Background

This UK business has been exporting its UK-manufactured components to an aircraft manufacturer in Italy for years, with the Italian manufacturer integrating the UK-supplied goods into aircraft parts for a known commercial aircraft end use. The goods are classified as dual-use, and an Open General Export Licence for dual-use goods supports their exports. Contracts for new deliveries have followed one after the other, but something has changed.

The customer has requested slight design changes. The Italian manufacturer has supplied updated, unclassified drawings, and the goods have been built to print in the UK. But something is off. 

The request for minimal design change was agreed upon at the commercial level in the last contract amendment, with support from the engineering and manufacturing leads. 

The design changes are slight, there will be minimal disruption to the UK manufacturing schedule, and the customer is well known. The required contract acceptance process for due diligence to end use was completed when the contracts were first contracted; the contracts are well established, and the supply route is well known.

The trade compliance manager questioned the design change as manufactured goods moved to supply; the inventory system flagged a design change to components for Italy, end use Italy. She asked about the purpose of the design changes; the trade compliance due diligence process has made it necessary to classify the new component before the goods are prepared for export.

What changed, and why?

The business holds monthly trade compliance briefings, a catch-up with the commercial, procurement, manufacturing, finance, trade compliance and logistics teams.   

This forum has historically proven useful for the project managers to catch up on any business risks to their individual projects. 

It was the project manager for the business supply for Project Typhoon who flagged a potential change in the supply route. A project manager at the Italian business mentioned, in passing, the potential supply of their Italian aircraft components to the Middle East. 

A business opportunity had opened up 18 months before, a new sales opportunity for the Italian business. They had recently commenced supplying spares for Project Typhoon in Germany; the Middle East was a game-changer for the Italian business. 

Since this could only be good news for the UK manufacturer, the project manager mentioned the conversation at the next monthly trade compliance meeting.

This information, coupled with a request for a manufacturing design change in the supplied goods, raised the following due diligence questions from the trade compliance team: 

• Had anyone documented the reasoning behind the design change for trade compliance purposes, and had the information been recorded, or had the supply documentation been updated? 
• The inventory system was programmed to raise a trade compliance flag to a design change, but due diligence to end use should be part of any contract amendment process. This had been missed.

• Had anyone been told officially that the end use of the original supply of goods was now Germany, not just Italy, and that the ultimate end use may now include Middle Eastern countries in the future? 
• Any change to end-use supply could influence compliance with UK export licences. 
• The original component classification is dual use. Any change to this component or change to the end use could alter both the tariff classification and impact on export licence provision.

The importance of good team communication and the application of due diligence

The trade compliance lead raised a business risk flag to all senior business leads. This resulted in the following:

• The commercial lead took urgent action to communicate the due diligence requirement to the procurement lead at the Italian company. This was to confirm any change to the reason for supply and alteration in the ultimate end use of UK-supplied goods, even after incorporation in Italy. 
• An updated due diligence document was completed by the Italian customer, confirming.
• The original supply design would continue to be Italian, with German end use added going forward.
• The supply of components with the altered design would be to support the maintenance of Typhoon aircraft in the Middle East from now on.
• The changes to end use were captured on the inventory system
• The updated design of the component for military end use caused a reclassification of the item to Military Goods, and an application was submitted for a UK export licence (OGEL, Military Goods: Collaborative Project Typhoon) to cover the ultimate end use of the goods supplied to Italy
• The conditions of the licence require confirmation that the supply of goods for end use in Kuwait, Qatar and Saudi Arabia is for maintenance purposes only, and evidence to support this, whether goods incorporated or not, must be on file for audit

Best practice is to ensure good communication across all areas of an export business, whether verbal in regular comms meetings or electronic via inventory system alerts.

In this instance, end-use and design-change flags built into the inventory system alerted the trade compliance team to potential reclassification requirements and end-use issues. 

The business is reviewing the due diligence process.