Extraterritorial applications in export controls: EU, UK, US, and CN – what to consider

The EU embargo regulation against Russia is extraterritorial in nature and applies worldwide, but only when the mentioned criteria are met:

• Individuals: nationals of an EU Member State
• Legal persons: incorporated or constituted under the law of an EU Member State

After Russia's attack on Ukraine in February 2022, it became evident that companies in the EU had very little experience with the extraterritorial application of EU embargo regulations. Many companies were at a complete loss as to whether their foreign company locations, in particular Russian sites, fell within the scope of the EU embargo regulation.

After initial confusion, it became clear to companies that independent subsidiaries outside the EU do not fall within the scope of the EU embargo regulation against Russia but are in fact subject to Russian law.

The example of an independent subsidiary of an EU company in China illustrates why this is the case. The Chinese subsidiary is established under Chinese law and is therefore not subject to the scope of the EU embargo regulation against Russia.

It is important to note at this point that independent subsidiaries outside the EU that do not fall within the scope of the EU embargo regulation against Russia and are not subject to comparable sanctions for doing business with Russia, may not be deliberately used as hubs for deliveries to Russia. In these cases, depending on the applicable national law, a company may be deemed to have intentionally violated the embargo regulation and criminal proceedings may be initiated. 

You can find out more about this in my article No Russia clause: How to identify and minimize risks

Although the EU also obliges all EU companies with the best-efforts clause of Art. 8a of the RU Embargo Regulation 833/2014 to take any necessary action for ensuring that their locations outside the EU comply with the EU embargo regulations against Russia, this cannot be considered legally standardized extraterritoriality.

The UK sanctions regulations are extraterritorial in nature and apply worldwide when the following criteria are met:

• Individuals: UK national
• Legal persons: incorporated or constituted under UK law

The wording on extraterritoriality in the UK is comparable to that in the EU regulations. Similar wording on extraterritorial application can be found in the trade compliance laws of many other countries.

If this wording is applied to a company based in the EU or elsewhere in the world, this means that all independent subsidiaries of UK companies based outside the UK do not fall within the scope of the UK Sanctions and Anti-Money Laundering Act 2018.

The Chinese export control law is the central legislation for Chinese export controls. The main objective of the ECL is to protect Chinese national security. The ECL is not extraterritorial in nature. It covers exports from China and the transfer of controlled items ("deemed exports") by Chinese nationals (individuals and legal persons) to non-Chinese nationals.

Companies based outside China are generally not covered by the ECL. One could now wonder why the ECL has actually made it into the global discussion on extraterritoriality.

This is where the complexity of trade compliance becomes apparent once again. Similar to countries with export controls for military items or the EU regarding dual-use goods, China also pays particular attention to certain goods that are deemed critical to Chinese national security. In addition to certain raw materials or rare earths, China is using certain Chinese goods to regulate global trade.

Chinese export controls apply to certain magnets or, more recently, to lithium technology. For exports from China, this means that a Chinese export license is required from MOFCOM or the relevant Chinese provincial authority. The Chinese licensing authority will only issue the export license if the Chinese exporter can present an end-use certificate from the foreign recipient. In this case, the end user must commit to refrain from reexporting the Chinese products or to reexporting them only to certain countries.

This approach will be familiar to anyone versed in the licensing procedure under EU export controls. This means that China has not implemented extraterritorial measures similar to US export controls but has adopted an approach aligned with the practices of the EU and other Western countries.

The EAR are extraterritorial in nature. The key factor for worldwide application is the re-export. All shipments outside the US that meet the requirements of a re-export as described in § 734.14 EAR fall within the scope of the EAR. 

The decisive criterion for a re-export within the scope of the EAR is the "item subject to the EAR". Which products this refers to is defined in § 734.3; 4 & 9. Under the EAR, the US product – not the US person – extends the application of US export controls to transactions outside the US.

All companies outside the US must comply with the EAR for transactions involving US civilian products. For example: If a company in the EU, UK, or Singapore exports US products to China, the EAR remain connected to the US product. From the US perspective, the delivery of US products to China is a re-export that falls within the scope of the EAR.

This means that the OFAC sanctions provisions are not extraterritorial in nature, and their scope is generally restricted to US persons (primary sanctions). There are exceptions to this general principle, however. From the US perspective, the sanctions regulations against Iran should be observed worldwide. Companies outside the US (non-US persons), should also fully comply with the US sanctions regulations against Iran, i.e. in the same way as a US person is required to (so-called "secondary sanctions").

There are currently no other sanctions programs under OFAC jurisdiction calling for comprehensive compliance worldwide. There are a number of US sanctions programs in the SDN list, however, with reference to secondary sanctions risks. These in turn establish the link to the US product in accordance with the EAR and therefore apply to trade with US products worldwide. These sanctions programs are listed in § 744.8 EAR.

In practice, the distinction between US export control law and US sanctions law is often not clear. Many companies do not realize that US sanctions law is not extraterritorial in nature. Further uncertainties arise when US persons are involved – for example, when there is a US parent company or a managing director with US citizenship. 

A company that is incorporated under the law of a country outside the US is then often mistakenly regarded as a US person. This leads to the incorrect assumption that the company must comply with all US sanctions programs, including the 50% rule of the SDN list. This example demonstrates how uncertainties in dealing with US sanctions law can lead companies outside the US to significantly overdo regulatory compliance.