Export controls are gaining ever increasing prominence. Their breach can lead to heavy financial penalties, reputational damage, and even criminal prosecution.
In the UK, HM Revenue & Customs ("HMRC") has recently reported a concerning increase in incorrect licence usage, breach of licence conditions and unlicenced exports. The latest figures to be published show that, in the first half of this year alone, HMRC issued nine compound penalties, including in February a penalty of just under £1 million relating to the unlicenced exports of military goods, and in March, a penalty exceeding £1 million in relation to the unlicensed exports of dual-use goods.1
Often, companies fall foul of UK export controls because of a lack of awareness and / or understanding of the changing legislation concerning dual-use items. A key legislative change, the Export Control (Amendment) Regulations 20242 (the "ECAR 2024"), introduced this year, may have significantly increased the scope for getting it wrong.
The UK Legislation
UK export controls are governed primarily by the Export Control Act 2002 and the Export Control Order 20083 (the "ECO 2008"). Following the UK's exit from the European Union (the "EU"), the ECO 2008 retained the controls imposed on the dual-use items identified in Annex I and IV of the Council Regulation (EC) No 428/2008 (the "Retained Dual-Use Regulation").
On 12 March 2024, the Economic Controls Joint Unit (the "ECJU"), the body responsible for administering the UK's system for export controls, announced changes to Schedules 2 and 3 of the ECO 2008 by way of the ECAR 2024, which came into effect from 1 April 2024.
The amendments to Schedule 2 included technical updates to reflect the revisions made to the control lists administered by the Wassenaar Arrangement Munitions List.
Schedule 3, which concerns 'Controlled Dual-Use Goods, Software and Technology', was amended to introduce new controls on the export of emerging technologies in the areas of artificial intelligence, quantum computing, and biotechnology. Referred to as 'targeted technologies', these include:
- certain types of semiconductors;
- quantum computers and components;
- cryogenic technologies; and
- additive manufacturing equipment.
As of 1 April 2024, the export of these targeted technologies from the UK to any country now requires an export licence, as does the transfer of any software and technology for its development and / or production. If the destination is an EU member state or the USA, the technology may be covered by the recently updated Open General Export Licence ("OGEL") for the export of dual-use items, which takes account of the additions to Schedule 3.4 However, for destinations outside of these jurisdictions, a specific licence will need to be obtained from the ECJU.
Rationale for changes
These controls imposed unilaterally by the UK go far beyond the controls initially imposed by way of the Retained Dual-use Regulation. As explained in the 'Explanatory Memorandum',5 the rationale driving these changes is to 'strengthen the national controls and address weaknesses in the multilateral system' and 'to update the export controls to keep pace with changing circumstances and technological developments'.6
Similar national controls on emerging technologies have been imposed by other 'like-minded countries' including Japan, Spain, the Netherlands, and France. More recently, the US Department of Commerce's Bureau of Industry and Security issued an interim final rule that imposes worldwide licensing controls on certain advanced technologies, including certain quantum, semiconductor and additive manufacturing items, and introduces new license exceptions to allied countries implementing equivalent controls (which includes the UK).7 This appears to reflect a growing dissatisfaction, exacerbated by the situation with Russia, with the multilateral regimes, which include the Australia Group, the Missile Technology Control Regime and the Nuclear Suppliers Group, as well as the Wassenaar Arrangement.
UK's approach to emerging technology
The official government statistics for 2023 confirmed that the most popular end-user destinations for UK exports continued to be the USA, China and India. Meanwhile, the highest value export licences are routinely obtained for information security technology and software, for which semiconductor technology and quantum computing can be integral, destined for China, India, South Korea and Taiwan (none of which are covered by the above OGEL).
Semiconductor technology is therefore ubiquitous throughout the modern world, with it being an essential component for the functioning of almost every electronic device now used. The previous UK Government pledged billions of pounds in investment to support the growth of this sector in the UK, in order to improve access to infrastructure, to galvanise research and development, and to facilitate greater international cooperation. Quantum technology is also a national focal point, with the previous government pledging to transform the UK into 'a quantum enabled economy by 2033'8 and invest billions of pounds into this area.
Despite this, prior to the ECAR 2024's introduction, the previous UK Government declined to conduct a 'full impact assessment' because it considered the changes to comprise a 'low regularity impact on business'. At the time, the new controls on emerging technologies were said likely 'to have a higher impact on a small number of companies who operate in the quantum sector, who will now need to apply for an export licence before exporting these items overseas'. It was also considered that 'the addition of these products to the control lists will provide greater clarity on what items are controlled and will improve the predictability of when licences are required'.9
However, given the ubiquitous nature of quantum and semi-conductor technology and the destinations to which high value export licences are being sort, we consider that there could, in fact, be a number of UK businesses and institutions involved in the technology sector which could be directly impacted by the ECAR 2024. Many exporters of this technology may struggle to understand, or may simply continue to be completely unaware of, the legislative changes introduced.
Potential implications for investors
It is not just those involved in the export or transfer of emerging technologies that need be aware of the legislative changes under the ECAR 2024; there are also potential implications for those investing in entities which carry out activities10 in the UK, or else have a sufficient UK nexus,11 that are engaged in the research, development and/or or production of materials subject to export controls.
On 4 January 2022, the National Security and Investment Act 2021 ("NSIA") came into force in the UK. The NSIA sets out both a mandatory and voluntary notification regime, the purpose of which is to allow the UK Government to monitor and review transactions taking place within, or which have the potential to affect,12 the UK from a national security standpoint.
Under the NSIA, a transaction will trigger a mandatory notification if: (1) there is an acquisition of shares and/or voting rights above specified thresholds13 in an entity which is carrying on activities in the UK; and (2) the entity in question is active in one, or more, of 17 so-called key sectors of the UK economy.14
In situations where there is an acquisition of an entity which meets threshold (1) above, the entity's activities will fall under the 'Military and Dual-Use' key sector (meaning the transaction will be subject to a mandatory NSIA filing) if the entity researches, develops and/or produces any goods and/or technologies15 which fall under any of the following:
- The UK Military List (taken from Schedule 2 to the ECO 2008, as amended by the ECAR 2024);
- The UK Dual-Use List (taken from Schedule 3 to the ECO 2008, as amended by the ECAR 2024);
- The UK Radioactive Sources List (taken from the Schedule to the Export of Radioactive Sources (Control) Order 2006); and
- The Dual-Use List (taken from the Retained Dual-Use Regulation).
Even if a target entity's activities are not covered by the definition of the 'Military and Dual-Use' key sector, it will be necessary to ensure that its activities are not covered by any of key sectors (which, if this is the case, will also be the basis for a mandatory NSIA filing if there is an acquisition of shares/voting rights which meets the requisite thresholds).
It is very important for parties to be aware of the NSIA, as any failure to make a mandatory NSIA filing can result in severe penalties, namely fines of up to 5% of an entity's global worldwide annual turnover or £10 million (whichever is the higher) and individual criminal sanctions. The underlying transaction will also be legally null and void.
Even if a transaction does not fall under the NSIA's mandatory regime, the UK Government has the discretion to call-in transactions which it considers may raise national security concerns. Thus, parties should self-assess in these situations whether such a call-in is likely and, if this is considered to be the case, a voluntary NSIA filing should be made in these circumstances. Unlike the mandatory regime – which is suspensory16 – parties which make a voluntary NSIA filing may proceed with the transaction without the need to wait for clearance.17
Ongoing compliance
It is early days, but it would seem unlikely that the new Government will take a different view on the UK's future as a technology economy. Therefore, it is likely that these sectors will continue to grow in the UK sectors, both in terms of production and development, but also potentially in terms of investments. However, thanks to the additional controls implemented via the ECAR 2024 this economy and the UK businesses involved are clearly going to be closely scrutinised as they grow.
The ECJU is clear that it is the exporter's responsibility to undertake its own due diligence and obtain its own legal advice on compliance with applicable legislation, including on export controls. Therefore, understanding the UK's export control regime must be a top priority for companies. Implementing a compliance culture may be time consuming and costly, but the price of non-compliance is significantly greater.
The ECJU has issued an updated 'compliance code of practice for export licensing' which provides helpful guidance on best practice and the procedures to implement to achieve an 'export control trade compliance' culture. If a company should ever be audited or investigated by the ECJU, this will be vital to demonstrate. Companies are otherwise expected to rely on their own internal integrated compliance processes, record keeping and due diligence, and external legal advice as necessary. Having suitable checks and procedures in place should help avoid potential breaches of the law. It remains to be seen how the UK technology market will adapt its practices to accommodate new and evolving legislation, but any non-compliance will be very hard to justify.
If you do suspect that certain exports or transfers may not have been in compliance with the law, we strongly advise that you submit a voluntary disclosure to the ECJU detailing the suspected breaches. Having advised on such disclosures, we have seen first-hand how effective taking an open and co-operative stance with HMRC can be when it comes to mitigating against the imposition of civil and criminal penalties. If you would like further information more generally about how export controls may affect your business or you have any concerns about recent exports or transfers that you have made, please do contact us and we can guide you through the implications and any necessary next steps.
2 Export Control (Amendment) Regulations 2024 No. 346
3 Export Control Order 2008 (SI 2008/3231)
4 NTE 2024/05: open general export licence (export of dual-use items to EU member states) - GOV.UK (www.gov.uk)5 *The Export Control (Amendment) Regulations 2024 (legislation.gov.uk)6 The Export Control Act 2002 provides such powers in relation to goods capable of having a 'relevant consequence', which are defined as those which can have an adverse effect on national security.
7 iec (bis.gov) 8 Unlocking the potential of quantum: £45 million investment to drive breakthroughs in brain scanners, navigation systems, and quantum computing - GOV.UK (www.gov.uk)9 The Export Control (Amendment) Regulations 2024 (legislation.gov.uk)10 Generally speaking, an entity will be deemed to "carry out activities" in the UK if it is either incorporated in the UK or else has a physical presence in the UK (e.g., an office, a manufacturing site or a distribution facility).
11 An entity will have a sufficient UK nexus if it supplies its goods and/or services to customers based in the UK.
12 Transactions which take place outside the UK can therefore be within the scope of the NSIA if the relevant target has a sufficient UK nexus.
13 The applicable thresholds are where the shares and/or voting rights being acquired involve: (i) the acquirer's ownership stake increasing from 25% or less to more than 25%; (ii) the acquirer's ownership stake increasing from 50% or less to more than 50%; (iii) the acquirer's ownership stake increasing from less than 75% to more than 75%; and/or (iv) the acquirer gaining the right to unilaterally block or pass any class of shareholder resolution in the target entity.
14 The 17 key sectors are set out in The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 ("
Key Sectors SI") and are as follows: (i) 'Advanced Materials'; (ii) 'Advanced Robotics'; (iii) 'Artificial Intelligence'; (iv) 'Civil Nuclear'; (v) 'Communications'; (vi) 'Computing Hardware'; (vii) 'Critical Suppliers to Government'; (viii) 'Cryptographic Authentication'; (ix) 'Data Infrastructure'; (x) 'Defence'; (xi) 'Energy'; (xii) 'Military and Dual-Use'; (xiii) 'Quantum Technologies'; (xiv) 'Satellite and Space Technology'; (xv) 'Suppliers to the Emergency Services'; (xvi) 'Synthetic Biology'; and (xvii) 'Transport'.
15 In this context, it should be noted that "technology" means "'information' necessary for the development, production or use of goods or software" where "'Information' may take forms including, but not limited to: blueprints, plans, diagrams, models, formulae, tables, source code, engineering designs and specifications, manuals and instructions written or recorded on other media or devices (for example disk, tape read-only memories). Please see the UK Government's guidance on the key sectors available at:
National Security and Investment Act: details of the 17 types of notifiable acquisitions16 This means that the underlying transaction may not complete until such time as the UK Government provides clearance under the NSIA.
17 Albeit parties should consider how likely it is that the UK Government could identify national security concerns in the course of its review. If it does, the UK Government could, in the worst case scenario, impose penalties or even prohibit the transaction. If the transaction has already closed, this is very difficult to comply with and any prohibition order will be tantamount to a requirement to unwind the transaction altogether (which is costly and burdensome for parties). Thus, parties which make a voluntary filing should only proceed if they have sufficient confidence that the UK Government will not identify any national security concerns.
