EU Dual Use Reform

POSITION | EXPORT CONTROLS | EXTERNAL ECONOMIC POLICY

EU Dual Use Reform A New Venture for the European Commission, Recommendations from German Industry

October 2020

Policy Recommendations of German Industry 23. Oktober 2017 ▪

German industry rejects catch-all controls of information and communications technology (ICT) under grounds of human security. German companies meet the highest standards in export control worldwide and stand firmly behind protection of human rights. However, an ICT catchall would create legal uncertainties.

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European export controls must, first and foremost, be committed to the non-proliferation of weapons of mass destruction. Obligations of sovereignty, such as the achievement of foreign policy and strategic goals, should not be transferred to economic operators.

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For German industry, an EU autonomous list could be a possible compromise. Here, the following prerequisites applies:

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The application framework should be limited to ICT dual-use items specifically designed to covertly extract information and telecommunications data with the aim of monitoring, collecting, or analyzing such data;

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Application should only take place if the export of these dual-use ICT items to a particular third country actually poses a serious, lasting and concrete threat to fundamental human rights;

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The aim of the aforementioned data collection for such a list should also be natural persons, whereby the data collection must be carried out at the instigation of official bodies;

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Within the framework of an EU autonomous control, the EU Member States should commit themselves to jointly introduce and represent the positions listed in the Wassenaar Agreement.

German industry rejects comprehensive disclosure obligations. Business relations should remain confidential – when possible – when exporting dual-use goods, in order to prevent competitive disadvantages. An intervention at this point calls the protection of business secrets into question. Highly aggregated data, in which exporters and end-users remain unnamed, could be a solid compromise here.

Dr. Stormy-Annika Mildner | External Economic Policy | T: +49 30 2028 - 1562 | s.mildner@bdi.eu | Dr. Nikolas Keßels | External Economic Policy | T: +49 30 2028 - 1518 | n.kessels@bdi.eu | Eckart von Unger | External Economic Policy | T: +32 2792 – 1020 | e.vonunger@bdi.eu | Kate Tepper | External Economic Policy | T: +49 30 20280-1499 | k.tepper@bdi.eu

EU Dual Use Reform

Table of Contents Background.......................................................................................................................................... 4 Catch-All-Rules Do Not Serve Human Security .................................................................................... 4 Catch-All Rules and Their Functionality ................................................................................................ 4 State of Affairs: August 2020 ............................................................................................................. 5 European Commission Proposal ........................................................................................................... 5 Position-Finding in the EU Council Working Group .............................................................................. 6 Assessment of German Industry ....................................................................................................... 6 Impressum ........................................................................................................................................... 9

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EU Dual Use Reform

Background Dual-use goods are items that can be used for either civil or military purposes. The European Union (EU) regulates their export on the basis of decisions made by the member states of the Wassenaar Agreement on the control of conventional weapons and dual-use goods. In the EU, the legally relevant regulation is Council Regulation (EC) 428/2009 (Dual-Use Regulation). In September 2016, the European Commission (COM) initiated the reform process of this regulation, which could not be completed thus far due to wide discrepancies between the proposals of the COM, the demands of the European Parliament (EP), and the views of the Member States in the European Council. Due to their competencies in national security issues, the Member States are additionally entrusted with the implementation of export controls. It thus does not come as a surprise that they played a critical role in the reform process.

The reform efforts were initiated because of the massive human rights violations that occurred during the Arab Spring. Regime critics and protesters were systematically suppressed, identified, and prosecuted by the respective state authorities through information and communications technology (ICT). As a political reaction to this, the negotiations on the dual-use reform therefore focused on the desire of the COM and EP to adapt European export controls to these events with a paradigm shift. For example, end-use-related export controls – so-called catch-all rules – were to rule out human rights abuses through ICT. Catch-All-Rules do not Serve Human Security Up until now, end-use-related export controls have been committed to the non-proliferation of weapons of mass destruction (WMD) and thus serve the objectives of national security. Catch-all rules to protect against the illegitimate use of ICT would push this system towards a so-called human security approach. In contrast to the national security approach, this method formulates an expanded security concept based on individual rights (e.g. freedoms of speech and assembly). German industry does not question the human security approach; industry in fact supported both the changes in the anti-torture ordinance and the new listings in the international export control regimes and the EU embargoes, in which goods we re listed for internal repression.

The BDI expressly supports stronger protection of human rights. However, catch -all rules are, from an industry perspective, not a suitable means. At no point during the reform efforts has it been possible to specifically identify critical cases and tailor controls to protect against internal repression in third countries. A human security catch-all would thus expose companies to enormous legal uncertainties without providing effective protection of human rights.

Catch-All Rules and Their Functionality In contrast to list-based controls, where controlled goods are identifiable by their technical description, catch all controls rely on non-specific standard rules depending on economic operators’ obligation to self-control.

The effectiveness of such controls relies on a one-stop mechanism that synchronizes the production of an item and its technological risk assessment. In concrete terms, this means that even if goods are not listed, they may still require a license if those responsible for exports know or have a well-founded suspicion that an ordered item could be WMD-relevant or used militarily in an embargoed country. End-use-related export controls are designed to leverage the engineering knowledge of economic operators to throw sand into the complex gears of WMD-production. The technical specifications of an order placed provide economic operators with the information on the technical potential for use in the construction o f facilities for the production of nuclear, chemical or even biological warfare agents as well as unmanned systems capable of delivering WMD warheads – i.e. an end-use relevant to control. The lack of a few components can already prevent such a production process.

The effectiveness of catch-all controls relies on a one-stop mechanism that synchronizes the production of an item and its technological risk assessment. Engineers can clearly identify the risk an order poses for WMD-

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EU Dual Use Reform

non-proliferation. An assessment of possible human rights violations through ICT, on the other hand, cannot be assessed alone by the technical competence of companies. This requires clear guidance from the state.

Companies do not have the intelligence and security policy information from regions subject to political change. However, without access to such information, economic operators should not be obliged to assess risks autonomously in the form of self-regulation.

In order to give new impetus to the faltering reform process, under the Croatian Council Presidency in February 2020, the EP and Council instructed the COM to present a compromise proposal on ICT export controls.

State of Affairs: August 2020 European Commission Proposal ▪

„Cyber-surveillance items“ are limited to those ICT that expressly serve the covert surveillance of information and telecommunications data.

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A use-related export control (catch-all), which provides for three further pertinent reasons for control in addition to that related to the regime: -

Military end-use;

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Terrorist end-users;

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ICT, where there is evidence that their end-use could serve internal repression and/or violate international human rights or international humanitarian law.

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Europeanization of the catch-all / Decision-making: -

If an EU Member State requires a use-related control for a good with essentially identical end-use in the sense of the above, the Member State concerned should inform the Commission and the other Member States of this, unless there are security policy considerations;

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Member States should take a position on this within ten days. Extensions up to 30 working days are possible;

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If all Member States agree to control essentially identical transactions, the Commission will publish the relevant information in the Official Journal of the European Union. This ensures the positive knowledge of economic operators in the context of export control law.

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Position-Finding in the EU Council Working Group 1 ▪

The Council’s position is relatively clear. The following points are supported by the vast majority of Member States. No camps have currently been formed within the Council, as in previous trilogue negotiations.

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Catch-all rules: -

In the case of military end-use, the Council seeks to continue to control only exports to embargoed countries. No alternative is foreseen as to how economic operators – who after all export multi-use goods – could be otherwise legally responsible for such transactions. In the view of the Council and particularly under the German Council Presidency, the weakness of the Commission proposal lies in the fact that exports to embargoed countries are already largely prohibited.

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In the case of terrorist end-use, the rejection in the Council is also clear from the state of affairs. Individuals with a terrorist background are already listed. It is therefore even now not permitted to export to this group of persons.

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A dedicated cyber catch-all, which is really limited to the aforementioned area, is conceivable. However, the members of the Council working group insist that this can only apply as long as the application criterion remains as clear as described before.

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Decision-making rules: With regard to the structural changes to the decision-making mechanism, the Council is cautiously optimistic that such a mechanism could be politically possible. This would give all Member States a veto right and therefore pose little danger.

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Transparency: There should not be a listing mechanism of the kind which the EP has demanded for at least since the listing of export licenses in the wake of the Covid-19 restrictions. The German Federal Government rejects the individual listing of exporters and end-users.

For the Federal Government and thus the current Council Presidency, a cyber catch-all as previously described is conceivable through the procedural changes based on the unanimity principle. Even under the current conditions, the Federal Government believes it can realistically conclude the n egotiations in November.

Assessment of German Industry The Commission proposal managed to surprise German industry, particularly because positions from 2016 are being taken again in the areas of terror catch-all and military end-use of dual-use goods. From the perspective of German industry, an end-use-related export control for terrorist or military end-use would be a fatal mis-regulation with unforeseeable consequences for economic operators and international non -proliferation.

Without a meticulously maintained list of persons with terrorist connections, it is impossible to foresee a terrorist end-use in any meaningful way. The same applies to a military catch-all for dual-use goods. On the basis of customer and business data and without official instructions, economic operators cannot assess whether the export of a dual-use good – as stated in the Commission’s draft – could possibly threaten international peace. From the point of view of German industry, the terror and military catch -all would be redundant. In the

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The following information is based on publicly accessible information from the Federal Government from 30 June 2020.

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EU Dual Use Reform

best-case scenario, such controls would still create new bureaucratic hurdles in an already intensively controlled area.

German business is also critical of the plans for an ICT catch-all. Good export controls are based on meticulously detailed work. The difficult negotiations between the European co-legislators have demonstrated how complex the definition of technologies is in such a way that covers only offensive and not also defensive cyber-instruments.

The amended Commission proposal from August 2020 still lacks a precise definition of “covert data detection.” As long as this remains the case, cyber defense instruments may be covered.

In principle, end-use-related export control is an instrument designed to prevent WMD proliferation. Non-proliferation is a valuable commodity – it must not be risked lightly. The legitimacy of catch-all controls is underpinned by the ability of economic operators to identify and decentralize risk assessments. In the area of nonproliferation, this is technically feasible and sensible. German industry continues to strictly reject any end-userelated export controls beyond non-proliferation. Politically, the Commission proposal also damages the integrity of multilateral non-proliferation regimes. However, from the perspective of German industry, substantial changes could lead to a solid negotiating compromise during the German Council Presidency.

German industry finds that an EU autonomous list could be a compromise, making the application framework set by the Commission more comprehensible for economic operators. First of all, dual-use telecommunication equipment specially designed to covertly intercept information and telecommunications data of natural persons with the aim of monitoring, extracting, collecting or analyzing this data should be controlled.

Secondly, before a listing, official evidence should be put forward that fundamental human rights, such as the rights to privacy, freedom of speech and assembly, are seriously, actually and demonstrably endangered by an export of these ICT items to a specific third country. From the perspective of German industry, it is important that a structured exchange of information between the export control authorities of the EU Member States take place in the context of the EU autonomous list.

Thirdly, in the view of German industry, two things are absolutely necessary to prevent increased unilateral controls and strengthen non-proliferation regimes: 1.

An EU autonomous list should be expandable according to the rules of qualified majority voting.

Additional list positions would be adopted by at least 55 percent of the Member States, making up 65 percent of the Union’s population. According to this mechanism, there would also be the possibility of a blocking minority, in which 4 Council members representing at least 35 percent of the Union’s population could prevent a resolution. Such a decision-making mechanism would guarantee that central European security interests could be swiftly implemented without excessively restricting Member States’ central sovereign rights.

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In order to prevent the danger of mission creep, i.e. an unimpeded regulatory encroachment of EU autonomous controls far beyond the non-proliferation objectives, a further condition must be fulfilled: the decision-making mechanism should be accompanied by a commitment obligating those EU-Member States represented in the Wassenaar Agreement to jointly push towards a regime listing of the relevant item.

In concrete terms, German industry calls therefore for a qualification of EU autonomous controls equivalent to the 0Y521-ECCN Series in the United States (see the blue box for background). This would ensure a temporary mechanism by which European export controls would remain linked to the processes in the Wassenaar Agreement. This would prevent political conflicts over European export controls in the future as well as the escalation of unilateral controls. Such an approach would not break new legal ground. The German

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Foreign Trade and Payments Act (AWG) already provides for the right to temporary individual interventions in accordance with AWG § 6 Paragraph 1: „…the provision of funds and economic resources for the benefit of certain persons or private companies may be restricted in order to avert a threat to the legal interests mentioned in § 4 paragraph 1 [national security], also in connection with paragraph 2 [international obligations].”

The proposed EU autonomous controls are a unilateral intervention in the freedom of foreign trade. Ideally, this should serve to enforce multilateral security interests. It is

Background 0Y521-ECCN-Series

therefore necessary to link EU controls back to the deci-

This is a classification series introduced in the United

sion-making process in the Wassenaar Agreement. This

States as early as 2012 and has initiated a process

would strengthen the list-based global control of dual-use

for basically civilian goods that was previously only

goods and reduce competitive disadvantages for Euro-

possible under Category XXI (Miscellaneous) of the

pean economic operators.

United States Munitions List (USML). The aim of the 0Y521 series is to enable unilateral export control at

German industry rejects comprehensive disclosure obliga-

short notice. In contrast to Category XXI USML, how-

tions as demanded by parliament. The main reasons are

ever, the U.S. government must bring a commodity

additional costs for economic operators and authorities and

that is temporarily held in the 0Y521 series in the mul-

the unclear informational added value for public safety.

tilateral process of the Wassenaar Agreement. The

Business relations should remain confidential – when possible – when exporting dual-use goods, in order to prevent

time limit under 0Y521 is initially limited to one year with the possibility of extending this control twice for

competitive disadvantages. Highly aggregated data in

one year each time. During this period, the Depart-

which the exporter and end-user remain unnamed could be

ments of Defense, Commerce, and State must agree

a good compromise here.

on whether an initiative for multilateral control in Wassenaar is worthwhile. In exceptional cases, the U.S. Undersecretary for Industry and Security may decide to extend it beyond the three years.

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EU Dual Use Reform

Impressum Bundesverband der Deutschen Industrie e.V. (BDI) Breite StraĂ&#x;e 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Authors Dr. Stormy-Annika Mildner T: +49 30 2028-1562 s.mildner@bdi.eu Dr. Nikolas KeĂ&#x;els T: +49 30 2028-1518 n.kessels@bdi.eu Eckart von Unger T: +32 2792-1020 e.vonunger@bdi.eu Katherine Tepper T: +49 30 2028-1499 k.tepper@bdi.eu

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