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Israeli Export Controls: Playing It Smart

Israeli Export Controls: Playing It Smart
By Jonathan Aronson, Adv. MBA

Article published in IsraelDefense see here

In some cases, intentional “downgrading” of a product can exempt it from the Export Control Laws. The planning process should start back in the R&D stageExport Control Laws: Playing it Smart

A fine of more than one million NIS was imposed by the Ministry of Defense (IMOD) on an Israeli company that marketed defense products without a marketing license. A notice published lately by Israeli Defense Export Controls Agency (DECA) stated that the company mistakenly thought that the license it held for similar products was enough , and thus was not aware of the need to request a new and different license for each one of the different versions. It will now pay the price of its mistake.

According to the Defense Export Control Law of 2007, Marketing defense equipment without a license is a criminal offence, punishable by law up to three years in prison (five years, in severe circumstances). In other words, the company got out of this pretty well. So did its officers and managers: the law enables courts to impose heavy fines also on active officers, partners or other officials whose responsibilities on behalf of the corporation include the areas of responsibility of the committed offense.

Nevertheless, the fine imposed on the company is in no way expected to be the last one. Here are some more “fines” that the company should expect:

Harm to the company’s reputation and sales: Information concerning investigations, fines and criminal offences tends to leak out one way or another, even if an effort was made to keep it secret. If the company is publicly traded, it probably will have the duty of reporting the existence of such proceedings, even if they clear the suspects. Entities undergoing mergers and acquisitions are usually requested to reveal any legal proceedings they were subject to, in the framework of due-diligence processes. All this information may well find its way out, at least to the respective market, harming the company’s reputation as law abiding and trustworthy and affecting sales negatively.

Long-term negative effects of transaction delays: Until obtaining all licenses as required by the IMOD, the export of the products is usually delayed for a considerable period of time, especially if the company is required to register a new product. In the meantime, the delay jeopardizes not only the transaction, but the business relations with the client.

Negative legal and insurance consequences: In certain circumstances, the delay or cancellation of the transaction (or both) may expose the company to claims in the millions, requests for compensation or indemnification and legal fees, as well as an increase in insurance premiums.

In some companies, export control issues are mistakenly perceived as simply a task of ‘filling in forms’. Thus, it is expected to be done either by junior workers or marketing managers, who are usually too busy to give this important issue the proper time and attention.

It is therefore important to emphasize that the fact that licenses are granted on time, that there are no containers stuck in the docks and that the company was not summoned to hearings at the IMOD, does not necessarily mean that the company’s export control issues are dealt with properly. The real consequences of poor treatment of export control issues are usually obscure yet strategic in nature.

The first reason is that the Israeli export control laws impose the sole liability on the defense exporters to decide whether or not a product is a defense product in the first place, and what type of license it requires. This is no simple task for people that lack knowledge and experience: on the one hand, the Israeli Export law was intentionally drafted using broad, all-encompassing definitions, and on the other hand, the courts or the attorney general have not provided any principles to guide exporters.

The result is that many companies, especially those that manufacture equipment that may be used by the civilian market as well, conduct their export control issues by inertia – in other words, using old, undated assumptions that are sometimes no longer valid. They assume that their products are subject to the Defense Export Control law, when in fact they are not, or – with the proper handling – may be exempt in the future.

Such companies are unaware of the fact that in some cases, for example, “downgrading” a product can result in exempting it from the law, hence opening vast new markets for it. Such companies are also unaware that the IMOD’s export control policy is a living, ever-changing thing, not only as a result of international relations and political changes, but also for efficiency purposes. This is how many products which were once viewed by the IMOD as “defense equipment” are no-longer seen as such, due to a decision made by the IMOD.

Changes in export control regimes are underway all around the world, as well as in Israel, and the release of products is a global trend. For some time now, the Obama administration has been aggressively promoting a policy of ‘higher walls around a smaller yard’, the logic for which is to put more effort in defending only the really important knowledge; while letting all the rest go partly or completely free.

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(C) All rights reserved to Jonathan Aronson. This information is not intended to constitute legal advice and should not be relied upon.

Aronson Law