The responsibility of the logistics service provider’s under sanctions legislation

1. Case of luxury goods

At the end of 2019, Customs (VGEM team) seized a number of luxury goods from a logistics service provider. The seizure was made on suspicion of violating the Syria Sanctions Regulation. The goods were seized on the basis of Article 94 of the Dutch Code of Criminal Procedure. It was therefore a criminal seizure, not a precautionary (customs) seizure.

The luxury goods in question were sold by company A to company B in Syria. The goods were stored at the logistics service provider that handled the export declaration on behalf of company A. These goods were intercepted during a control by Customs and export was refused. However, the goods were not going be exported but re-exported. Is the sanctions regime applicable to re-export?

2. Scope of the ban

In the context of a sale and purchase agreement, the seller sold the goods in question to a company in Syria. Based on the sanctions legislation specific luxury goods may not end up in Syria. Regulation (EU) 36/2012 (which has been amended several times since then) states in Article 11:

“A prohibition is imposed on: a) the direct or indirect sale, supply, transfer to or export to Syria of the luxury goods listed in Annex X; (…)”

Annex X lists the following luxury goods:

“4. Wines (including sparkling wines) with a sales price of over EUR 70 per litre, alcohol and spirits with a sales price of over EUR 50 per litre CN codes: ex 2204 21 to ex 2204 29, ex 2208, ex 2205”

At first glance, it seems that a prohibition could well be applicable.

3. Export versus re-export

As mentioned above, the goods had a so-called T1 status. This means that they were not in free circulation in the EU. Not EU goods, but in this case non-EU goods.

It is important to recognize that there is a customs-technical difference between export and re-export. Export is defined as ‘EU goods that leave the customs territory of the Union’ and re-export as ‘non-EU goods that leave the customs territory of the Union’. This is based on Articles 269 and 270 of the Union Customs Code.

Based on the aforementioned regulation, it appears that the direct or indirect sale, supply, transfer or export to Syria of the luxury goods listed in Annex X is prohibited. The concept of export is not defined in the regulation. Therefore, it is not clear from the regulation itself whether this also includes re-export. There are also no references in the regulation (or in the sanctions regime) that show an equivalence with customs legislation.

Nevertheless, it is clear that the legislator wanted to match with the customs legislation. This follows (among other things) from Article 1(r) which describes the ‘customs territory of the Union’. It refers to “the territory as defined in Article 3 of Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code”. It can be deduced from this that the regulation (also) must be read from a ‘customs law’ perspective.

On the website of Customs[1] a distinction is also specifically made between export and re-export. In this context, re-export is only considered to be restricted where strategic goods are concerned. This is also logical. Strategic goods are after all ‘more dangerous’ than the goods involved in these cases, namely luxury goods. Luxury goods are not unequivocally prohibited.

In contrast to Regulation (EU) 36/2012, other regulations describing sanctions do make a distinction between EU goods and non-EU goods.

4. Follow-up

In this case, the public prosecutor was involved quite quickly. This led to a (large) number of emails and phone calls. The settlement proposed by the public prosecutor was rejected by our client. Last year it was announced that the case had been dropped. Whether this was solely due to the export-re-export discussion is not stated, but it seems likely. It will also have played a role that this was ‘only’ the logistics service provider and not the selling party itself. Does that make a difference? In my opinion, yes.

5. Scope of Responsibility

A selling party can be expected to know what he is selling, to whom and whether this is legally possible. This also applies to a logistics service provider, but to a certain extent. Of course, he must make a correct declaration and he must ensure that the process is set up in such a way that mistakes are not made or are prevented as much as possible. In this context, screening of the recipients / end user of the goods and the ultimate end use is necessary. This is well known for dual-use goods, but to a much lesser extent for food and beverages. However, in essence, the government’s approach is the same.

If we consult the Guidelines for the preparation of an Internal Compliance Program (ICP)[2], we can read that a “company must state how it ensures that it does not supply products to sanctioned parties or to parties that are at risk of, for example, diversion. This screening must be carried out, inter alia, by screening sanction lists, sanction rules for the country concerned and international and European trade restrictions. It must also be investigated whether there are any risks associated with the delivery, for example by conducting open source research and checking ownership to see if there is a sanctioned parent company. A computerised system or an external service can be used for screening. The testing and quality control of the relevant sources/systems is the responsibility of the exporter.”

In this context, a checklist of signals has been drawn up, the so-called ‘red flags’, where questions can be asked. For example, these questions include:

• Is clear information about the end user available in open sources?
• Does the end user have an address and not just a post office box for example?
• Are the customer’s business activities clear?
• Was there personal contact with representatives of the recipient and/or end user?
• Does the customer want to pay cash and/or an unreasonable price?
• Are the delivery conditions clear?
• Has the customer completed an end-use declaration with full information and the correct declarations?

The end use should therefore be known for each transaction. The core of export control is to prevent products from being used for the wrong purposes, such as proliferation or human rights violations. A compliant company has safeguards in place to prevent the goods from being used for purposes other than the specified end use.

6. Concrete Actions

This is all still very ‘non-specific’. What can you do as a company?

In any case, it appears that the end-use declaration is undervalued. Having the end user sign an end-use declaration can cover risks to a certain extent. Verification of that end-use declaration can provide an extra guarantee. A Chamber of Commerce or a similar authorized, independent organization will then check whether the company in question exists and is registered and whether the declarations and signatures are authentic. It will be clear that there are some limits of reasonableness, even though nothing is said about this in the government documents.

Also, use clear delivery conditions and check the delivery conditions of those involved. That way it can be determined whether the contractor(s) has/have built-in safeguards to prevent the export or transit of goods as much as possible. If there are no clear delivery conditions between the contractors involved, further information may be requested about the purchase/sale and the logistical ‘journey’. If this is not available, then that is a clear signal.

With regard to deliveries to distributors, a logistics service provider must have procedures in place to ensure that the distributor is also compliant. A distributor must be able to extend the controls of an exporter to the end user and must also be compliant with all applicable laws and regulations. The responsibility of a logistics service provider is therefore not limited to the distributor’s establishment, but extends to the end user. A logistics service provider must always be able to find out from the distributor to which end user the goods have been delivered.

7. Conclusion

Is a case such as the one outlined above be preventable? Never completely, but the above described measure prevent mistakes from being made and enable the logistics provider to demonstrate that he has made every effort to uphold the sanctions legislation. Furthermore, then there is also a ‘good explanation’ towards the government. This makes enforcement by the government with criminal sanctions – because that is usually the starting point – less opportune.

While every care has been taken in the preparation of this publication, Customs Knowledge accepts no liability for any errors or omissions, nor for their consequences. This article is not intended as specific advice. Please also refer to the General Terms and Conditions of Customs Knowledge BV.