The defense industry has seen some serious growth in recent years, mostly because of geopolitical tensions and bigger defense budgets. What are the key factors behind this trend? How does it affect the business environment and legislation? In an interview with Michaela Mokrá from the law firm Hronček & Partners, you will learn what conditions companies trading in defense industry products must meet, what security requirements they must comply with, and what challenges await them in administrative proceedings.
In recent years, we have seen a significant boom in the defense industry. What do you think has caused this trend?
The main factor is certainly increased geopolitical tension and ongoing military conflicts, primarily the conflict in Ukraine, which are leading to increased defense budgets in individual countries and increasing demand for arms products for defense or security operations. Countries are trying to strengthen their defense capabilities, which naturally increases demand for military equipment, weapons, ammunition, and other defense industry products or components for their manufacture. This trend is visible not only in Europe but also on a global scale. Defense industry entities are currently investing heavily in research and development, which naturally attracts capital, talent, and the attention of public institutions. Conversely, some traditional engineering sectors are experiencing a downturn, which naturally leads companies to transform their research and production capacities to the defense industry. The arms industry is not just about weapons in the traditional sense—the importance of various support systems, such as electronic or communication technologies for defense, which opens up opportunities for engineering companies originally focused on other areas, in our country mainly automotive, to reorient their development and production to this area as well.
This growth is also increasing the demand for licenses to manufacture and trade in defense industry products. Do you feel that the authorities are overburdened with these applications?
We can certainly talk about an increased administrative burden on the relevant state authorities, whether it be the licensing departments of ministries or, in particular, the National Security Authority (NBÚ). Cooperation with experts can significantly streamline and speed up this process. We know from experience that it is very important to be thorough when preparing documentation. If clients only contact us when they encounter a problem in the administrative process, such as documents being returned repeatedly for changes and additions, and each such addition is also associated with an extension of the procedural deadlines, it is more difficult for us to respond in a way that maximizes the efficiency of the administrative process, and in certain cases it may even be easier and less time-consuming to prepare and submit a new application.
We have been addressing industrial safety issues for a long time and, as a result, we have sufficient know-how and thoroughly prepared model documentation, where we anticipate in advance the content of the documentation and annexes to the application which, based on our experience, the relevant authorities usually require as part of their assessment of the application's content. In this way, we try to minimize the need for any additions and delays in the process. Of course, the office will also treat documentation that is familiar and clear to it and structured for the purpose of the simplest possible assessment differently. Our experience from previous proceedings at the NSA, but especially the experience of colleagues and partners who have worked in these institutions for a long time, can therefore help clients streamline and speed up the process of obtaining the relevant confirmations and permits, making us a good partner for the office itself in terms of communication during the proceedings.
What requirements must a company meet in order to trade in the defense sector?
Act No. 392/2011 Coll. regulates the conditions for trading in defense industry products and intermediary activities in the trade of defense industry products, regulates the transfer of defense industry products, and establishes controls on foreign trade in defense industry products. First and foremost, in order to determine the legal obligations of clients, we distinguish whether they are only traders or also manufacturers of defense industry products.
The legal definition of trading in defense industry products is very broad and formal, and includes all contractual relationships involving the sale or purchase of defense industry products, foreign trade in defense industry products and their transfer, and intermediary activities involving defense industry products. This also includes any other pre-contractual and contractual relationships related to trade in defense industry products.
Only persons who meet the conditions laid down by law and obtain the relevant authorization may trade in defense industry products and carry out intermediary activities. Licenses for trading and licenses for brokering activities are issued for a period not exceeding five years, so it is necessary to monitor this period and renew the license in a timely manner to ensure business continuity.
In addition to the Ministry of Economy of the Slovak Republic, the Ministry of Foreign Affairs of the Slovak Republic, the Ministry of Defense of the Slovak Republic, the Ministry of the Interior of the Slovak Republic, the National Security Authority, and the Slovak Information Service are also involved in the licensing regime for defense industry products and intermediary activities from the perspective of protecting the security interests of the Slovak Republic.
The application itself must be accompanied, among other things, by an officially certified copy of the applicant's industrial security clearance.
One of the conditions for applicants for a license to trade in defense industry products is therefore the submission of an industrial security certificate. What are the basic industrial security requirements for businesses?
Industrial security is a set of measures and conditions for the protection of classified information relating to an entrepreneur. Every company in this sector must comply with strict security standards relating to the protection of classified information, physical and facility security, and cyber security.
This means that the company must comply with the relevant obligations under the Classified Information Protection Act, which includes that members of the statutory body must obtain security clearance for the relevant level of classification depending on the nature of the planned activity, and are therefore vetted for integrity, trustworthiness, and security risks. In addition, the company must have appropriate measures and mechanisms for the protection of buildings and premises where classified information is located described and properly implemented in its internal documentation to protect them from access by unauthorized persons. Another part of the conditions for obtaining industrial security clearance may be the development of a security project for technical means and the certification of technical means. The NSA also checks the ownership structure of the company, its finances, and its links to foreign entities.
Industrial security is governed by various levels of classification. What levels of classification are there?
We distinguish between four basic levels of classification:
Restricted: this is the lowest level of classification and relates to information where unauthorized handling could harm the interests of citizens or state authorities, which could be detrimental to the interests of the Slovak Republic.
Confidential: This is information where unauthorized handling could cause damage to state interests, public interests, or other legally protected interests, such as the interests of a state authority.
Secret: unauthorized disclosure could seriously jeopardize the foreign policy position, defense, security, and interests of the state in the international and economic sphere, thereby causing serious harm to the interests of the state, the Union, or an alliance;
Top Secret: this is the highest level of protection, where the disclosure of information could seriously jeopardize the constitutionality, sovereignty, and territorial integrity of the state or cause irreparable and serious damage to defense, security, economic interests, foreign policy, or international relations, and could cause extremely serious damage to the interests of the Slovak Republic.
Each of these levels requires specific security measures. It is important that all entities handling information at a given level of classification have the necessary clearances, secure premises, and adequate technical infrastructure.
Not every entrepreneur has a clear idea of their needs in terms of the required level of classification or the specific measures and mechanisms to ensure compliance with strict legislative requirements. It is true that higher levels of classification come with stricter conditions and greater time and financial demands. At Top Privacy, we focus on designing solutions that guide applicants to the optimal level of classification. Our security measures are designed to comply with legislative requirements while minimizing financial costs for clients, taking into account their individual needs.
When is it mandatory to secure a facility or technical equipment?
Michaela Mokrá: It is practically always mandatory when classified information is handled in a given facility or when certain technical equipment is used. Therefore, if classified information is processed electronically using technical equipment, it must be secured and properly certified. The same applies to the buildings and premises where it is located.
This includes a whole range of security measures and tools that must be carefully set up in accordance with the specific needs and conditions of each entity, such as, in the case of facility security, primarily access security codes, specific locks, camera systems or alarms, but also rules for keeping and handling documents; in the case of technical means, this mainly concerns cyber security and IT settings.
The extent and nature of these measures often depend on the level of secrecy and complexity of the projects in which the entity is involved. For example, if a company stores or develops products related to information with a higher level of confidentiality, or if the company is bidding for government contracts and works with classified information of a higher level, it must expect stricter requirements for securing its premises and technical equipment, which is naturally reflected in the costs of these measures.
How does cooperation with the EU and NATO affect security requirements?
Michaela Mokrá: Slovakia's membership in the EU and NATO means that, in terms of protecting classified information, entities must not only meet national industrial security requirements under the Classified Information Protection Act, but many security standards are also coordinated at international level, which must then also be taken into account. It is also necessary to comply with international obligations contained in international treaties, such as the recognition of security clearances of persons from other countries, or on the prohibition of exports of defense industry products to countries that are not authorized and are subject to various sanctions.
If a company wants to cooperate in the supply of defense industry products and military projects of the alliance, it must, of course, meet the stricter security clearance standards required by NATO.
How does the process of obtaining a license to trade in defense industry products work?
Michaela Mokrá: First, we consult with clients to review their business model in order to identify the level and degree of protection of classified information that will apply to them, and we generally familiarize them with the legal conditions relating to trade in defense industry products and industrial security, so that they are aware of all the legal requirements they must meet and so that we can identify any shortcomings that need to be addressed. We take a comprehensive view of the applicant's business model and, as our team consists of security experts and lawyers, we can also assist with setting up supply chains or with establishing the applicant's position within a group of companies with property or personnel links.
The first step is to prepare industrial security documentation, i.e., the applicant's security project. This involves a whole range of documentation on physical and facility security, within which we also propose a method of securing the protected area and facility, as well as administrative security documentation, within which we prepare a filing plan and then a personnel security policy. It also includes a security project for technical equipment and ensuring its certification, where we cooperate with our partner IT technician in setting up the technical equipment. We also assist the applicant in obtaining security clearance for members of the statutory body, which mainly involves assistance and advice in completing the entrepreneur's security questionnaire and subsequently submitting an application for security clearance of the entrepreneur to the National Security Authority.
After submitting the application to the National Security Authority, we also work simultaneously on preparing the application and documentation for obtaining a license to trade in defense industry products, where we must demonstrate to the Ministry of Economy, in particular, that the applicant meets the capital requirements, has a clean criminal record, and that the members of its statutory body are suitable. It is also necessary to identify a responsible representative and specify the defense industry products as well as the individual methods of trading in them. We strive to prepare this application on an ongoing basis during the proceedings at the National Security Authority so that we can complete and submit it as soon as possible after obtaining confirmation of the applicant's industrial security, which also makes the entire process more time-efficient.
Do you expect the legislation in this area to become stricter?
Michaela Mokrá: The current wording of Act No. 392/2011 Coll. on trade in defense industry products and on amendments to certain acts is indeed outdated and does not sufficiently reflect the current situation in the sector. We have information from practice and from the Ministry that in some cases it causes complications in terms of interpretation, and therefore there are currently initiatives within the ministry to amend it. However, we will monitor how the legislative process progresses, whether the law will be amended in the foreseeable future, and whether there will be political will to do so. It will certainly be primarily about modernizing the law, and to a certain extent we also expect it to be tightened, especially in connection with new security threats and technological developments. In particular, we expect an improvement in the control powers of the relevant authorities over exports and increased supervision of supply chains.
As regards the legal regulation of the protection of classified information, this law has not been amended since 2004, but we currently have no information about any planned changes, nor is such a proposal part of the legislative process.
The most significant and rapid changes in relation to entities operating in the defense industry concern the area of cyber security, where, at European level, great emphasis is currently being placed on modern regulation that would be able to respond better to rapid technological progress and security threats associated with information and communication technologies.
Do you have any final comments or thoughts you would like to share?
I wish well-prepared companies success in obtaining all the necessary permits and meeting the legal requirements, despite the demanding administrative process, so that their business in the defense industry can move forward. Of course, we will be happy to assist them in this regard if they decide to use our services and expertise.
