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The time has come when ministries of defense were purchasing defense equipment according to their own national rules to an end. The new law, the “EU Defence Procurement Directive”, governs the procurement procedures for defense and non-military security supply, services and works contracts. This law is applicable in all EU Member States. EU Directive 2009/81/EC must be transposed in each Member State’s body of legislation by August 2011. The aim of this Directive is to harmonize acquisition procedures throughout the EU: first by increasing competition and encouraging cross-border bidding among European bidders, so as to prevent systematic sole-source procurement or non-competitive procurement from national suppliers; second, by increasing transparency through the obligation to advertise defense contracts in the EU Official Journal. Various contract performance conditions will make indirect offsets in defense contracts illegal (see our separate report on: “EU Policy on Offsets”).
Defense and interior ministries of EU Member States will have to abide by the new EU law. Likewise, U.S. firms bidding on defense contracts in the EU will have to follow the new procurement rules. The EU Directive contains no “EU preference” clause, and leaves to Member States the decision to invite non-EU bidders in competitions. Defense contracts covered by the Directive will become subject to investigation from European Union authorities (the European Commission) and will come under the jurisdiction of the European Court of Justice.
It is important for U.S. firms to fully understand the implications of this new EU Directive with regard to the rights and obligations of procurement authorities in the EU. U.S. companies should also be cognizant of the effects of the new EU Directive on their negotiations to ensure the compatibility of their bids with EU law. U.S. procurement professionals and their advisers will need to be properly briefed on their compliance obligations under the new EU Directive when they sell equipment or services to European
MR-163 / EU Policy on Offsets in Defense Contracts
The new EU Directive 2009/81 for defense and security procurement is set to challenge the way Member States currently purchase sensitive military and security equipment. Offsets are a purchasing practice whereby a foreign government demands industrial compensation in return for awarding a contract to a non-national supplier. However, the European Commission (EC) considers that such industrial compensation schemes violate the principles of the EU Treaty. EU Directive 2009/81 brings defense purchases under the rules of the Single Market and many offsets are set to become illegal, in particular indirect and nonmilitary offsets. The EC has started to scrutinize defense contracts whose offsets present clear discriminatory provisions. In contrast, the voluntary Code of Conduct on Offsets of the European Defense Agency addresses a different set of defense contracts procured outside the framework of Community law, and its impact is uncertain, as it lacks a legal enforcement mechanism. This report analyses the legal justifications of the European Commission for its position on offsets and hints at its first legal actions in the area of defense contracts.
In June 2010, the European Commission (EC) published a Communication1 on the use of body scanners, as one of the screening methods allowed by the EU Civil Aviation Security Directive. The Communication1 assesses the potential risk of body scanner technologies to human rights, data privacy and to the health of the individuals exposed. It remains up to the EU Member States to choose whether or not to make use of these technologies. Some EU Member States have been testing such technologies while others currently ban the use of ionizing radiation other than for medical purposes. This report outlines the background and basic recommendations of the EC.
The new EU Council Regulation 428/2009 sets up an EU wide regime for the control of exports of dual-use items and technology, and replaces the former Regulation 1334/2000. The new Regulation defines a common list of dual-use items which are controlled for transfer, export, brokering and transit. The Regulation is a directly applicable law throughout the EU and is enforced by its 27 Member States. The European Commission is responsible for verifying the correct implementation of the EU Regulation, while national export control authorities remain responsible for deciding on applications for export authorizations. Notable inclusions to the regulation are the introduction of controls on brokering services of dual-use items and specific provisions for the prohibition of certain transits of dual-use items on the EU territory based on certain restricted end-uses. The Regulation implements Member State and EU international commitments to enforce export controls on dual-use items.
The EU sets new export control standards for conventional arms exports outside the EU. In December 2008, the Council of EU Foreign Affairs Ministers approved the "Common Position" 2008/944 making the 1998 EU Code of Conduct on Arms Exports legally binding. Every request for an arms export license for an item referenced in the EU Common Military List will have to be assessed according to the eight criteria outlined in the new Common Rules. The new Common Position also creates a mechanism among EU Member States to consult and inform each other about denials of arms export and brokering licenses. The new Common Position only concerns exports of military items outside the EU, and complements the recently adopted EU Directive on Intra-EU Transfers of Defense Equipment and Technology, which regulates the transfers between EU Member States (so: inside the EU). The most important expected impact is a better alignment of policies of EU Member States regarding the consistent and common application of U.N., EU and OSCE arms embargoes and other international export restrictions. The combination of these new rules that govern both internal transfers and external exports aim at creating higher standards for a more coherent and harmonized European defense market.
US exporters should be aware of the changing environment in the EU that this decision triggers in arms export control policy. The circulation of U.S. components included in European systems could be indirectly impacted in light of this new legally binding framework. In cases of transfers between EU Member States, US equipment continues to be covered by ITAR. In cases of re-export outside the EU, the final destination of purely-European defense equipment will be assessed under the terms of the EU Code of Conduct, while US-made equipment, and US components included in European systems, will continue to be covered by ITAR and EAR, as applicable. However, U.S. exporters should be aware that some manufacturers may choose to "design out" US-origin components requiring licenses under the ITAR and/or the EAR (i.e., components requiring a license for transfer within or out of the EU even if incorporated into a European product) as a result of the U.S. license requirement.
EU Directive 2009/43/EC on Intra-EU Transfers of Defense Products outlines a set of new laws with a twofold aim: first, reforming European licensing procedures for the transfer of defense articles within the EU, and second, introducing common criteria for the certification of defense companies. The Transfers Directive is one part of the so-called "EC Defense Package" that also comprises the EU Directive on Defense Procurement. The objective of the Transfers Directive is to create an area where military goods and components can circulate more freely between EU Member States, on the basis of a harmonized European licensing system aimed at reducing the number of individual licenses to the benefit of General Licenses. This initiative is also complementary to the recently adopted EU Common Rules on Governing the Control of Exports of Military Technology and Equipment outside the EU. Both initiatives are aimed at strengthening the European Defense Technological and Industrial Base (EDTIB) and creating a more secure and harmonized European defense market. Comments are included at the end of the report.