1.   INTRODUCTION

  1.1  Licences to export arms and other goods whose export is controlled for strategic reasons are issued by the Secretary of State for Trade and Industry through the Export Control Organisation (ECO) of the Department of Trade and Industry. All relevant individual licence applications are circulated by the DTI to other Government Departments with an interest as determined by them in line with their policy responsibilities. These include the Foreign and Commonwealth Office (FCO), the Ministry of Defence (MoD) and the Department for International Development (DFID). Decisions on applications circulated to other departments are taken in light of their advice. (The only applications that are not circulated to other departments are those covering exports that other departments have previously advised would not raise any concerns). If there is any disagreement between Departments that cannot be resolved by them at official level, then Ministers' views will be sought.

  1.2  The ECO is also the licensing authority for certain licences required solely because of UN trade sanctions. This memorandum does not deal specifically with sanctions licensing, although the process is similar in most respects to the licensing process described in this Memorandum.

  1.3  Controls imposed for strategic reasons are set out in secondary legislation made under the Import, Export and Customs Powers (Defence) Act 1939 and in European legislation. Broadly these controls fall into three categories—controls on military equipment, controls on dual-use goods and the end-use or "catch-all" control. The details of current controls are set out in Annex A.

2.   TYPES OF LICENCES

  2.1  Open licences are used wherever it is possible (ie consistent with Government policy on strategic exports) to reduce the burden of export controls for exporters and reduce the cost of administration for Government. For simplicity, the following describes the types of licences available for the export of goods or technology only, as a licence is not required for the majority of transhipments through the UK from one country to another.

  2.2  Standard Individual Export Licences (SIELs) generally allow shipments of specified goods to a specified consignee up to the quantity specified by the licence. Such licences are generally valid for two years where the export will be permanent; where the export is temporary, for example for the purposes of demonstration, trial and evaluation, the licence is generally valid for one year only and the goods must be returned before the licence expires.

  2.3  Open Individual Export Licences (OIELs) are specific to individual exporters and cover multiple shipments of specified goods to specified countries and/or, in some cases, specified consignees. 23[23] OIELs covering the export of goods entered in the Military List are valid for two years, while OIELs covering other goods are valid for three years. OIELs often allow exports of spare parts as part of continuing service support for goods supplied under a SIEL to enable companies to provide a quick response and a high level of service to their customers.

  2.4  Holders of OIELs must comply with the conditions of the licence, including maintaining records of all shipments made with the authority of the OIEL for at least three years (four years for military OIELs) after the year of export, and make them available for inspection by members of the ECO on request. These records must include information on the goods exported and the end-user and end-use of the exports, where known.

  2.5  Open General Export Licences (OGELs) remove the need for exporters to apply for an individual licence, provided the shipment and destinations are eligible and the conditions are met. Exporters must register with the ECO before they make use of most OGELs. OGELs do not have a fixed period of validity and can be withdrawn or revised as necessary.

  2.6  A list of the titles of all current Open General Licences is at Annex B.

  2.7  In its Third Report on Export Licensing and BMARC, published in June 1996, the Committee recommended that the availability of open licences be reviewed in the light of possible diversion whenever embargoes are imposed on particular countries. The risk of diversion within the buyer country or re-export under undesirable conditions is explicitly identified in both the July 1997 Criteria and EU Code of Conduct as one of the factors to be taken into account in all decisions on applications for individual licences and in determining what changes are required to the coverage of open licences on the adoption of an arms embargo. However, it remains true that it is difficult, at the point of imposing an arms embargo, to identify all countries where there is a clear risk that they would become diversionary procurement routes. Such countries may include countries not bordering the embargoed territory, and in some cases it will take time for the embargoed parties to establish new conduits.

 3.  THE DEPARTMENT OF TRADE AND INDUSTRY'S ROLE IN STRATEGIC EXPORT LICENSING

  3.1  The ECO within the DTI's Export Control and Non-Proliferation Directorate (XNP), administers strategic export controls. An organisation chart for the ECO is at Annex C. This section of the memorandum describes the ECO's role in processing individual licence applications and its other functions which relate directly to export licensing.

3.2  Processing individual licence applications

  3.2.1  A flowchart showing how applications for standard or open individual licences are processed within DTI is at Annex D. Tables giving statistics relating to licence processing are at Annex E.

3.2.2  Licence application forms

  There are two main licence application forms: Form A for applications for SIELs and Form D for applications for OIELs. (Copies of Forms A and D are at Annex F, together with the guidance material sent to those requesting the application forms). Applicants for both types of licence are required to provide full supporting documentation. Where the consignee is a government body, this would include, for example, the official purchase order or a copy of the relevant part of the contract covering the order. In other circumstances, the consignee or end-user—if known and not the same as the consignee—will provide an End-Use Undertaking; current guidance on End-User Undertakings is at Annex F.

3.2.3  Reception of licence applications

  All licence applications sent to the ECO are received at a central licence reception point within the Licensing Group. Basic details are checked and the relevant papers put together to form a case folder. A letter is sent to the applicant requesting any information that has obviously been omitted, such as an End-User Undertaking.

3.2.4  Technical assessment

  The ECO's Technologies Unit (TU), a multi-disciplinary team of engineers and scientists, then assesses the goods for which the licence has been sought to determine whether or not the goods are controlled under the current legislation and if so under which entry in the legislation. This process is known as "rating" the goods. (Where appropriate, reference is made to technical experts in the MoD or other Departments.) If the goods are not controlled, the applicant is informed. If the goods are controlled, TU annotates the case papers to indicate whether or not the application should be circulated to other Departments for advice. This is done by checking the intended destination and the goods against a matrix which identifies the exports for which each of the other departments have asked to see licence applications.

  3.2.5  Data entry and circulation of licences to other Departments. After TU has assessed and rated all goods, the details of the application, including the rating of all goods covered by the application, are entered on to the ECO's ECLIPS computer system (see separate memorandum) by a Data Entry team. They then send the papers to the Licensing Unit which ensures that all papers, including an End-User Certificate, are satisfactory and then circulates the papers to the government departments that have an interest. Any application not requiring circulation (as determined by other departments in line with their policy responsibilities) is dealt with by the Licensing Unit.

  3.2.6  Decisions on applications. If the application has been circulated to one or more other departments for advice, the processing is not completed until that advice has been received and considered, whether it is to refuse the application or to issue the licence. The decision on the licence application will be taken in light of that advice. For any case where refusal is advised, the case is considered at senior levels in the ECO to determine if the refusal is soundly based; if it is judged to be so, the licence will be refused. If not, the advice will be challenged and the cycle repeated. Ministers' views will be sought where it is not possible to reach agreement at official level.

  3.2.7  If an application is rejected, the applicant will be informed in writing. In the period 23 August 1997 to 21 August 1998 there were 89 refusals of SIEL applications. Reasons for the refusal will be given as fully as possible, but sometimes only the broadest of reasons can be given on the grounds, for example, of national security. This is in accordance with the Code of Practice on Access to Government Information.

  3.2.8  Under certain of the international regimes and the EU Code of Conduct on Arms Exports (see separate FCO memorandum) there are requirements for notifying other members of decisions to refuse, or sometimes to approve licences where other members have denied export of the same goods to the same destination.

  3.2.9  Appeals. Where applications for SIELs are refused, applicants will be informed of their right to appeal. The applicant must state the basis of the appeal and any new circumstances to be taken into account. The application plus any further information submitted in the appeal are then re-circulated to advisors in other Departments for reconsideration and the ECO will only accept advice which has been given by someone at a more senior level than the person giving the original advice. Similarly, within the ECO, an appeal is considered by the Director of Export Control. Where ministers had considered the original application, they will also consider the appeal. In the period 23 August 1997 to 21 August 1998, 15 appeals against refusals to grant a licence were received. As the White Paper on Strategic Export Controls published on 1 July states, the ECO is planning to regularise the appeals system. While this system will not change in its essentials, we consider it would be advisable to put it on a more formal basis, including by providing more information to exporters on the appeals process. In the longer term, the White Paper proposes that new primary legislation would provide for the right of an export licence applicant to appeal against a refusal to grant a licence.

3.2.10  Licence processing performance

  The ECO sets out the Government's commitments to exporters in a Code of Practice. Where it is not necessary for an application for a SIEL to be circulated to other government departments according to their policy requirements, the aim is to provide a substantive response within 10 working days of receipt of the application. Where circulation is necessary, as is the case with the majority of applications, the aim is to provide such a response within 20 working days. However, the periods start to run only as soon as full documentation in support of the application has been provided by the applicant. The ECO's internal targets are to achieve 70 per cent of licences processed within these periods (the 70 per cent reflects the reality that there will always be some licence applications that need to take longer).

  3.2.11  The targets do not apply to applications for OIELs, because of the very wide variation in the goods and country coverage of such licences. Nor do they apply to licences concerning Iran or Iraq or to applications for licences to export goods which are subject to control solely because of UN sanctions.

  3.2.12  The first table at Annex E details the proportion of SIEL applications processed within these time targets for each four week period since the General Election. For SIEL applications circulated to other Government Departments, the table indicates that the percentage processed within the 20 day target remained under 50 per cent for most of the last eight months of 1997. Consideration of sensitive SIEL applications was postponed pending the outcome of the review of export licensing criteria which took place from early May to late July and this, followed by the need to take additional care to ensure that the new criteria were applied correctly in the early stage of their existence, led to an increase in the time taken to assess some applications. Subsequently, improvements in performance were achieved but in recent months the percentage of SIEL applications processed within this time target has fallen again. In part, this was caused by uncertainty as to how to assess applications for licences for India and Pakistan in the immediate aftermath of their nuclear tests, and then subsequently by the need to assess them against the additional measures announced by the Government on 10 July (Hansard Cols 687-688). However, the additional measures against which SIEL applications for India and Pakistan are assessed have almost bedded down. Finally, with the impending introduction of a new computer system, ELATE (see separate memorandum), the ECO is currently undertaking a comprehensive review of its business practices and procedures which, it is anticipated, will lead to the more efficient processing of licence applications.

 3.3  OTHER ECO ACTIVITIES RELATED TO LICENCE PROCESSING

3.3.1  Rating Service

  This is provided by the ECO's Technologies Unit to give guidance to exporters as to whether or not their goods are subject to control at the time of the advice. To use this service exporters need to send technical specifications of the equipment to the ECO. A Rating Enquiry Form is provided for exporters to use if they wish. Technical advice is sought from advisors in other Departments, eg MoD, where necessary. TU also provides advice on ratings to HM Customs and Excise (HMC&E) in support of their enforcement of strategic export controls.

3.3.2  Compliance

  The ECO's Compliance Unit is responsible for ensuring compliance with the conditions of Open Licences. Compliance teams visit OIEL holders and registered users of OGLs to examine the records that the exporters are required to maintain as a condition of the relevant licence and to check that the systems and procedures for meeting the requirements of the licences are working properly. The team also aims to promote wider understanding of the UK export control regime. During a compliance visit, the company is asked (with an assurance of strict commercial confidentiality) to give an overview of its organisation, structure, products and sources, markets and export activity. Exporters will be asked to show how export orders are received and processed, how records are maintained, how the company handles suspicious enquiries or orders, how the shipping of goods is administered and that export records comply with the conditions of UK export licences. A tour of the premises may be requested to see facilities and meet any of the relevant personnel.

3.3.3  Provision of Guidance for exporters

  The ECO has a telephone and fax helpline as a first point of contact for those seeking information on strategic export controls. A Guide to Business and other information is available from the ECO. The ECO also has an Internet web site (http://www.dti.gov.uk/export.control) which includes export control guidance literature, combined lists of goods that are subject to export control, the texts of OGLs and latest news updates. A full paper-based Export Control Information Service is also available on subscription for those who still prefer to keep their records on paper.

3.3.4  Enforcement

  The Director of the ECO chairs the Restricted Enforcement Unit (REU) and the ECO's Enforcement Unit (EU) provides the secretariat. The REU is an interdepartmental committee of officials from all those departments and agencies involved in countering procurement for weapons of mass destruction and the enforcement of the UK's strategic export controls. The following Departments and agencies attend the REU: FCO, MoD, HMC&E and the intelligence agencies. The REU meets fortnightly and provides a forum for the identification, dissemination and discussion of possible action in respect of information, largely secret intelligence, relevant to the achievement of UK export control objectives and non-proliferation policy. There is a natural emphasis on information relating to the activities of UK individuals and organisations but the REU also considers the appropriateness of action being taken with other governments.

  3.3.5  The Enforcement Unit also has responsibility for ensuring that relevant information about the above type of problems is connected with the ECO's day-to-day licensing activities. This is done by maintaining a Watch List (eg of suspect end-users) and by day-to-day involvement in individual cases. EU also provides support to HMC&E in their investigations and prosecutions, for example by providing them with information, advice and acting as a focal point for disclosure exercises and requests for witness statements. Finally, it gives advice to exporters on potential end-users of concern.

4.  ROLE OF MINISTRY OF DEFENCE

  4.1  The MoD has sole responsibility for considering the potential risk to the security of the UK, British forces overseas and our allies of any proposed export or supply. MoD also: considers the risk of diversion to third countries of potential concern; provides military, technical and equipment security advice; assesses whether goods are controlled and whether they are appropriate for the stated end-use; provides advice on bilateral defence relations and advises on export sales generally. The MoD is also the lead Department responsible for processing Form 680 applications (see paragraph 4.3.1).

4.2  Processing individual licence applications

  4.2.1  The Defence Export Services Secretariat (DESS) is responsible for the processing of individual licence applications within the MoD. Where MoD has an interest in licence applications, the DTI passes on the applications to DESS who are responsible for co-ordinating an MoD response. DESS seeks the views of a range of advisors in order to produce the agreed MoD recommendation. Circulation of the application within MoD differs according to the type of equipment for which the application is made. Typically, however, DESS will consult representatives of the equipment security directorate, technical security and the Defence Intelligence Staff. Applications which are particularly sensitive or which raise questions of policy are referred to the Proliferation and Arms Control Secretariat who lead within MoD on export control policy. Each advisor consulted will comment on the application in line with their responsibilities. They will either raise no objection to the proposed export, raise no objection subject to conditions being set or changes made, or object to the issue of any licence, giving reasons for their recommendation. DESS will then co-ordinate and relay the outcome to the DTI. Where MoD officials do not agree or the application is sensitive for some other reason, DESS will seek a ministerial decision. Any queries are relayed back to advisors for resolution before the DTI is informed of the final outcome.

4.3  MoD Form 680 Process

  4.3.1  In essence, the MoD Form 680 process allows industry to seek preliminary Government approval for the release of information or the potential export of defence equipment overseas prior to their submission of a formal application for an export licence. While DESS encourages industry to use the MoD Form 680 process, it is a purely voluntary arrangement. Nevertheless, the Government and industry recognise that the process is an important means of preventing the unauthorised disclosure of information, thereby protecting their individual interests. The Criteria announced in July 1997 by the Foreign Secretary, apply to Form 680 applications.

  4.3.2  The Form 680 process operates in a way similar to that for export licence applications with policy and technical advisers in both the FCO and MoD being consulted. While there can be no guarantee that an export licence will eventually be issued, the MoD Form 680 process provides industry with an indication, at an early stage in their product promotion, of whether or not the Government would be likely to approve any eventual export. In cases where they are advised that an export licence is unlikely to be granted, industry benefits from this early advice by redirecting its marketing resources to other areas.

  4.3.3  Finally, as an assessment will have already been made, any eventual export licence application is likely to be handled much more quickly in cases where the MoD Form 680 process has been used.

5.  ROLE OF FOREIGN AND COMMONWEALTH OFFICE

  5.1  The FCO has the sole responsibility for considering the foreign policy implications of any proposed export or supply of controlled goods or technology and for giving appropriate advice on export licence applications to the DTI and on Form 680 applications to the MoD.

5.2  Non-Proliferation Department (NPD)

  5.2.2  NPD is responsible for the processing of all export licence applications circulated to the FCO for advice by the DTI. This includes logging "live" applications on a database, circulating them as necessary within the FCO, chasing delayed applications and conveying FCO advice back to the DTI or MoD. NPD is also responsible for ensuring that recommendations given to DTI on these applications are consistent with overall FCO policy on defence exports, and in particular with the UK's national export licensing criteria and those in the EU Code of Conduct. This includes ensuring that proposed exports are consistent with the UK's international obligations and commitments under the Nuclear Non-Proliferation Treaty, the Biological Weapons Convention, the Chemical Weapons Convention and the Australia Group, the Nuclear Suppliers Group and the Missile Technology Control Regime. Applications relative to one of these regimes are considered by NPD's Non-Conventional Weapons Control Section. NPD will either recommend refusal of the application before passing it to the geographical department for information or will record that there are no concerns in relation to these regimes. In addition, NPD is responsible for co-ordinating policy in relation to the imposition, amendment or lifting of non-UN (ie EU, OSCE or national) arms embargoes.

  5.2.3  NPD is also responsible for the administration within FCO, of all applications for Form 680s passed to FCO for advice.

5.3  Geographical Departments

  5.3.1  NPD does not have the expertise or resources to take the lead on export licence and Form 680 applications, other than those which raise concerns related to proliferation of weapons of mass destruction. Instead, it circulates these to geographical departments, who take the lead in considering them against the July 1997 criteria and those in the EU Code of Conduct, and deciding whether the FCO should recommend approval or refusal to the DTI/MoD. To assist in making this recommendation they may seek advice from DTI on the technical characteristics of the equipment or from MoD on the military significance. They are also responsible for checking whether there is any specific intelligence relevant to the proposed export (eg which might suggest that it would be diverted to an undesirable end-user). They may also seek information and advice from overseas posts eg on the bona fides of end-user undertakings and on the human rights record of the proposed end-user and recipient country. They also check against records of previous applications in order to ensure that cumulative flows of equipment to the country in question are not excessive in either military or financial terms and hence a threat to regional stability or economic development. Geographical departments need to clear with Human Rights Policy Department any advice to Ministers on applications which raise human rights concerns.

6.  ROLE OF DEPARTMENT FOR INTERNATIONAL DEVELOPMENT

  6.1  Licence applications covering the export of certain goods to some 80 countries are circulated to DFID for advice on the economic and development impact of the proposed export on the recipient country. DFID also has an interest in human rights issues and internal repression records of recipient countries, consistent with the importance given to these matters in DFID's objectives. FCO will also alert DFID to any particularly sensitive cases involving a further 42 countries.

7.  ROLE OF HM CUSTOMS AND EXCISE

  7.1  HMC&E enforces strategic export controls. It is, however, not directly involved in the licensing process and, in particular, does not advise on whether or not a particular licence application should be approved. Information derived from Customs' enforcement activity which might be relevant to licensing decisions (eg information that documentation from an end-user had proved false) is fed into the licensing process through the REU, Customs liaison with DTI's Enforcement Unit and application of the Watch List.

8.  CHALLENGES AHEAD FOR THE EXPORT LICENSING SYSTEM

  8.1  The export licensing system needs to balance the requirements of a range of interests; exporters require a system that is fast, consistent and equitable with other potential supplier countries; Government requires a system that can stop exports to destinations of concern, meets the UK's obligations to treaties and regimes while allowing efficient administration of applications, while there is increasing demand for greater transparency in—and scruting of—the export licensing process.

  8.2  In addition to the continuous need to balance these requirements, the licensing system also needs to respond to changing external political and technological circumstances. For example in recent years, a major change in emphasis has occurred with the demise of the Soviet Bloc and, following the Gulf War, with the heightened awareness of the potential proliferation of weapons of mass destruction. Although such constantly changing circumstances mean that it is difficult to predict what the future holds for export controls, it is possible to identify a number of challenges which the Government will need to address in the near future:

—  Collaborative projects: Increasingly, UK companies are entering into partnerships with their foreign counterparts to develop new products. By doing so they are able to share development costs and technical know-how as well as cut development timescales and gain access to more markets. As such internationalisation of business is likely to increase, export licensing needs to be structured so that the legitimate transfer of controlled goods and technology between partners in the UK and other countries is not unnecessarily hindered by onerous licensing requirements. So far, the Government's response to this problem has been to tailor OIELs for companies involved in such partnerships. This approach has been successful where the UK exporter is large and well-known, where its foreign partner is of similar standing and is located in the EU or another "friendly" destination, and where the products being developed are well understood. However, the position becomes less clear where some or all of these criteria do not apply.

—  Intangible transfer of technology (ITT): The Import, Export and Customs Powers (Defence) Act 1939, provides the Government with the power to control only tangible exports. This means that whereas an export licence is required for the export of controlled technology in physical form (eg on paper or disc), it is not required to export the same technology by intangible means (eg by fax, e-mail or orally). In view of the increasing use of e-mail in particular, there is a clear need to address this anomaly, and the White Paper on Strategic Export Controls contains proposals to do precisely this. However, a solution will need to be found to licence such exports which does not unnecessarily stifle legitimate product and technology development, much of which is now undertaken by people working in different countries who need the immediacy provided by e-mail to meet tight deadlines. There is also the issue of how to enforce controls on intangible transfers.

—  At the same time as considering how to update strategic export controls to take account of modern means of communication, the Government also needs to consider how to take advantage of these means of communication to improve the efficiency of the licensing operation. In particular, following on from the work described in the separate Memorandum on computers, which will allow licence applications to be submitted on disc, we will need to consider the possibility of providing for licence applications to be submitted by electronic mail.

—  Project timescales: In order to retain a competitive advantage, UK companies are having to reduce lead times both for developing new products and for responding to export orders. If it then takes an unreasonable length of time to process an export licence application, then clearly the competitive advantage could be lost. In view of this, it is vital that the Government continues to look at ways of processing licence applications more efficiently.

—  Increasing dual-use nature of "military" goods: With the world-wide decrease in demand for military goods, rather than design a product solely for military use and then subsequently consider how it could be converted for civilian applications, many manufacturers are now designing products with civilian, as well as military purposes in mind from the very beginning to offset development costs. This means that a number of goods, of which previous generations are described on the Military List, can no longer be controlled as military goods because of their fundamentally dual-use nature. In view of this, increasingly there will be a need to ensure that the lists of controlled dual-use goods are constantly revised to ensure that goods which have a military capability but are no longer on the Military List are added to the list of dual-use goods which are controlled for strategic reasons. The anomaly of older goods of a lower technology still being controlled will also need to be considered, with the possibility that some of these can be decontrolled.

—  Self-regulation of less sensitive exports: The sensitivity of an export depends not only on the nature of the product, but also on the destination and end-user. In view of this, a product which has to be controlled because of its military application, may not be a particularly sensitive export if the destination is a "friendly" country. In such circumstances it may become increasingly appropriate to put more emphasis on self-regulation by making increasing use of OIELs, so that the Government can concentrate its resources on more sensitive areas such as non-proliferation of weapons of mass destruction. Goods exported under OIELs are still controlled, as OIEL holders are subject to regular ECO compliance visits, but the exporter is not required to submit individual export licence applications for each export, thus saving time both for the exporter and the ECO.

  8.3  Several of these challenges do not have immediately obvious or simple solutions and, as has often been the case in the past, it may well be that compromises will need to be found between the requirement of the Government to control all exports which might be of concern for strategic reasons and the increasing requirement of industry for quick decisions on licence applications. In addition, the above mentioned list of challenges is not exhaustive and the ever changing nature of export controls means that there may soon be others on the horizon. It is for this reason, above all, the Government must remain flexible so that it can respond to the changing demands made upon it.

Export Control Organisation

DTI

13 October 1998

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