Goods and technologies for military use: licensing obligations | In Principle

In Poland, manufacturing and trading in technologies and devices for military or police use is a strictly regulated economic activity requiring a licence. But simply obtaining a licence is not the end of contacts with regulators. Changes in corporate authorities and some changes in ownership require notification to the relevant authority. Failure to comply with the notification obligation may lead to restriction or even revocation of the licence.

A broadly defined licensing obligation

In this area, the main law defining companies’ obligations is the Act on Conducting the Business of Manufacturing and Trading in Explosives, Weapons, Ammunition, and Devices and Technology for Military or Police Use of 13 June 2019. It introduces an obligation to obtain a licence to do business in this area. In official practice, licences for doing business in these areas used to be referred to as “special trading licences.”

The act also employs broad definitions and many general clauses. It should be recognised that the parliament’s intention was to introduce the broadest possible control over manufacturing and trading in technology for military use, and to strictly regulate such activities in the public interest.

Pursuant to Art. 3(13) of the act, “devices for military use” are defined as devices designed for military purposes.

“Technology for military use” is defined as information necessary for the development, production or use of a given device for military use, in the form of technological data or technical assistance involving the transfer of technological data (Art. 3(12)).

“Weapons” are defined as firearms (which also have a broad statutory definition) and other devices and instruments designed to destroy or incapacitate targets (Art. 3(12)).

The list of materials and technologies covered by the licensing obligation is further spelled out in the government regulation issued pursuant to Art. 7(3) of the act (currently, the regulation dated 17 September 2019 is in force).

“Trade” and “manufacture” of weapons or technologies for military use are also broadly and vaguely defined.

The act defines “manufacturing” not only to include production activity as such, but also “activities aimed at restoring or modifying the original properties” of these items, “including gunsmithing activities.” And the statutory definition of “manufacturing” also includes repairs in a broad sense.

On the other hand, “trade” in these items is defined as “any commercial activity related to weapons and technology for military use, including brokerage and advisory on entering into contracts and organising the movement of devices (excluding shipping activities).”

Not just the arms industry

Given the very broad definitions applied in the act and the regulation, it may turn out that offering services or goods even in sectors not obviously related to defence may require a licence. This is particularly important for businesses operating in IT, cybersecurity, aviation, and the emerging space industry. Even if a service does not apply to technologies of a military nature, it may turn out that it covers dual-use technologies. Although designed by the manufacturer for civilian applications, these technologies can also be exploited for military purposes, and therefore are subject to separate regulatory obligations. Thus, before starting activity in an industry even indirectly related to defence, it is advisable to conduct a proper licensing audit, performed not only by lawyers but also by consultants with experience in the military or the defence sector.

Regardless of the broad definitions, it should be emphasised that the act and regulation should be interpreted and applied in accordance with the Polish Constitution and other laws. In particular, interpretation should be compliant with the Business Law of 6 March 2018, which is fundamental to conducting all business activities in Poland. Art. 11(1) of the Business Law introduces the principle of business-friendly interpretation of provisions, pursuant to which doubts regarding the meaning of a legal norm are resolved in favour of the business. While relevant to defence activity, the limitation of this principle for considerations of public policy and security provided for in Art. 11(2) of the Business Law does not automatically apply in licensing proceedings.

Art. 15 of the Business Law also states that the authorities must provide businesses with information on the conditions for undertaking, carrying out and terminating business activity within the authority’s competence. Our experience indicates that the public officers in Poland responsible for conducting licensing proceedings are open to contact with counsel for businesses and are willing to provide helpful information.

Licensing proceedings

The licensing authority for special trade is the Minister of the Interior and Administration. Before granting a licence, the minister is required to seek an opinion from the minister for economy, the head of the Internal Security Agency, the head of the Military Counterintelligence Service, or the head of the Police for the province in question. Under the general rules of administrative procedure, these opinions are not binding on the minister. However, in practice it is difficult to imagine a situation where the minister would issue a licence over the objection of any of the reviewing bodies, in particular against the opinion of the heads of the security services.

The act provides for a number of documents and statements to be submitted with the licence application. In practice, an important and labour-intensive element of the application is specifying the type and scope of business for which the licence is sought (Art. 17(4)). This will be reflected in the wording of the licence, and will be essential for the legal security of the business conducted by the licensee. This element of the licence application should be carefully prepared in consultation with counsel and other consultants experienced in this type of proceeding.

Another important requirement for obtaining a licence is the specific requirements for members of the applicant’s management board and its partners or shareholders. At least two members of the governing body of the licensed entity, or one member of the governing body and a commercial proxy or attorney-in-fact in charge of the licensed activity, must meet the requirements in Art. 10(1) of the act. These persons may be citizens of Poland (or another EU member state, Switzerland or an EFTA country), but may be citizens of another country if they have obtained a permanent residence permit or a long-term EU resident permit in Poland. Additionally, persons serving on the governing body or directing the performance of the licensed activity:

• Should have the professional background to conduct the licensed activity—this requirement is met by completing training at a relevant institution, as specified in the regulation of the minister for economy (among others, the Military University of Technology, the Łukasiewicz Research Network—Institute of Industrial Organic Chemistry, or the Internal Security Agency)
• Must not exhibit mental disorders or significant impairment of mental functioning, as confirmed by an appropriate psychological and medical examination, and
• Must not have been convicted of an intentional crime or an intentional tax offence, and there must be no proceedings pending against them in this regard.

The requirement of having no criminal record and no pending criminal proceedings also applies to the company’s partners (if they are natural persons), members of the management body, proxies, and holders of 20% or more of the shares in the entity applying for a licence.

A well-prepared licence application will help the proceedings go smoothly and contribute to speedy handling of the case by the Minister of the Interior and the referee bodies. In practice, the need to correct the application or provide additional information to the authorities is the most common reason for prolonging the licensing proceedings, and relatively easy to avoid.

Licensee’s corporate information obligations

Obtaining a licence does not end the licensee’s obligations to the licensing authority. Art. 27(1) of the act imposes a broad obligation on the company to provide information to the minister, especially regarding the corporate status of the licence holder. Among other things, the licensee must notify the Minister of the Interior of:

• A change of the licensee’s seat, the address of the licensee’s registered office, or the place where the licensee does business
• A change in the composition of the management body or proxies, or attorneys-in-fact authorised to manage the business activity specified in the licence
• A change of partners in a partnership, or shareholders holding at least 20% of the company’s shares
• A change in the factual basis on which the opinions were issued confirming compliance with the technical conditions for conducting the licensed activity, or fire protection certificates (in particular, any change in the technology applied, structural changes to the facility, and changes in the location of the production or storage part of the facility)
• A change in the company’s name or the name of a partner or shareholder who is not a natural person, and
• A change resulting in transfer of the licence by operation of law to another entity, in particular as a result of a corporate merger, division or reorganisation, transfer of the enterprise or an organised part of the enterprise together with the licence, or contribution of the licence as an intangible asset of the enterprise to a company to cover shares taken up in the other company.

These information obligations are particularly broad for companies doing business in the form of a branch of a foreign company, where the licence holder is formally a foreign company (a branch has no separate legal personality). Then the information obligation extends to members of the bodies and partners or shareholders of the foreign company.

The obligation to notify changes in the applied technology is particularly important for larger businesses processing data in different units (or branches). It is essential to remember about this information obligation in the case of reorganisations involving outsourcing, introduction of a shared services centre, or adoption of a new production technology.

Failure to comply with the obligation to provide this information to the licensing authority may even be grounds for revocation of the licence (Art. 24(3)(3) of the act). However, loss of the licence is not automatic, and the authority has some discretion here.

But the minister has a duty to revoke the licence if continued conduct of the licensed activity poses a threat to defence or security of the state or public policy (Art. 24(1)(2)). The authority has discretion in making findings on this issue, but it should be recognised that a change of ownership in a licensed entity may be found to pose a threat to state security or defence.

Additionally, the authority must revoke the licence if there are not at least two members of the management body or proxies who meet the mental health and professional training requirements for conducting the licensed activity (Art. 24(1)(2)).

Conclusions

The act gives the minister broad powers to supervise the business of manufacturing and trading in materials or technologies for military use. In exercising this oversight, the minister is vested with broad discretion and the power to interpret a wide range of general clauses.

In particular, the authority may revoke a licence if the licensee fails to provide the authority with the information required by law. And the minister must revoke the licence if, as a result of ownership or organisational changes:

• There is a threat to the defence or security of the state, or
• The licensee no longer meets the requirement to have at least two persons in its management holding the relevant professional training and medical certificates.

Hubert Bińkiewicz, M&A and Corporate practice, Energy practice, Wardyński & Partners