Linking trade control compliance and customs compliance programs

Executive standing and talking to colleague holding notepads

With the introduction of the new Union Customs Code (UCC) on 1 May 2016, the status of Authorized Economic Operator (AEO) became the cornerstone of the revised customs legislation in the EU.

By Bert Gevers, Jack Nuijten and Yassine El Bojaddaini

This concept of certified traders was first introduced in the EU in 2008 in order to enhance international supply chain security and to facilitate legitimate trade by certifying reliable and trustworthy traders. Under the new legislation traders seeking to benefit from customs simplifications or guarantee reductions will now mandatorily have to meet the criteria set out to become an AEO or be certified as an AEO for some of the more sophisticated simplifications (such as for example self-assessment or centralized clearance).

In order to set the scene we briefly remind you of the criteria that need to be met in order to become an AEO (article 39 of the UCC and articles 24-28 of the UCC Implementing Act):

Compliance with customs legislation and taxation rules and absence of criminal offences related to the economic activity;

Appropriate record keeping;
Financial solvency;
Proven practical standards of competence or professional qualifications (only AEO Customs Simplification);
Appropriate security and safety measures (only AEO Safety and Security).

The success of the AEO program was perhaps not as overwhelming as some of the EU legislators anticipated when the program was rolled out in 2008. In practice businesses often considered the administrative and organizational burden of the application and maintenance process too high compared to the actual benefits that the program delivered (fewer controls, easier access to simplifications, and priority treatment in case of audits). Medium sized and smaller businesses in particular considered it too much effort and often only applied for AEO status when explicitly asked by suppliers or customers. The new UCC certainly increased the burdens and added new standards such as the operator’s compliance with general taxation rules and its proven practical standards of competence, but it also created more and more tangible benefits for holders of the AEO status (including exclusive access to simplifications and guaranteed reductions or waivers). It is clear that these recent changes will result in a significant increase of the number of AEOs across the EU.

But how does this AEO status interact with an operator’s obligation to comply with export control regulations and economic sanctions?

Under the UCC an AEO should comply with customs and taxation rules and cannot be involved in criminal offences related to its economic activity. The newly published AEO guidelines indicate that the violation of dual use regulations could be a serious criminal offence related to the economic activity of the AEO. Although complying with the dual use regulation or economic sanctions is not explicitly mentioned as falling under the ‘customs rules’, there is a general and clear reference to “infringements relating to prohibitions and restrictions”.

Article 25 (1) (k) UCC IA, which provides more detail on the criterion that an AEO should keep appropriate records, requires that, “where applicable, the applicant has satisfactory procedures in place for the handling of import and export licenses connected to prohibitions and restrictions, including measures to distinguish goods subject to the prohibitions or restrictions from other goods and measures to ensure compliance with those prohibitions and restrictions“.

This is new under the UCC as the handling of import and/or export licenses connected to prohibitions and restrictions was previously included under the criterion on safety and security and as such limited to the AEOS status. It has to be seen in context with Article 25 (1) (g) UCC IA which provides that “the applicant ensures that its staff having responsibilities relevant for security issues regularly participate in programs to raise their awareness of those security issues”.

The AEO guidelines explicitly mention that these procedures may be/include:

to distinguish goods subject to non-fiscal requirements and other goods;
to check if the operations are carried out in accordance with current (non-fiscal) legislation;
related to the handling of goods subject to an embargo;
related to the handling of licenses;
regarding other goods that are subject to restrictions;
to identify potential dual-use goods and routines attached to their handling.

Furthermore they state that “it is crucial that the staff is aware of the importance of non-fiscal requirements, the correct classification of goods and keeping the master data up to date. Regular training or self-study of the developing legislation is mandatory for businesses dealing with above mentioned goods (…)”.

Under the AEO guidelines applicants are also asked to provide Customs with an overview of the dual use goods they are trading in and to inform Customs if they have implemented an ICP.

Based on the above one could conclude that the UCC and its Implementing Act impose on AEO applicants certain obligations which are even not (explicitly) foreseen in applicable legislation on export controls or economic sanctions.

Dual Use Regulation 428/2009 foresees for example in article 12, 2) of Regulation 428/2009 that “when assessing an application for a global export authorization Member States shall take into consideration the application by the exporter of proportionate and adequate means and procedures to ensure compliance with the provisions and objectives of this Regulation (….)”. National export control regulators competent for the issuing of licenses generally require that applicants have implemented an Internal Compliance Program (ICP) based on that provision. The obligations for AEO applicants under the UCC to establish ‘satisfactory procedures’ and ‘to train its staff’ seem thus to be broader than the obligations under Dual Use Regulation 428/2009 which only refer to applications for global licenses.

Furthermore it should be said that in the framework of the EU export control reform project efforts are being made by the Dual Use Working Party to promote convergence between the AEO program and ICPs in order to reduce the duplication of controls (see http://trade.ec.europa.eu/doclib/docs/2015/december/tradoc_154041.pdf). In Germany for example the export control regulator (BAFA) already communicates the acceptance of an ICP to Customs. Other Member States including Belgium have announced similar projects.

Another idea which is by the way discussed in the framework of export control reform is the creation of a Certified Company status which should give these certified companies benefits like license waivers for intercompany transfers or intra-EU transfers of military goods. And so we are back where we started …

Co-authors of this post are:

Bert Gevers

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Bert Gevers

Attorney at law, Local Partner at Loyens & Loeff Belgium

Bert is a partner of the Brussels office, he heads the Loyens & Loeff Indirect tax group in Brussels and co-chairs the firm’s International Trade Group. He advises clients on matters related to international and domestic exchange of goods and services. Matters such as export controls and sanctions, FTA's, customs valuation, origin, classification, excise duties and VAT are familiar parts of my practice. He is also co-heading the Food & Beverages team and he is a core member of the firm's Corporate Investigation Team.

Bert assists clients by drafting compliance programmes, giving trainings, as well as in performing internal scans and audits. He also represent clients before the Belgian and Dutch authorities and courts as well as before the European Commission, its advisory committees and the Court of Justice of the European Union. He has ample experience in counselling clients involved in (criminal) investigations on suspected tax and trade law violations.

He is a member of the Brussels Bar since 2000, the current President of the Global Legal Customs Association, a global network of trade-lawyers, a correspondent for the international VAT Club, a member of the ICC section on Customs and trade facilitation and the sub-committee on indirect taxes and a member of the steering committee of the ABA International Law Section on sanctions and export controls.

He is the co-founder and scientific coordinator of the blog www.worldtradecontrols.com in cooperation with ICC Belgium, VBO/FEB and Bryan Cave LLP where he comments the recent developments in sanctions and export controls.