House of Commons - Foreign Affairs

Select Committee on Foreign Affairs Eighth Report

INTRODUCTION

1. The control of the export of military goods and technologies, and of equipment and components which might be used to make weapons, is rightly regarded as a particularly sensitive area of Government activity. It engages vital issues of national security and international stability as well as profound ethical questions about the protection of the innocent and the avoidance of deadly conflict.

2. These considerations are all the more important for the UK given the size and significance of its domestic defence manufacturing industry. The UK is (after the USA) the world's second largest exporter of defence equipment, accounting for 19% of the global total in 1999.[1] It employs around 175,000 people directly and the jobs of around another 170,000 depend on it indirectly. It is reckoned that about 97,000 of these jobs depend on export sales. UK defence exports, made to almost every part of the world, were in 1998 and 1999 worth about £6 billion annually.[2]

3. Judgements about the control of defence-related exports therefore involve a complex balancing of factors—between, for example, doing good by restricting arms sales to those who may misuse them, doing good by enabling others to defend themselves against aggression, and doing good by encouraging industry, prosperity and employment in the UK. As the Foreign Secretary said to us—

4. For these reasons, the full involvement of Parliament in holding the Government to account for its exercise of its control over defence exports is essential. Transparency in the exercise of that function is essential to that accountability. At the same time, we recognise that any system of accountability must acknowledge the need to ensure national security and protect the UK's vital interests (and to a lesser extent protect domestic industry from unfair competition).

The Consolidated Criteria

5. Serious efforts have been made in recent years to improve the transparency of the export control régime, to eliminate the kind of imprecisions and unannounced policy changes that led to the "Arms to Iraq" débâcle in the early 1990s. In particular, in July 1997[4] the Government published a set of national criteria against which decisions on whether to license exports would be made. The Government also committed itself to the development of an EU-wide code of conduct on strategic exports. With effect from 26 October 2000,[5] the Government implemented the so-called "consolidated EU and national arms export licensing criteria" against which decisions on the granting or withholding of licences are made. These brought together the UK's national export licensing criteria[6] with those of the EU Code of Conduct on Arms Exports adopted on 8 June 1998.[7] The EU Code represents minimum standards which all member states have agreed to apply to exports of controlled goods, but the adoption of the Consolidated Criteria did not imply any change in the UK's policy, as they encompass the previously used national criteria.[8] The preamble to the Consolidated Criteria states—

6. These Consolidated Criteria (as spelled out in greater detail in the Annual Report)[10] are, broadly—

One:	Respect for the UK's international obligations and commitments (the Government will not issue a licence where this would be incompatible with, in particular, UN and OSCE embargoes, EU common positions and embargoes, and non-proliferation agreements).[11]

Two:	Respect for human rights and fundamental freedoms in destination countries (the Government will not issue a licence if there is a clear risk that the equipment will be used for internal repression; and will exercise special caution and vigilance before issuing a licence for relevant types of equipment for use in countries where serious violations of human rights have been established to have occurred) .

Three:	The internal situation of destination countries (the Government will not issue a licence for exports which would promote or prolong armed conflicts or aggravate existing tensions or conflicts).

Four:	Preservation of regional peace, security and stability (the Government will not issue a licence if there is a clear risk that the intended recipient would use the proposed export aggressively against another country or to assert by force a territorial claim).

Five:	The security of the UK and its overseas territories, its European and other allies (the Government will take account of the effect of the proposed export on the defence and security interests of the UK and such other countries described, while such considerations cannot override the application of the first four criteria).

Six:	The behaviour of the buyer country with regard to the international community, particularly in relation to terrorism, unsuitable alliances and respect for international commitments and law (the Government, in deciding whether to issue a licence, will take account of the record of the proposed recipient country in relation to such factors).

Seven:	The risk of diversion to undesirable destinations (the legitimate defence and security interests of the destination country, its technical capability to use the equipment, and the efficacy of its export controls will be considered before the Government issues a licence, especially in relation to the risk of the export falling into the hands of terrorists).

Eight:	The compatibility of the arms exports with the recipient country's technical and economic capacity, taking into account the legitimate needs for security and self-defence (the Government will take into account whether the proposed export would seriously undermine the economy or seriously hamper the sustainable development of the recipient country).

7. As the Foreign Secretary told us,[12] the criteria, and nothing else, are the relevant consideration in making licensing decisions—

The Foreign Secretary rejected, for example, the argument that the possibility that another country might supply goods for which the UK had refused a licence could be allowed to affect the application of the criteria.[14] However, the eight criteria do not each carry the same weight and may sometimes conflict with each other. As the preamble makes clear (with a carefully worded exception in relation to human rights violations under Criterion Two), in applying the first four, if the conditions are met, a licence cannot be issued (though there will remain room for doubt over whether the conditions have been met in any particular case). The latter four criteria require only that certain factors will be taken into account or considered when deciding whether or not a licence should be issued.

8. Provision 10 of the EU Code also states, rather oracularly, that member states, where appropriate—

The Government glosses this by stating that it will, in deciding whether to grant a licence, give full weight to—

-the potential effect on the UK's relations with the recipient country;

-the potential effect on any collaborative defence procurement; and

-the protection of the UK's essential strategic industrial base.[16]

The first of these provisos clearly reflects the particular interests of the DTI, the second those of the FCO and the last two those of the MoD. We come on to a discussion of the roles in the licensing process of these three Departments—each of whose Secretaries of State sign the Government's Annual Reports—in the next chapter.

9. The Consolidated Criteria do not, therefore, provide a simple check-list of factors against which licensing decisions can be mechanically measured. The Government insistently repeats that each licence application must be considered on a "case-by-case" basis. The duties to protect the UK's security interests and to honour its international obligations are paramount, and they are in general relatively straightforward to apply and to check in their application. The duty to avoid taking sides in or fomenting regional or internal conflict elsewhere in the world is expressed in clear and binding terms, but in practice is likely to come into conflict with, and to need to be balanced against, the perceived need to bolster the security of friendly nations. The commitments to discourage terrorism and lawlessness are uncontroversial and universally supported, but in practice will sometimes require difficult judgements to be made about the reliability and trustworthiness of the declared end-user of the proposed export, or about the efficacy of another nation's control over potential diversion of goods to illegal destinations. The commitments to promote humanitarian concerns are expressed in distinctly more discretionary terms, and giving effect to these requires a much more debatable exercise of that process of weighing and balancing of different factors and considerations that the Foreign Secretary described to us. And all of these obligations, commitments and aspirations have to be looked at in the context of the right to sustain international trading relationships and promote industry and commerce. That context was thrown into particular prominence by the Government's announcement of 8 July 2002 relating to the export of aircraft components to Israel via the USA. We discuss that announcement in more detail below.

10. There will very often be room for debate about how the criteria have been applied in particular circumstances. Our predecessors on the "Quadripartite Committee" began an exploration of this debate. In this report, we continue it.

History of the "Quadripartite" Committee

11. The Defence and Trade and Industry Committees produced a joint report in July 1998 which, among other matters, considered the arms export control régime. Noting the Government's declared intention to produce an annual report on licences granted for the export of strategic goods and the Government's own suggestion that it was—

... likely that various select committees will wish to examine the Annual Report ...[

the two Committees commented—

12. In December 1998, the Trade and Industry Committee produced its own separate report on strategic export controls, pursuing the Government's undertaking to revise the legislative régime under which they were operated.[19] In that report the Committee commented at some length on the parliamentary scrutiny of licences, and picked up on its own earlier suggestion of the need to devise a system to enable the select committees to act in concert on this topic.[20] It concluded—

The Defence, Foreign Affairs, International Development and Trade and Industry Committees subsequently agreed to work together to conduct examinations of the Government's new series of Annual Reports on strategic export controls.

13. The Government's first Annual Report (for 1997) was not published until 25 March 1999. The four Committees met together for the first time on 20 April 1999. The arrangement quickly became known as the "Quadripartite Committee". The Committees took evidence on the first Annual Report and published this as a Special Report (that is without commentary on or analysis of the evidence) in June of that year.[22] The second Annual Report (for 1998) was published in November 1999, and the Committees published their first substantive report on the two Annual Reports in February 2000.[23] The Government's reply was published in July 2000[24] to coincide with the publication of its third Annual Report (for 1999). The Committees took further evidence from the Minister of State at the FCO in May 2000, and in July published a further report, picking up on issues in the 1998 Annual Report and also putting forward proposals for a system of prior parliamentary scrutiny of licence applications.[25] The Government's response, published in December 2000, rejected the Committees' proposed scheme.[26]

14. In January 2001 the Committees took evidence from the Foreign Secretary on the Annual Report for 1999 and on the prior scrutiny issue, and published their next report in March 2001.[27] In that report they set out, amongst other things, further revised proposals for giving the Committees prior access to licensing applications before decisions were made. The Government's response was published to coincide with publication of the next Annual Report, for 2000.[28] The Government again rejected the proposal for parliamentary scrutiny of licence applications before they were approved or refused by Ministers.

15. After their reappointment in the new Parliament, the four participating Committees agreed to continue to co-operate in the scrutiny of Annual Reports on strategic exports and related matters through the medium of the "Quadripartite Committee". This is our first such report of this new Parliament, focussing on the Government's Annual Report for 2000, published in July 2001.

The Annual Reports on Strategic Export Controls

THE LICENSING PROCESS

16. The Government's Annual Reports on strategic export controls have now reached their fourth edition.[29] The reports are signed by three Secretaries of State—the Foreign Secretary, the Secretary of State for Defence and the Secretary of State for Trade and Industry. Each of these Departments has a role in the export control régime. The Department for International Development—whose Secretary of State does not sign the reports—also plays a part, which we discuss in some detail below.

17. The FCO is responsible for the overall policy, and of course for the UK's relationships with countries which are potential destinations for exports. It also monitors and promotes human rights overseas.

18. The MoD is the sponsoring department for the defence manufacturing industry. It clearly has a role in ensuring that strategic exports do not threaten the security of the UK. In part, it does this through a process of prior informal consent, or agreement in principle, to the export of certain categories of goods. This process is known as the "F680 procedure" (after the Form 680 which is used as its basis). Mr Dowse, the Head of the FCO's Non-proliferation Department, explained it to us in oral evidence that the procedure—

19. Nonetheless, it is unsurprising that some commentators see a conflict of interest between the MoD's role as sponsor of the defence industries and its function as one of their regulators. It spends directly about £20 million a year supporting defence export sales (mainly through the Defence Exports Services Organisation—DESO).[31] It is also, of course, the industry's largest customer, spending something of the order of £6 billion a year on equipment procurement within the UK (or £10 billion if equipment research and development expenditure—most of which is spent with industry—is included).[32] The MoD has a strategic interest in maintaining an independent UK strategic industrial base, but the arguments about the costs and benefits to the UK of support for defence exports is a complex one. In 1999, the Defence Committee commented—

to the national interest

This challenge provoked a study sponsored by the MoD, the conclusions of which were published in November 2001.[34] Responding more quickly, two NGOs had produced in July 2001 their own report on the topic,[35] which asserted that the true cost of support to the UK defence manufacturing industry was of the order of £420 million a year. The MoD's study, undertaken jointly with the Centre for Defence Economics at the University of York, argued that the net cost to the economy of a cessation of defence exports would be between £90 million and £200 million a year. Perhaps the most that can be said of the two reports at this stage is that they give considerable scope for further debate.

20. Despite these caveats, there is no doubt that the MoD's role in the licensing process is an essential one—crucially for the protection it offers for national security, but also for saving potential exporters from wasting time and money on hopeless licence applications which would inevitably be refused. However, we believe the Government should give some thought to ways in which the F680 process could be made more transparent—perhaps by involving more Departments than the MoD in the process. We recommend that consideration be given to the Annual Reports indicating where a licence was refused or revoked for equipment which had previously been given F680 approval.

21. The DTI administers the licensing system. This is done by its Export Control Organisation (ECO) which has a budget of around £5¼ million and employs 137 staff, of whom 22 are technical experts.[36] It is organised into three main groups: Licensing; Policy, Communications and Enforcement; and the Technologies Unit. The licensing process has essentially three stages—

Stage1

- Stage 2: advice is then sought from other Government departments, almost always the MoD and the FCO, sometimes the DfID and the intelligence services, as appropriate;

- Stage 3: a final assessment is made by the ECO of the advice from other sources, disagreements are negotiated and resolved, and a recommendation put to DTI Ministers for final approval.

22. Thus in addition to the three departments whose Secretaries of State sign the Annual Reports, the Department for International Development is also regularly consulted on a proportion of licence applications. There is a list (which we were shown in confidence) which specifies the sorts of applications which the DfID will see. In general terms these are applications to export goods over certain value thresholds to developing countries. In its response to our predecessors' report on the 1997 and 1998 Annual Reports on strategic export controls, the Government informed us that the—

This steep fall in the number and percentage of licence applications seen by DfID over the last five years is shown below.[38]

Export Licence Applications seen by the DfID
	1997§	1998	1999	2000	2001
OIEL applications circulated to DfID	3	272	284	221	188
SIEL applications circulated to DfID	461	1739	1584	717	219
% of all SIEL applications circulated to DfID	5.6	14.7	14.7	6.5	2.2
§ 8 months data only (2 May to 31 December)

23. The Secretary of State for International Development does not sign off the Annual Report because she apparently feels that the DfID does not play enough of a role in the consideration of licence applications to warrant her public assent to the information it contains (and, implicitly, to the policy choices it reveals). In response to a PQ asking why she is not a signatory, the Secretary of State explained that—

We conclude that the point at issue is not the number of licence applications seen by the DfID, but the weight accorded to its views on the applications it sees. Without the evidence of the number of applications objected to by the DfID and the number of these leading to an application refusal, it is difficult to assess whether the views of the DfID are given any significant weight in the licensing process.

24. We have been unable to discover the number of objections made by DfID in recent years.[40] We sought a fuller explanation of the DfID's role in the licensing process from the Government. The response we received was not revealing.[41] Whilst we heard that no applications have ever been refused on the grounds of sustainable development, the International Development Committee was told in December 1998 that DfID had raised objections to 17 licence applications, and was provided with a list of these licence applications.[42] The Committee congratulated—

... the Secretary of State on her openness in providing the Committee with detailed information on those export licence applications queried by the DfID ...

and considered this to be—

However, in its response to that report, the Government commented—

The answer of 27 March 1998 stated that—

25. We do not accept this claim that some modest increase in transparency would be incompatible with the effective working of Government. We recommend that there should be greater openness about Departmental inputs into the decision-making process on licensing applications. Information on the number of applications objected to by individual Departments should be provided to us in confidence, showing in how many cases an application was eventually allowed.

INFORMATION ON LICENCES GRANTED, REFUSED OR REVOKED

26. The format of the Government's Annual Reports on strategic export controls has evolved over the four editions so far, but has remained broadly the same. In essence, each sets out, for the calendar year in question and for each relevant destination country, the export licences granted for controlled goods to be exported to that country. There are two main categories of licence relevant to the Annual Reports.

- Standard Individual Export Licences (SIELs) generally permit the export by a particular manufacturer of specified quantities of specified goods to a specified end-user. They are usually valid for two years.

- Open Individual Export Licences (OIELs),[46] which are usually applicable to a specified exporter, generally permit the export of a class of defined goods in respect of specified destinations up to a given quantity. The same OIEL may therefore appear under different destinations in the Annual Report, though these overlaps are not cross-referenced. An OIEL relating to military goods or technology is generally valid for two years, those for other controlled goods may last for three years.

27. Open General Export Licences (OGELs) allow the export of specified goods by any exporter providing the destination is eligible and the specified conditions met. They therefore relieve exporters of the need to apply for a SIEL. A list of all those in force during the relevant period is in the report[47] (23 were in force in February of this year). They are published on the ECO website.[48] There are other minor categories of licence permitting transhipment of goods, either general (listed with OGELs in the Annual Report) or individual (11 were issued and none refused in 2000)[49] and providing for temporary export.

28. The goods which are currently subject to control are, broadly—

- those covered by the European Council regulations governing the dual-use items and technology,[50] given effect for the first part of the reporting period in question by the Dual-use and Related (Export Control) Regulations[51] and replaced with effect from 28 September 2000 by the Dual-Use Items (Export Control) Regulations 2000;[52] these include material covered by three international, non-treaty, agreements—the Nuclear Suppliers Group (covering nuclear materials including enrichment and reprocessing technology and machine tools), the Missile Technology Control Régime (covering rocket systems, propulsion technology, components and fuels), and the Australia Group (covering chemical and biological weapons and their precursors and related technology);

- those which the exporter has been told, or suspects or knows, would or might be used in connection with the manufacture or delivery of weapons of mass destruction (the so-called "catch all" provision); and

- those which the manufacturer has been told, or suspects or knows, are or may be intended for military use in countries to which a relevant official embargo applies or where they will be used as components of illegally-exported military items.

29. The list which forms Schedule III to the 1994 Control Order is commonly known as the 'Military List'.[53] The items included are agreed through the international Wassenaar Arrangement.[54] The list is reproduced in the Annual Report, and the different categories of goods are given an index reference, known as a "rating".[55] The dual-use items are given a separate categorisation which is, inevitably, rather less informative.[56]

30. For each destination country, the Annual Report also lists refusals and revocations of licences. These are broken down according to the Military List rating, dual-use classification or simply recorded as having been on 'end use' grounds (where they fall within the catch-all provision).

31. The Annual Reports now also give consolidated data on refusals and revocations of SIELs,[57] on appeals against refusals and revocations,[58] on the amount and value of exports,[59] on international commitments relating to arms exports,[60] and on general policy developments in the field.[61]

The Export Control Bill

32. The UK's export control régime is about to undergo a major revision. The legal basis of the present régime dates from September 1939, when export controls were given statutory force by the "emergency" Import, Export and Customs Powers (Defence) Bill. That Act provided that it should continue in force until "such date as His Majesty may by Order in Council declare to be the date on which the emergency that was the occasion of the passing of this Act came to an end, and shall then expire...". No such Order was ever made. For over half a century the emergency wartime powers granted by the Act were used to control strategic exports.

33. After the fall of the Berlin Wall and the rapid reunification of Germany in 1990, concerns began to mount in Government that the Act might be susceptible to legal challenge on the basis that the end of the Cold War meant that there was no continuing "emergency". These concerns became urgent after the Act came into public prominence following the Customs and Excise seizure of the notorious Iraq-bound "Supergun" components at Teesside docks in April 1990 and subsequent legal proceedings. In December of that year the Import and Export Control Act 1990 was passed which removed the subsection which had provided for expiry of the 1939 Act. In effect, it made the 1939 Act permanent. It remains, for the present, the legal basis of the export control régime.

34. Following the collapse on 9 November 1992 of the prosecution for alleged export control offences of senior executives of Matrix Churchill Ltd,[62] the Government set up an independent inquiry by Lord Justice (now Lord) Scott into exports of defence equipment and dual-use goods to Iraq and related prosecutions. In his report, published on 15 February 1996, Lord Scott commented that the existing legislation governing export controls lacked—

and recommended, amongst other things—

... new empowering legislation in place of the 1939 Act and ... an export licensing system and export licensing procedures suitable for the peacetime requirements of a trading nation ...[64]

35. Following the Scott report, the Government published a consultative document on strategic export controls in July 1996.[65] After the change of Government in 1997, a White Paper on strategic export controls was published in July 1998.[66] It contained proposals for a new legislative framework for strategic export controls, for new controls on electronic transfers of controlled technology and on provision of technical assistance, and for powers to control trading in controlled goods, and for improvements in licensing procedures. However, despite the urgings of the Trade and Industry Committee,[67] no time was found for legislation in the following two sessions. In February 2000, in our predecessors' first report as the Quadripartite Committee, they expressed their dismay that "the Government should not have afforded greater priority to bringing forward a Bill to implement the recommendations made four years ago in the Scott Report".[68]

36. In March 2001 the Government published its draft Export Control and Non-Proliferation Bill and accompanying texts.[69] Our predecessors conducted a high-speed inquiry into the draft Bill, and published their Report in May 2001, just before the general election was called.[70] Amongst other conclusions and recommendations, they noted—

- That Orders proposed to be made under the Act should first be exposed in draft and in confidence to the Quadripartite Committee and, if then made and laid, the Government should undertake to use their best endeavours to find time for a debate if the Committee so recommended.[72]

37. Following the 2001 general election, the Government introduced the Export Control Bill in the Commons on 26 June.[73] Its response to our predecessors' report on the draft Bill was not published until some time later.[74] The proposed draft orders were published in "dummy" form, though not until after the second reading of the Bill had taken place on 26 July.[75] Some of the"non-proliferation provisions of the draft Bill, which had disappeared from the Bill as presented, were subsequently introduced separately as Parts 6 and 7 of the Anti-terrorism, Crime and Security Bill, introduced in the Commons on 12 November 2001 and already an Act.

38. The Export Control Bill has been radically rewritten during its passage through Parliament,[76] not always with the consent of the Government. The main areas of contention have been—

- provision for prior parliamentary scrutiny of licensing decisions;

- the extent of the powers to control intangible transfers, especially with regard to constraints on academic freedom; and

- the extent of the controls on the extra-territorial activities of persons trading in controlled goods.

39. We do not propose to discuss the Bill, or the Government's response to our predecessors' report, in any detail in this report. However, we note that as it presently stands the Bill will require Ministers to issue guidance (which will reflect, or possibly just reproduce, the Consolidated Criteria) about the matters which will be taken into account when making licensing decisions, including the issue of sustainable development. It will give power to Ministers to make regulations and orders defining the goods which are subject to controls (which will largely reproduce the existing lists) and how the powers to control "intangible" transfers and the provision of technical assistance overseas will be implemented. It will also give power to Ministers to bring trade ("trafficking and brokering") in controlled goods under statutory control—an entirely novel power. There are also powers to make other regulations creating offences and giving authorities the enforcement powers necessary to underpin these controls. As the Foreign Secretary commented,[77] all this will formalise and give statutory basis to the approval process for licence applications, making it more transparent and more "justiciable", both informally and, potentially, in the courts.

40. The detail of the orders and regulations to be made under the Act, and the guidance to be issued, will be crucial components of the new export control régime. Given the slower than expected progress of the Bill, the Government was unable to publish drafts of these for consultation and scrutiny by us before the summer recess. We expect the Government to honour its commitment to giving time for our Committees to consider, and if necessary report on, the proposals for draft subordinate legislation and the draft guidance to be made under the Export Control Act.

41. In the meantime, the Annual Report we currently have under consideration, and those for 2001 and 2002, will be made under the existing control arrangements. We now turn to the Annual Report for 2000.

EXPORT LICENCES AND DEFENCE EXPORTS 1997 TO 2000
Licence or Export Type Etc.	1997¹	1998	1999 ( year on year change)	2000 ( year on year change)
SIELs granted²	6418³	9869³	8967 (- 9%)	8371 (- 7%)
SIELs refused or revoked²	653³	1233³	136 (+ 11%)	207 ( + 52%)
Appeals heard²	74⁴	15	25	33
Appeals upheld²	14⁴	1	6	2
OIELs issued or extended²	156	566	449 (- 21%)	419 (- 7%)
OIELs refused or curtailed²	25	8	16 (+ 100%)	65 (+ 306%)
Total value of exports of military equipment²	£3360m⁶	£1968m	£981m	£1720m
Estimated total defence export deliveries⁵	£6684m⁶	£6030m	£4250 m	£4406m
Identified total defence export orders⁵	£5540m⁶	£6049m	£5044m	£4737m
Notes ¹ Data relating to licences for 8 months only (2 May to 31 December) ² Source: Annual Reports on Strategic Export Controls ³ Corrected after Annual Report issued ⁴ Not published in Annual Report ⁵ Source: UK Defence Statistics 2001, Table 1.13 ⁶ 12 months data The data on defence export values are difficult to interpret and compare because of the use of different categories of classification of goods and services. There is a detailed discussion of these problems in The Economic Costs and Benefits of UK Defence Exports, Chalmers, Davies, Hartley and Wilkinson, Centre for Defence Economics, University of York, November 2001, paras 13 to 19.