While most Australian companies understand that arms embargoes prevent the supply of weapons and other military goods or equipment, what may not be appreciated is that they also apply to goods developed for commercial purposes, which may also facilitate military objectives (so-called “dual use” goods).
Dual use goods cover a wide array of goods – from certain metals and alloys to machine tools, electronic equipment, information security systems, and cameras. Goods which require particular attention are intermediary products (such as components or parts) with multiple potential end uses, including possible military uses.
At present, Australia has arms embargoes in respect of a range of countries, including Iran, Fiji, Iraq, Myanmar, Libya, DRC, Liberia, Sudan and Syria.
Notably, Australian companies are not only subject to these embargoes through their own conduct, but also through the conduct of any entity over which they have effective control. This is the case regardless of where the controlled entity is incorporated or situated.
For companies, a breach of an arms embargo is a strict liability offence, meaning that companies will be liable for any breach irrespective of intention. This is subject to a defence if the company is able to show it took reasonable precautions, and exercised due diligence, to avoid the contravention.
If a company does wish to supply dual use goods to a country the subject of sanctions, it may only do so with authorisation from the Minister of Foreign Affairs, which can be applied for through DFAT. However, these authorisations do not come easily (and, in some cases, are not available at all, eg in respect of Eritrea).
Penalties for breach are severe. Individuals can face up to 10 years’ imprisonment, and companies face fines of the greater of three times the value of the transaction in breach (if this can be calculated) and AU$1.7 million.
As always, the key is awareness of the risk, and then taking steps to address it.
What does this mean in practice?
It means conducting (and documenting) early due diligence when supplying goods to sanctioned countries to determine whether what is intended as a commercial good may in fact be banned from export without authorisation. It means, in many cases, asking relevant questions of the counter-party (for example, regarding the intended use of the good and who the ultimate user will be) and, where necessary, engaging third parties to perform due diligence to determine whether the counter-party, or anyone in the supply chain, has military links. And, if the due diligence raises any grey areas or does not provide confidence as to the position, considering whether to proceed and, if so, on what basis, potentially with the assistance of legal advice and/or consultation with DFAT.
This due diligence process may be time-consuming, but this is in the short term as it minimises the risk of a breach, increases the likelihood of being able to address any questions raised or hold ups by Customs and increases the prospect of having a due diligence defence if an unforeseen breach occurs.
Written by Leon Chung and Caroline Cox, who are both partners at Herbert Smith Freehills. The authors would like to thank Jamie Stollery for his assistance.
Arms embargoes. It’s a term that brings to mind images of shady, underworld figures engaging in underhand weapons deals far from our fair shores. But, in reality, arms embargoes have a commercial relevance that extends much closer to home than many of us appreciate.