[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 18.12.2006

SEC(2006) 1696

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to the COMMUNICATION FROM THE COMMISSION TO THE COUNCIL THE REVIEW OF THE EC REGIME OF CONTROLS OF EXPORTS OF DUAL-USE ITEMS AND TECHNOLOGY SUMMARY OF THE IMPACT ASSESSMENT {COM(2006) 828 final}{COM(2006} 829 final}

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to the COMMUNICATION FROM THE COMMISSION TO THE COUNCIL THE REVIEW OF THE EC REGIME OF CONTROLS OF EXPORTS OF DUAL-USE ITEMS AND TECHNOLOGY SUMMARY OF THE IMPACT ASSESSMENT

BACKGROUND AND METHODOLOGY

A) BACKGROUND

The EC Regulation on export controls of dual-use items and technologies contributes to the implementation of Member States' commitments in the area of non- proliferation. This is due to the fact that dual-use items are civil items that can be used for military purposes and, in some cases, for the production or the means of delivery of weapons of mass destruction (nuclear, biological, chemical or missiles).

B) Methodology

1) The scope of the terms of reference of the study

The decision to outsource this impact assessment study was made in early December 2004 due to the lack of resources available in the DG. The draft terms of reference for the scope of the study were submitted to the Member States in January 2005. The call for tender was published in the Official Journal of the EU, on the 2 March 2005 (OJS 43).

The overall objective of the study was to examine the potential impact and enforceability of various options to reform the EU regime for export controls of dual-use items, in order to meet the standards set by the UN Security Council Resolution 1540 and to implement the recommendations following the peer reviews of the implementation of the Regulation by the Member States in 2004 (for background, please refer to the Communication on the reform of the EU regime and to past report on implementation of the Regulation from 2000 to 2004[1]).

2) The selection of the company which carried out the study was finalised in July 2005

The consultancy firm[2] started the study in September 2005. The final report was made available on 23 February 2006 at the following URL address: http://ec.europa.eu/comm/trade/issues/sectoral/industry/dualuse/pr230206_en.htm.

3) Methodology

The first task was to identify a relevant sample of exporters. To that end, a questionnaire was sent to about 450 potential dual-use exporters based in the EU (including a large number of EU federations of industry (70)). The consultation of exporters and other stakeholders concerned by the study was made public on the DG TRADE webpage on 5 October 2005. The sample of stakeholders (about 150 companies) consulted in the survey was based on exporters' answers to the first questionnaire. Its distribution of SMEs, large and medium sized companies and of suppliers of the 10 categories of dual-use items listed in the Annex I of the Regulation[3] is satisfactory. Transporters and traders were also consulted. All stakeholders were consulted on the different options for reforming the Regulation during the study and were actively involved in the process. Opinions from Member States and other stakeholders on the results of the study and the intended follow-up by the Commission services were collected from January until early July 2006 and are well reflected by this proposal. |

MAIN OPTIONS TESTED IN THE IMPACT ASSESSMENT STUDY, COMMISSION SERVICES' VIEWS ON THE IMPACT ASSESSMENT FINDINGS AND COMMISSION SERVICES' SUBSEQUENT PROPOSALS TO THE COUNCIL

A) Options tested in the outsourced Impact Assessment Study but not reflected into Commission’ proposals to amend the Regulation

1) Transparency of legislation to exporters

The option tested in the impact assessment study enabled the assessment of the cost for Member States to align on a common EU minimum standard of transparency regarding the access for national exporters to relevant legislation and guidelines facilitating enforcement. The conclusions have been that those Member States not having a website or those Member States whose websites did not contain the necessary minimum content defined in the study should remedy the situation without delay.

Another option accepted by DG TRADE is that its webpage[4] be extended to include more background information on international export control regimes[5] and to constitute a useful and added value point of entry to all EU MS websites. Another important recommendation supported by DG TRADE is to create a "single window" in the Commission so that all relevant EC legislation on export and import is accessible to EU economic operators and located in a single place.

2) Option to condition the granting of global export authorisations (defined in Article 6 of the Regulation) to the implementation by the exporter of an internal compliance programme

The rationale for testing such option was:

- the initial surveys made by DG TRADE and confirmed by the peer reviews which stressed discrepancies in Member States’ practices

- the recognition that other governments have induced exporters to adopt ICP in their recommended best practices (USA in particular).

The findings highlighted the important benefits of ICPs on exporters’ capacities to fully comply with the scope and the conditions of the export authorisations granted to them in particular in case of intangible transfers of technology. However the study was too short in its duration to make an in depth assessment on industry and on Member States' administrations of imposing ICPs.

All those considerations led DG TRADE to renounce to the initial option and to propose to amend the current Article 8 of the Regulation to refer to ICP as a positive factor to be taken into account in assessing applications for global export authorisations.

3) Amendment to the Community general export authorisation to allow Member States to withdraw its use to criminals

The justification of this option originated in surveys of Member States' practices and of their enforcement of criminal sanctions against the violation of the Regulation. It was found that about 50 exporters in the EU have been convicted with criminal sanctions related to the violation of the Community general export authorisation . This led consultants and some Member States to conclude that this could not justify amendments to the Regulation. Other implementation difficulties were reported and led DG TRADE to renounce to this option.

4) Creation of new and additional Community General Export Authorisations (possibly EU 002 and EU003)

The study has highlighted that the exporters who could benefit of national general export authorisations at national level enjoy a comparative advantage compared to other exporters. In order to create a level playing field for all EU exporters, the Commission is committed to make proposals to create new and additional Community General Export Authorisations however no sufficient time was available to enable the Commission to include such proposals in the present document. Details can be found in the Annex V to the Commission communication on the reform of the EU Regulation.

5) Option to impose maximum timeframe to process export authorisations

The study has revealed that exporters suffer in some cases of important delays imposed by Member States administrations in the course of their processing of export applications. Such delays are detrimental to those exporters' penetration of third markets (in particular in emerging economies such as China, India) since those markets are served by foreign competitors who either get those authorisations quicker or are already established on those markets.

This has led to recommend that the recasted Regulation include a provision requesting Member States to insert into their legislation an indicative time frame for the processing of applications for export authorisations or of exporters' inquiries to national authorities regarding the status of export authorisations of non listed items in case of doubts as to their end use.

6) Options to remedy inconsistencies in national interpretations of items listed in Annex I

The only means to remedy those divergences that can exist between member States or between EU and third countries members of the regimes are to refer those cases to the international export control regimes since it is those regimes who define the content of the controls. However, given that the European Community has no role in those regimes and has not opted for asking an enhanced role, such actions have not been retained but industry is encouraged to report those cases to the Commission so that the Commission can report them to Member States.

B) Options which have been studied in the outsourced impact assessment study and which have led to the Commission’s proposals to amend the EC Regulation

1) Harmonisation of export authorisations format defined in Annex IIIa)

The study has concluded that there is a need to recast the Regulation so as to remove existing ambiguities created by the current wording. This will create a level playing field and facilitate enforcement in the EU as it was found that some national export control authorisations do not meet the requirements in Annex IIIa).

2) Introducing controls of transit and transhipment of dual-use items

The justification of the options comes from:

- the obligations set by the Resolution UN SC 1540 adopted in April 2004 and renewed in 2006;

- the fact that such controls are exempted by Article 3-4 of the Regulation.

The options were based on the three different types of controls that are currently in force in few Member States[6]. The definition of transit used in the proposal also covers transhipment.

Given the high volume of trade passing through the EU, the proposal to submit all transit or transhipment of dual-use items entering into the EU with a destination outside the EU to systematic pre-authorisation requirements was excluded. The alternative consisting in submitting only certain transit or transhipment cases to authorisations (the suspicious ones) was disregarded based on comments from Member States and transporters. The choice has been to propose to allow all Member States competent national authorities to take possession of a dual-use item in transit or transhipped when they have serious indications (mainly from intelligence sources) that the item is or may be intended for illicit proliferation in a third country.

3) Introducing controls on brokering/provision of intermediation services regarding dual-use items

The different options have taken into account that brokering controls (a service facilitating a transaction covering dual-use items located in third countries) would cover goods located outside the EU and therefore would be submitted to third country's legislation. The study has revealed the extreme difficulty to enforce such controls. It was concluded that controls should only cover two limited cases:

- when the broker is aware of the illicit WMD end uses of the goods in third countries

- when the Member State where the broker is located has informed him of proliferation risks.

Under those cases, the broker will be bound to apply for an authorisation if he aims at pursuing the transaction.

4) Harmonisation of the implementation of the end use controls

The option tested consisted in deleting from the current Article 4.6 of the Regulation the words “ where appropriate ”. Those words restrict the scope of the sharing of information among Member States on national obligations to control non listed items to certain end users to only those cases that Member States consider as "appropriate". The study has shown that "where appropriate" meant in Member States' practice "never". A Commission survey has also confirmed and completed the study's findings about the significant discrepancies in Member States' practices which create not only distortions to trade but undermine the EU security and the efficiency of the EU export control system

The results of the study have led to propose a middle position between the option initially tested and the current situation. The proposal aims at obliging Member States to share with other Member States and the Commission relevant details (products and end users) regarding the general requirements that Member States impose to national exporters to oblige them to request an export authorisation prior to exporting a non listed item to a given end user (under Articles 4.1 to 4.3 or 4.4 of the Regulation). In addition, it is proposed to organise regular sharing of Member States' practices so as to encourage convergence and harmonisation

5) Harmonisation of the conditions of use of the Community general export authorisation and the national general export authorisations

a) Regarding the Community general export authorisation, the impact assessment study has led the Commission to opt for a proposal which:

- clarifies that exporters will only have to register to national authorities by notifying their intention to use the Community general export authorisation before or at the latest 30 days after the first shipment;

- aligns the reporting requirements on those described under Article 16 of the Regulation;

- lists the criteria under which the use of the Community general export authorisation can be denied.

b) Regarding the harmonisation of the conditions of use of the National General Export Authorisations, the option aims at strengthening enforcement by imposing registration to all exporters using those national authorisations.

6) Registration of all exporters using export authorisations and of suppliers intending to transfer dual use goods listed in recasted Annex V within the Community (Recasted Article 25)

The positive impact originates from the Member States' increased capacities to control the implementation of the Regulation.

C) Other recommendations which are reflected into proposals to amend the EC Regulation were not part of the outsourced impact assessment study but their impact assessment was made internally to the DG in cooperation with relevant DGs

1) Clarification of the content of the controls of intangible transfers of technology (Recasted Article 2biii))

The proposal can have a certain impact on industry as currently there is no EU-wide definition and harmonisation of the enforcement of intangible controls of technology. One reason has been that until recently, it was not clear if the current Article 2biii) covered the transmission of controlled dual-use technology via the access to intranet by third parties located outside the EU.

2) Recasted Article 7.2 aims at reducing the current risks that a Member State exports a dual use item to an end user when this transaction threatens the essential security interests of another Member State

A study carried out by DG TRADE revealed that in 50% of cases, the Member State who had asked another Member State to stop an export threatening its essential security interests under Article 7.2 had not been successful. The added value of the proposal is to extend the current bilateral consultations to other Members States in case of disagreement between the two Member States concerned so as to enhance EU security.

3) Recasted Article 9 of the Regulation aims at improving the sharing of denials and reduce the risks that one Member State exports a dual-use item to an end user which would have been refused by another Member State

Following initial Commission proposals made in 2003 and the conclusions of the peer reviews, the proposals to amend the Regulation aim at:

- implementing the peer review recommendations;

- aligning the EU regime on international export control regimes' guidelines calling for regular review of the validity of denials issued after a certain period of duration;

- enabling the EU to develop, where appropriate, a secure electronic system for sharing sensitive information including on denials based on the lessons learnt by the Commission services from the ongoing pilot database.

An assessment of the costs of establishing such a system is provided in the annex to the Explanatory Memorandum of the proposal for the amendment of the Regulation.

4) Recasted Article 10 provides that Member State can manage the entire process of export authorisations electronically

The amendment of Article 10 aims at facilitating work in conformity with industry's requests.

5) Recasted Article 11 on list of items to control in the EU It aims at adjusting the Regulation to the institutional state of play since May 2004 because not all new Member States have become members of international export control regimes.

6) Recasted Article 16 of the Regulation

In addition to the obligation for registration detailed above in part B-6, the obligations regarding record keeping have been amended to meet demands from stakeholders to improve the situation by introducing proportionate and enforceable requirements in particular for Intangible technology transfers and for intermediaries providing intermediation services.

7) Recasted Article 19 creates a comitology process for the review of the control list

The objective is to create a comitology procedure for amending the list of items under control (Annex I of the Regulation). It will have positive impacts on Member States and on industry. The impact will be mainly of technical and administrative nature for the Commission.

8) Recasted Article 21introduces a reference to criminal penalties at least for serious infringements of the Regulation and the provisions adopted by Member States for its implementation

a) The impact will be beneficial as it will provide a deterrent for the violation of export controls regulations. It responds to the call in the European Strategy against the proliferation of WMD adopted on 12 December 2003 to adopt common policies related to criminal sanctions for illegal export, brokering and smuggling of WMD-related material, and to the call by UNSC Resolution 1540 for the introduction of appropriate civil or criminal penalties for violations of such export control regulations. At the same time, it reflects the current practices of Member States that came from a survey carried out in 2005 by the Commission services in conformity with the European Council declaration of June 2004.

b) Recasted Article 22 on international cooperation

It will contribute to solving current situations such as those, among others, where exporters in third countries and in the EU are obliged either to violate third countries laws or the principle of freedom of movement of dual-use items in the single market. It will also facilitate mutual recognition of export authorisations which has the potential to greatly facilitate joint industrial projects or research projects with third countries. It will allow for the adoption of specific procedures for export controls in case of EU dual use technologies being involved (tangibly and intangibly) in projects associating third countries.

9) Recasted Article 24 to introduce more transparency in the European Commission report on Member States' practices

The impact will be to increase transparency to the benefit of all parties.

10) Recasted Article 25) to replace the current prior transfer authorisations for items listed in recasted Annex V by a pre-notification system conformity with the principles of freedom of move of dual use items in the single market and in line with the Article 30 of the EC Treaty.

The impact is positive for industry as it will facilitate transfers within the internal market without having a negative impact on security as Members States will retain the possibility of blocking such transfers for justified reasons.

11) Introduction of a review clause which is a good practice required by the Commission's commitment towards better Regulation.

The impact is positive for all stakeholders.

[1] Available on TRADE website at: http://ec.europa.eu/comm/trade/issues/sectoral/industry/dualuse/index_en.htm

[2] The notice announcing the selection was advertised on DG TRADE website on 10 August 2005.

[3] A small number of Member States have accepted to give to DG TRADE names of exporters to consult or the number of exporters to which they grant export authorisations. However the total number of EU exporters of dual use items can range between 5000 and 6000. The Member States issuing the highest number of authorisations count individually about1000 exporters each. Those issuing medium volume of authorisations count between 50 to 100 exporters each while some Member States count no exporter.

[4] http://ec.europa.eu/comm/trade/issues/sectoral/industry/dualuse/index_en.htm.

[5] Currently the page (http://ec.europa.eu/comm/trade/issues/sectoral/industry/dualuse/links.htm) gives access to the relevant websites of all international export control regimes such as the Nuclear Suppliers' Group, the Wassenaar Arrangement, the Australia Group (Biological and chemical dual use items) and the Missile Technology Control Regime.

[6] 3 types of control have been identified:

- systematic ex ante authorisation

- ex ante authorisations imposed by national authorities only for suspicious transactions

- legal possibility for national authorities to stop dual-use items in transit and in some cases to confiscate them.