesses, as well as for responsible directors.

What are Export Controls?

UK Export Controls are legal restrictions on the transfer of certain items from the UK to other countries and are in place to:

• prevent internal repression, regional instability, or other human rights violations
• curb the development and proliferation of Weapons of Mass Destruction (WMDs)
• adhere to international treaties and foreign policy objectives
• protect the security interests of the UK and its allies.

The responsibility for compliance with the controls lies with the UK exporter, regardless of the terms of sale. For example, if goods are exported under Ex-Works terms, while the foreign buyer may be responsible for export customs clearance, the UK business in responsible for compliance with export controls. Even where the business does not export, it’s involvement in a supply chain which ultimately breaches export controls can result in legal action and penalties.

The UK Strategic Export Control Lists, a comprehensive 400-page document known as ‘the consolidated list’, defines whether goods are controlled and be highly complex to navigate. It should be noted that commodity codes are entirely distinct from the consolidated list and can only act as a general steer to whether goods may be controlled.

Categories of controlled goods

Controlled goods fall under three main categories.

• Military goods: items specifically designed or modified for military use, such as firearms, explosives, and certain chemicals. These require a licence for export to all destinations.
• Dual-Use goods: items that can be used for both civilian and military applications, such as certain chemicals, electronics, and software. For example, ball bearings used in bicycles could also be repurposed for the production of ballistic missiles.
• End-Use controls: these apply to any item based on its potential end-use, particularly if it may be used in the development, production, or delivery of WMDs. Approximately 40% of licence refusals are based on end-use grounds.

Certain cultural items are also subject to export controls e.g. artworks and antiques, with this system managed by the Arts Council England (ACE).

Compliance requirements

For goods which are controlled, different licences can be used depending on the circumstances, including Standard Individual Export Licences (SIELs), Open Individual Export Licences (OIELs), and Open General Export Licences (OGEL).

Following the UK’s exit from the European Union in December 2020, export controls also apply to the export of controlled goods from the UK to the EU. While an OGEL can be used for such exports, strict compliance with the conditions of the licence is essential to avoid penalties.

Complying with UK export controls involves:

• applying for the appropriate licences well in advance of shipment
• providing accurate and complete information in license applications
• conducting due diligence on end-users and other actors in the onward supply chain
• referencing the licence on export declarations and other shipping documents
• maintaining relevant documentation and accurate records.

Consequences of non-compliance

The penalties for non-compliance with export controls can be stringent and are governed by the Customs and Excise Management Act (CEMA) 1979.

• Strict liability offences, CEMA Section 68(1): even without intent, penalties can reach up to three times the value of the goods.
• Deliberate offences, CEMA Section 68(2): Intentional breaches can lead to penalties of up to 10 years in prison.

HMRC often opts for compound settlements when breaches are identified. Between January and September 2024, UK exporters faced settlements totalling £4.7 million for violations such as unlicensed exports, non-compliance with license conditions, and breaches of Russian sanctions.

Recent examples highlight the gravity.

• September 2024: a company paid a £1.5 million settlement for the unlicensed export of military goods.
• March 2024: Another company faced a £1.1 million settlement for the unlicensed export of dual-use goods.

Another recent case from October 2024, underscores the importance of compliance. A missile launched by Russia and shot down over Ukraine was identified as North Korean but contained several Western-made components from companies based in the UK, US, and the Netherlands.

These companies were publicly named in media reports and are likely to face penalties due to potentially inadequate internal procedures and controls. This incident highlights the critical need for rigorous compliance to prevent such breaches and their far-reaching consequences.

The message is clear: non-compliance can lead to substantial financial penalties and severe legal consequences. Ensuring adherence to export controls is not just a legal obligation but a critical business imperative.

Voluntary disclosures

Where a business becomes aware that it has breached export controls, HMRC encourages voluntary disclosures to be made to them for any offending incidents, and recently advised that they have seen an increase in disclosures relating to:

• unlicenced exports
• incorrect licence usage
• breach of licence conditions.

The Export Control Joint Unit (ECJU), part of the Department of Business & Trade, administers the UK’s system of export controls, while HMRC are responsible for enforcement action relating to non-compliance.

While the ECJU conduct their own audits of UK exporters, broader HMRC customs audits are also expected to increasingly cover export controls within their scope moving forward. Non compliance is also often detected by Border Force when goods are presented for export from the UK.

Export controls in the current climate

The current global geopolitical context, marked by increasing conflicts and tensions, makes compliance with export controls more complex and essential. As global security dynamics evolve, businesses must navigate a more intricate regulatory landscape and ensure their practices align with international standards.

Compliance with export controls is crucial not only to avoid penalties but also to maintain the integrity and reputation of businesses. Non-compliance can result in severe financial and legal consequences, damage to a company’s reputation, and loss of business opportunities. Additionally, adhering to export controls ensures that businesses contribute to global security and stability.

How Crowe can help

Understanding and complying with UK export controls is essential for any business involved in international trade. It ensures legal compliance, protects national and global security, and upholds the reputation and integrity of businesses.

We offer a range of services to help businesses navigate UK export controls.

• Awareness and education programs.
• Establishing controls and procedures.
• Assisting with voluntary disclosures.
• Providing training and managing customs or ECJU.

To discuss this further, please contact Ian Worth or your usual Crowe contact.