Export Control: Considerations for Cloud Services

Your cloud-based services could be subject to export controls. I will walk you through the key concerns you must address to remain compliant in this complex area. Understanding export control in the cloud is essential for mitigating risk and ensuring compliance with national and international regulations.

What Questions We Will Answer in this blog

• What Are Export Controls, and Why Do They Matter?

• How do export controls affect cloud-based services?

• What are the key compliance concerns in using cloud storage and services internationally?

• How can businesses adapt their policies to remain compliant with export control laws?

• What are some industry-specific considerations regarding cloud-based services?

• What is the role of Export Control Compliance Programmes?

  
  

Introduction

As technology advances, cloud-based services are an increasingly important part of business operations. These services are vital to ensuring competitiveness and efficiency in today’s marketplace, from storing sensitive data to providing global software solutions. But, like any business tool, cloud services come with responsibilities. One of the most critical is ensuring compliance with export control regulations.

"The risks associated with cloud-based services and export controls are invisible but very real. Businesses must actively manage their compliance to avoid facing costly sanctions." — Arne Mielken, Managing Director of Customs Manager Ltd

Abbreviations We Use in this Blog

To help you follow along, here are the abbreviations used in this blog:

• ECN: Export Control Number

• EAR: Export Administration Regulations

• ECCN: Export Control Classification Number

• OFAC: Office of Foreign Assets Control

• ITAR: International Traffic in Arms Regulations

  
  

What Are Export Controls, and Why Do They Matter?

Export controls are legal measures that govern the transfer of goods, services, technology, and sensitive data to foreign countries or individuals. These controls are in place for several reasons, including national security, foreign policy objectives, and the prevention of the proliferation of weapons of mass destruction (WMD).

Governments worldwide, including the UK, EU, and US, have established complex regulatory frameworks to manage exports. Violating these laws can result in severe penalties, including fines, revocation of export privileges, and reputational damage. As cloud-based services facilitate cross-border data transfers, businesses must ensure that they comply with these regulations even when dealing with intangible goods.

How do Export Controls Affect Cloud-Based Services?

When businesses think of export controls, they usually envision physical goods crossing borders. However, with the increasing use of cloud computing, export controls also affect intangible goods, such as software and data stored on cloud servers.

Cloud services can fall under the scope of export controls for several reasons:

1. Data Location: Where your data is stored matters. If your data is stored on servers in a foreign country or if data moves between different jurisdictions, your business could inadvertently breach export controls.

2. Access by Foreign Nationals: Even if the data is stored domestically, export controls can apply if foreign nationals from restricted countries access that data. This is especially relevant under U.S. export control laws like the ITAR and EAR, which regulate not only physical exports but also "deemed exports" — information transferred to non-U.S. persons.

3. Technology Transfer: Export controls also govern the transfer of certain technologies. For example, encryption technologies are subject to stringent export controls, and storing encrypted data on a cloud server located abroad could require a license.

   
   

What Are the Key Compliance Concerns in Using Cloud Services Internationally?

The risk awareness required when using cloud services internationally cannot be overstated. There are several professionalism and accountability measures that your business should adopt to mitigate risks, including:

1. Data Location and Transfer

   • One of the fundamental issues with cloud-based services is that the data stored in the cloud can be located anywhere in the world. Cloud service providers often use a network of data centres located in multiple jurisdictions. As a result, sensitive data could unintentionally be transferred to or accessed from countries subject to export restrictions, leading to violations of export control laws.

   • Actionable Insight: Companies should carefully review their cloud service providers’ data storage and transfer policies. Knowing where the data resides and how it is transmitted is crucial for maintaining compliance. Many businesses choose providers that allow them to specify where their data will be stored (e.g., within the EU or UK).

     
     

2. Encryption and Deemed Exports

   • Cloud services often involve the use of encryption to secure data in transit and at rest. However, encryption technology itself can be subject to export controls. Certain high-grade encryption technologies may require an export licence before they can be used or transferred internationally.

   • Moreover, the concept of “deemed exports” can come into play. A deemed export occurs when controlled technology is shared with a foreign national, even if the data remains within the same country. For example, if a UK-based company uses cloud services to share controlled technology with an employee or contractor from a restricted country, this could trigger a deemed export violation.

   • Actionable Insight: Review your company’s use of encryption technology and ensure compliance with relevant export control requirements. Additionally, assess the nationality of individuals who may have access to controlled technology, even if they are located within the same jurisdiction.

     
     

3. Export Licensing Requirements

   • For certain types of data or technology, an export licence may be required. Export licensing is not only necessary for physical shipments of goods but also for the transfer of controlled technology, software, or technical data via cloud-based services. For example, sensitive military or dual-use technologies (items with both civilian and military applications) often require a licence before they can be exported or transferred across borders.

   • Actionable Insight: Businesses must identify whether the data or technology they handle is subject to export licensing requirements. This often involves classifying data under the relevant export control regimes, such as the UK’s Export Control Order, the EU’s Dual-Use Regulation, or the US Export Administration Regulations (EAR). If an export licence is needed, it must be obtained before the data is transferred through the cloud.

     
     

4. Third-Party Cloud Providers

   • The use of third-party cloud service providers introduces additional complexities. Although companies may not directly manage the servers storing their data, they are still responsible for ensuring compliance with export control laws. A cloud service provider located in a country subject to sanctions or restrictions could inadvertently place your data at risk of non-compliance.

   • Actionable Insight: Conduct due diligence when selecting cloud service providers. Ensure they have robust export control compliance programmes in place, especially regarding the location of their servers and their data transfer practices. Furthermore, ensure that your contract with the provider includes clauses on compliance with export controls.

     
     

5. Sanctions and Embargoes

   • Export control regulations often intersect with sanctions regimes. Businesses must ensure that their cloud-based services are not facilitating transactions with sanctioned individuals, entities, or countries. Violating sanctions can result in severe legal consequences and reputational harm.

   • Actionable Insight: Implement strong screening measures to ensure that your company’s cloud-based services are not accessed by sanctioned parties. This includes conducting regular checks against government sanctions lists and maintaining a comprehensive understanding of which jurisdictions your data may be transferred to.

How Can Businesses Adapt Their Policies to Remain Compliant with Export Control Laws?

Staying on top of compliance requires ongoing attention to detail and adaptability. Businesses must regularly review their cloud services to ensure they are operating within the scope of national and international regulations.

Here’s how to strengthen your compliance program:

• Classify Data: Understand what type of data you are dealing with, and ensure that it has been properly classified according to export control laws. Cloud storage is not a grey area — it is subject to the same laws as physical goods.

• Internal Training: Your compliance team must be well-versed in the relevant export control laws, particularly as they relate to technology transfers. Training should include updates on national export control regimes, including the EU and U.S. Customs regulations.

• Work Closely with Your Cloud Provider: Ask questions about how your data is managed and where it is stored. Make sure the provider can demonstrate their compliance with relevant export control laws, such as ensuring that no restricted parties have access to your data.

• Audits and Recordkeeping: Regular audits of your cloud service use will help identify potential risks. Ensure that accurate records are kept to demonstrate compliance in case of a regulatory investigation.

  
  

What Are Some Industry-Specific Considerations as regards Cloud-Based Services?

Different industries face varying levels of export control risks when using cloud services. Sectors such as defence, aerospace, energy, and pharmaceuticals often handle sensitive data that is subject to stringent export control regulations. For instance, a defence contractor using cloud services to store technical specifications for weapons systems may face heightened scrutiny under export control regimes.

Actionable Insight: Identify industry-specific export control regulations that apply to your business. This may involve consulting with export control experts or obtaining advice from government authorities to ensure compliance when using cloud-based services.

What Is Role of Export Control Compliance Programmes?

Given the complexity of export control regulations, businesses that rely on cloud-based services should establish comprehensive export control compliance programmes. These programmes should include:

• Risk Assessments: Regularly assess the risks associated with data transfers via cloud services, especially when dealing with controlled technology.

• Employee Training: Ensure that employees, contractors, and third-party providers are aware of export control obligations and the potential risks of non-compliance.

• Export Licence Management: Maintain a system for tracking and managing export licences, including renewals and amendments, to ensure that all necessary approvals are in place.

Arne’s Takeaway

Export control laws have expanded beyond the physical shipment of goods and now cover intangible transfers like cloud-based services. Professionalism, impartiality, and confidentiality are essential when dealing with these issues. To remain compliant, businesses must take an active role in monitoring where their data is stored, who can access it, and whether they are complying with Customs, export control, and sanctions regulations.

Expert Recommendations

• Implement robust compliance policies that address cloud storage and technology transfers.

• Train your staff on how export control regulations apply to intangible services, such as cloud computing.

• Regularly audit your cloud service use and work closely with your cloud provider to ensure compliance with national and international regulations.

  
  

How My Team and I Can Help

Along with a great team of enthusiastic specialists, we offer comprehensive support for export control compliance. My team and I support all your import-export operations, including bespoke consultancy and practical assistance. We provide public, in-house, and on-demand training tailored for customs professionals, importers, exporters, and their partners. Our membership services include weekly customs trade intelligence and updates. We also offer UK import and export customs clearance services. For more details on services, visit www.customsmanager.org.

Sources That We Base Our Information in This Blog On

For this blog, we consulted the latest export control regulations, including guidance from the U.S. EAR, OFAC, and the ITAR. We also relied on legal and policy frameworks from various international authorities governing export control compliance for cloud-based services.

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Learn With Me

I and my team offer extensive training on export controls and cloud services. Please visit www.customsmanager.org/events to explore the course plan and book one of the following public courses.

About the Author

I (Arne Mielken) am a customs, export control, and sanctions expert with over 20 years of experience. I have worked as an executive director for many years in Big 4 Consultancy, global trade management technology companies, and many international trade and export UK and EU trade associations. I am proud to be a Freeman of the City of London and a Liveryman of the Worshipful Company of World Traders and am a member of many customs, export control & sanctions associations.

Connect With Me & My Team

You can learn more about me here and connect with me on LinkedIn. I also run a channel where you can get free tips and advice on customs, export controls, and sanctions.

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Disclaimer

The information provided in this blog post is for educational purposes only and should not be construed as legal advice. Consulting with legal professionals, specialists, or specific compliance requirements and guidance are recommended. Book a free call with our expert at Customs Manager Ltd.

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