House of Commons - Defence - Appendices to the Minutes of Evidence

Select Committee on Defence Appendices to the Minutes of Evidence

APPENDIX 3

Memorandum from UK Working Group on Arms[1]

INTRODUCTION

The UK Working Group on Arms (UKWG) welcomes the publication of the Consultation Paper on the secondary legislation and the opportunity it provides to further strengthen and clarify the proposed controls under the Export Control Act 2002.

As the Export Control Act was an enabling Act, we fully support the active role of Parliament, via the work of the Committee, in the process of refining and developing the secondary legislation. This submission is a joint submission concentrating on three main aspects of the secondary legislation:

Brokering;

Licensed production overseas;

End-use monitoring.

Individual UKWG members will be submitting separate submissions to the Department for Trade and Industry as part of the Government's formal consultation process.

(1) BROKERING

The UKWG welcomes the fact that under the proposed controls UK-based arms brokers will require a licence for their activities. However, the proposed system of licensing remains unclear in several areas and insufficient in others.

Extra-territoriality

Under the draft secondary legislation the Government does not intend to introduce controls on all UK brokers wherever they are located, despite this being promised in its election manifesto in 2001. Instead the Government has opted to pursue only torture equipment, embargo breaking and long-range missiles. This comes at a time when other European countries introducing controls are doing so with full extra-territorial powers. Finland and Poland have introduced controls and they are under consideration in Belgium and France. The UK, once the front-runner on standards for arms exports, is in danger of becoming the back marker. The UKWG believes that only full extra-territorial control over arms brokering has any chance of properly regulating the industry and stopping the kind of deals for which the Government would in the normal course of events refuse a licence. The Quadripartite Select Committee (QSC) should urge the Government to use the consultation period to reconsider its plans.

Current Government proposals centre around the idea that a broker must have a licence before entering into a "commitment" to do any of the activities associated with the acquisition, disposal or movement of controlled goods, but it is unclear how this term is to be defined. There will be a licensing requirement for brokering deals only if "any part of the deal" takes place in the UK, and this licensing requirement will only be triggered once a "commitment" has been entered into. However, the overlap between "any part of the deal" and "commitment" is unclear. It would appear that "any part of the deal" does not apply to marketing and promotion services, as the controls are "expressly disapplied" to those whose sole involvement is to provide these services. Does the Government intend to allow unlicensed marketing and promotion of controlled goods in the UK which could be subsequently brokered offshore with no licensing requirement? Unscrupulous brokers could simply become "promoters" for the purposes of UK law, maintaining a base in the UK and carrying on their offshore activities with impunity.

Requiring all arms transfers brokered by UK persons, regardless of their whereabouts, to require a licence would avoid this complication. It is only where negotiations might lead to unregulated transfers that Government need concern itself with those negotiations. If all transfers are regulated, the control of negotiations becomes redundant.

Failure to exercise full extra-territorial controls and instead to base the need for controls upon location and "commitment" risks creating legal loopholes that would allow brokers to continue to act with impunity. Brokering is an international business requiring few or no fixed assets. It is also eminently transferable as the broker need only step on a plane or cross a border to carry on business as usual. This is not a theoretical risk: the German legislation, which is territorially based, has produced the phenomenon of the commuting arms broker who travels to Luxembourg or France to continue his operations. [2]

Licence applications from arms brokers based in the UK to destinations of concern will presumably be carefully scrutinised by the Government in view of the risks that arms will be misused by the end-user. However, an arms broker involved in a questionable transaction would be aware of the possibility that his application might be refused, and would choose to conduct his business abroad, thus avoiding any form of control. It is the transactions that the Government needs to control most that would escape the system of regulation. As Minister Nigel Griffiths himself has said, arms traffickers are "resourceful, cunning and deceitful people"[3]

Scale of the problem

The potential human cost of excluding the brokering of most conventional weapons from extra-territorial controls is difficult to quantify. However, the following conflict countries are not under embargo, and therefore will not fall under extra-territorial controls: Algeria, India, Indonesia, Pakistan, Philippines, Sri Lanka, Russia, Israel, and Colombia. Five of these are amongst the world's eleven major armed conflicts which each cause the deaths of over a thousand people a year. Brokered deals have a disproportionately harmful effect. Although they only make up a small percentage of arms deals, weapons transferred through brokered deals are often sent directly into conflict zones, fuelling cycles of violence.

Brokering to non-UN embargoed destinations by UK nationals is currently legal and unregistered so it is difficult to assess the extent of the trade. However, frequently examples do come to light, such as the Guardian report in November 2001 that British dealers had arranged for 1,000 vacuum bombs to be sent to Sri Lanka. This suggests that deals can be both considerable in size and deadly in their effect.

A little more is known about brokering deals that are investigated because they break existing UN embargoes or other laws. In recent years, British brokers have been reported selling to factions involved in conflicts in countries such as Iraq, Angola, Sierra Leone and Liberia, as well as to terrorist groups, often through non-embargoed diversion points. The proposed patchy system of extra-territorial controls would not monitor brokering deals to countries well known as diversion points—such as Jordan into Iraq. Only an intelligent licensing system would be able to detect and prevent deals likely to be diverted into embargoed destinations or to terrorist organisations before they happen. The failure to introduce export controls would undermine the Government's serious international commitments on embargoed destinations and terrorism.

A law requiring a licence for all deals, including known points of diversion, would shift the burden of proof to the broker and help the prevention of illegal arms deals. For example, if a deal to a country neighbouring an embargoed destinations was regulated, the government could refuse a licence on grounds of suspicion. If there is no regulation, the Government then has to prove that the broker was involved in the subsequent embargo-breaking diversion.

— The Government should honour its manifesto commitment and introduce full extra-territorial controls on arms brokers.

The Government's position

The Government has confirmed to the UKWG that its arguments against full extra-territoriality do not involve a principled objection, as the principle that extra-territorial controls are necessary was conceded in the manifesto and in the powers given the Government in the Export Control Act. The Government's main arguments against using these powers are that:

— Brokering without a licence is not self-evidently a criminal offence, leading to legitimate activities being criminalised;

— The Government is not confident that awareness of the new rules would reach brokers working abroad;

— There are enforcement difficulties; and

— There is a need to target specialist resources (eg intelligence).

Enforcement

The Government has argued that enforcing extra-territorial controls would be too difficult, so the credibility of the law would be undermined. This same argument could be levelled at other extra-territorial laws such as the Chemical Weapons Act 1996, the Sex Offenders Act 1997, the Landmines Act 1998, and the Anti-Terrorism, Crime and Security Act 2002. This view fails to take account of the positive benefit of setting a standard ruling on what is legal and illegal, even if subsequently not every offender is caught. The first of these for which extra-territorial proceedings have been brought is the Sex Offenders Act, under which there have been three prosecutions for the sexual exploitation of children overseas. The Government was originally resistant to introducing jurisdiction over "sex tourists" but the public outcry at the time against sex offenders prompted it to do so. There was an awareness that the UK could be open to the charge of double standards: legislating to protect children at home, but doing nothing to protect those children exploited by British nationals travelling overseas. The exploitation of children is rightly illegal for UK citizens, wherever in the world they may engage in it. The level of prosecutions may be low but an important principle has been established. The trafficking of arms, for personal profit, to regimes or groups where they are likely to be used for repression or for committing human rights abuses, is similarly morally unacceptable and the Government should be seeking to control its citizens who engage in such activities anywhere in the world. If it is wrong to do it in the UK, it is wrong to do it anywhere.

— The UKWG believes that the real prospect of human suffering caused by the brokering loophole is serious enough to demand Government resources for enforcement, including building up capacity amongst the intelligence services.

Another argument the Government makes against extending controls is that the UK has in the past only prosecuted in cases with extra-territorial jurisdiction where the crime is also an offence in the country where the offence occurred. This is not the case in other countries with comparable legal systems. In Australia, dual criminality is not required for sex offences committed against children, and three times as many convictions have been made as in the UK.

To wait for all countries to introduce controls to criminalise brokering without a licence would be to defer the matter indefinitely; even so, any future system would doubtless still leave "brokering havens" to which brokers would gravitate. In cases like child sex tourism and arms brokering, governments have an obligation to control their nationals. The people that the Government should clamp down on are not people who live in another country and just happen to be engaging in activities of which the Government disapproves. Rather, they are in a foreign country because the laws there are lax and allow them to pursue their reprehensible activities. Legislation should be used to bring these people to account, not drive them to those countries with weak legislation. The Government are also currently considering this aspect of extra-territorial application drawing up proposals for a change in the UK law concerning female genital mutilation.

The Government has therefore overcome the difficulty of enforcement. For example, in January 2002, the Government placed full extra-territorial controls on corruption as part of the Anti-terrorism, Crime and Security Act. In a Home Office Consultation Paper (June 2000) on this issue, the Government set out its reasoning for introducing controls:

— The UKWG believes the rationale given by the Government for introducing extra-territorial controls would be equally relevant for arms brokering and send out a necessary "deterrent message."

The Government has argued that the "the inevitable enforcement difficulties arising from jurisdiction would also distract valuable resources from tackling the most serious cases." [5]However, mechanisms will have to be established to enforce controls on the three categories of equipment on which it is proposed to apply controls. These same systems should be utilised to control brokering conventional arms without a licence. Establishing channels for international cooperation between police forces and customs officials tackling organised crime, including drugs and people trafficking, could also provide some solutions to the practical difficulties of law enforcement of arms brokering. Recent data gathered by the US government and the UK National Criminal Intelligence Service (NCIS) supports this. NCIS note that firearms are already entering the UK alongside drug consignments and confirm the "strong link between firearms possession and drug trafficking" and the networks used to smuggle them. [6]

International consensus

There are six conditions for the application of jurisdiction, only one of which need be met. A strong case has repeatedly been made that arms brokering meets five of those six conditions. [7]

One of these criteria is international consensus. The UKWG believes that there is growing international consensus on the need for controls on brokering. In the Programme of Action agreed at the 2001 UN Conference on the Illicit Trade in Small Arms and Light Weapons in All its Aspects, all participating states undertook "to develop adequate national legislation or administrative procedures regulating the activities of those who engage in small arms and light weapons brokering"[8] a clear indication of an international consensus on the need for controls. A number of countries now have domestic legislation on brokering, and are looking at extra-territorial aspects.

The Government have argued that "extra-territorial jurisdiction is justified only in the case of serious offences which are subject to universal international condemnation"[9] and that brokering is not universally internationally condemned. However, in the Anti-terrorism, Crime and Security Act, the Government legislated that bribery and corruption committed outside the UK constituted an offence, even though in many jurisdictions this activity is not criminalised. The Government has also singled out equipment used in torture as a category to be subject to control. This stems from the 1997 Government announcement on the ban on torture equipment and transhipment of certain equipment that had been used for torture. Interestingly, at the end of the 1997 press statement, the Government stated:

"We have considered with our EU partners how they might align themselves with this policy. While there is broad support for the idea of controlling equipment which evidence shows may be used in torture not all our partners control the export of the same equipment."

This shows the willingness of the Government to act unilaterally on some aspects of arms control. It is prepared to extend jurisdiction only for the brokering of equipment used in torture in the absence of common EU controls.

— The UKWG believes that the Government should therefore move to promote the principle of this consensus by legislating for the extra-territorial application of its brokering controls.

Ignorance

Another objection to extra-territorial controls is that "legitimate" brokers with UK nationality, but operating overseas, could not know that they were subject to UK controls.

The answer to overcoming the problem of ignorance amongst those to whom a law applies is not to abandon the law. The answer is a targeted information policy. The US system, already fully extra-territorial, has no more than 200 registered brokers; adjusting for the smaller size of the UK economy, it would be highly unlikely that the number of UK nationals involved would exceed this figure, and may well be much less. It would therefore not be difficult for the Government to publicise the fact that it expected all its nationals brokering arms to apply for a licence, particularly because the defence industry has well recognised publications and frequent trade events suited to this purpose.

A better informed industry would result in the longer-term if the government changed its proposal and established a comprehensive register of brokers, made a high-profile push to publicise the requirement for all brokers to register, thus providing it with the necessary names and addresses for future communication.

In any event, the majority of "legitimate" dealers operating overseas will be employed by well-known firms and ignorance is no defence for a large company which should as a matter of course keep abreast of all developments affecting its work. Direct advertising of the new law can be done to the best-known firms on the international scene. Those not targeted directly can be reached through the UK embassy in the country where the company operates.

The draft legislation provides tools by which extra-territorial controls can rest lightly on those conducting legitimate business and mitigate any negative effect on UK persons in the international job market. A regulated form of an open licensing system could be introduced for brokers who regularly deal certain arms to particular unproblematic end-users.

The UKWG maintains that it is possible for the Government to frame a law which is sufficiently intelligent to strike a sensible balance between the interests of legitimate brokers and the requirement to control less scrupulous individuals.

Open General Trade Licences (OGTL)

In addition to standard individual and open individual licences for trading activities, the Government is proposing to introduce an Open General Trade Licence (OGTL) which will cover trade in everything on the Military List barring torture equipment, long-range missiles and landmines. The OGTL will permit brokers and traffickers to trade in these goods between selected countries with no additional case-by-case licensing requirement.

The UKWG recognises the need to minimise the extra administrative burden that the new controls on trade in controlled goods will place on the licensing authorities, however, the UKWG is concerned that the new OGTL could seriously undermine the progress made towards controlling the activities of arms brokers.

For example, the proposed OGTL will allow trade in military equipment from the EU, USA, Canada, New Zealand, Australia, Japan, Norway or Iceland to any destination other than those to which the UK is obliged, or has given specific commitments, to prevent or limit exports. It would also allow trade in military equipment from almost any country to the EU, USA, Canada, New Zealand, Australia, Japan, Norway or Iceland. Paragraph 4.33 of the consultation document suggests that one OGTL might apply for all such transfers. This raises the prospect that an open general licence will apply for traded goods in cases where a direct export of the same goods would require a standard individual or open individual licence. It would be both inconsistent and inappropriate for Government to apply lesser standards of control on brokered than direct transfers.

Furthermore, although the list of proscribed countries (as noted in the consultation document) consists of 40 states, it is by no means exhaustive—significant omissions include inter alia: Algeria, Colombia, Indonesia, Israel, Philippines, Syria, and Turkey—all of which have given rise to human rights concerns or concerns regarding diversion in the past. There is a danger that the proposed OGTL will effectively legitimise brokering activity without sufficient scrutiny or regulation.

There is also concern that these "approved" source countries do not all operate the same standards in export controls. For example, the US Government has no export criteria on sustainable development. There is a clear rationale for extending some form of open licensing to traders operating from EU countries but certainly not for countries outside the EU. Even if some of these countries have endorsed the principles of the EU Code, they are not part of the information exchange mechanism and so there is no way that implementation of the criteria can be monitored.

— The Government should reconsider the extent to which it will allow OGTLs to be the sole control on the majority of brokered deals. In the absence of case-by-case licensing and the lack of any prior parliamentary scrutiny, the proposed system of open licensing is unacceptably permissive. Open general licences should not be used to authorise brokered transfers where a direct delivery of the same goods to the same destination would be licensed more stringently. Where it is determined that an OGTL might be appropriate, they should only apply for trade from EU countries to an agreed "white list" of countries that are not of concern.

The users of open licences will be required to register with the Export Control Organisation and keep records of their activities, however the proposals for the registration of brokers is severely limited (see section c).

Registration

The draft legislation proposes a de facto list of brokers compiled from licence applications as opposed to a register with eligibility conditions. The system is not comprehensive and fails to establish a clearly identifiable group of brokers for subsequent communications relevant to their business (eg new export control orders). A piecemeal register will perpetuate the current lack of transparency about this sector of the arms trade. There would also be no provision for excluding brokers, ie no power to "strike off" those caught infringing the law in the UK or in a jurisdiction abroad. Whilst the Government may argue that such a person would not be granted a further licence, it is not clear how this information will be captured or indeed shared to prevent the broker from relocating their business to another country, nor what would happen to an existing licence (such as an OGTL) which is still in force.

— The Government should introduce mandatory registration for those intending to function as arms brokers with removal from the register as a penalty for professional misconduct. Removal should have the force of rescinding the right to trade as a broker and voiding all current licences.

An example drawn from another sphere of business provides a possible model for this. The Financial Services Authority (FSA), an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000, for example, applies the test of a "fit and proper person" to those involved in handling investments and publishes a list of those whom it fails. Similar statutory powers for those who handle weapons would be beneficial to the process of identifying and disqualifying rogue traders.

If the Government continues with the present proposal, the UKWG would welcome clarity as to whether the list of brokers would be made public and for how long a name would remain noted. For greater transparency, the practice of publishing a list of those who have been struck off the list for misconduct should be introduced, such as exists for the US list of brokers and for the FSA.

Record-keeping

Detailed and accurate record-keeping by exporters and Government alike is vital for monitoring the quantity, type and end-user of arms being exported from the UK. Record-keeping ensures that exporters are complying with the terms of their licences, provides the information used to compile the Government's Annual Reports and will be fundamental to the effective operation of the new controls. It is also a crucial tool in improving the traceability of small arms and thus preventing destabilising accumulations of such weapons. The Government is under an obligation to share information on exports it has authorised or denied with all EU member states. It must also meet other international reporting obligations, such as those required under the Wassenaar Arrangement and the UN Register of Conventional Arms.

— The UKWG believes that the record-keeping and reporting requirements for those trading in controlled goods should be as rigorous and transparent as for those involved in their direct exportation.

In the consultation document the Government proposes two options for record-keeping required under the new open trade licences (as it also does for the intangible transfer of technology and the provision of technical assistance). The first is based on current requirements for direct physical exports, which explicitly specify the records which must be kept for each export in secondary legislation.

The second is what the Government is calling a "functional" approach, where exporters will be required to keep "sufficient information" in their internal records to allow several criteria to be identified. These criteria are listed in the secondary legislation and include: the type and quantity of goods exported; the date of their supply, delivery, acquisition or disposal; the name and address of the applicant, the end-user (where known) and the supplier (where known) of the controlled goods. This approach mirrors the existing reporting requirements under the EC Dual-Use Regulations.

The difference between these two options is unclear.

— The Government should clarify how the so-called "functional approach" to record-keeping will operate.

It is vital that the information is accurate, legible and accessible to appropriate Government representatives, andmade available in a specified timeframe to ensure transparency and accountability. At present there is no timeframe specified in the Dummy Orders, unlike the existing Statutory Instrument on direct physical transfers which requires exporters to give written notice of where and by whom the records are held within 30 days of the export.

The UKWG also believes that an additional record-keeping requirement is necessary. The Government proposes to allow trade in controlled goods from any source country to the EU, USA, Canada, New Zealand, Australia, Japan, Norway and Iceland, and from the countries named above to any destination under an Open General Trade Licence (OGTL). Bearing in mind that these deals will only be permitted if the transaction does not contravene the export or import laws of the exporting or importing countries:

— The Government should include a requirement for brokers to provide proof that a deal was authorised by the source country.

This proof should be in the form of original documentation such as an official export licence from the source country. Failure to provide this documentation on demand should result in the revocation of the OGTL and the cancellation of any unfulfilled orders under the licence.

The Scott Report into the arms-to-Iraq affair was the catalyst to the overhaul of the UK export control regime in which we are currently engaged. The report drew on the testimony of key players in the debacle and relied heavily on the seizure and inspection of documents and records relating to the exports in question. Many of these documents pre-dated the inquiry by considerably more than three years. The Government currently holds no substantive information on exports carried out under open licences.

The UKWG is therefore extremely concerned that companies are only required to keep records for a period of three years from the end of the calendar year in which the authorised act took place. We feel that a longer-term record-keeping requirement would facilitate any potential future investigations similar to those leading to the Scott Report. Ideally records would be kept by both industry and Government, but in order to reduce the administrative burden on industry one option would be to class these as Government documents and keep them for a significantly longer period to ensure future accountability.

— The Government should ensure the future accountability of brokers and companies by requiring that records of trade carried out under open licences are classified as Government documents and kept for an extended time-period.

Subsidiaries

It is regrettable that the government is not imposing tougher controls on companies with regards to the activities of their subsidiaries. Combined with the very limited extra-territorial application of trade controls the absence of proposals elsewhere in the Export Control Act to control the licensed production of arms overseas, and the ease with which companies can abrogate all responsibility for the activities of their overseas subsidiaries (despite reaping the financial rewards), the door is open for companies who wish to avoid export controls to do so with ease.

As has been previously noted, a broker need only leave the country briefly to conduct a deal to avoid UK controls. Without more robust rules to make UK companies more accountable for the activities of their subsidiaries, an overseas trip may not be necessary. UK brokers will potentially be able to avoid UK export controls by setting up an overseas subsidiary and conducting any business they do not want scrutinised in a country with less exacting licensing requirements.

— The Government should make UK persons and companies more accountable for the activities of their overseas subsidiaries. It cannot be right that a parent company which shares the profit from overseas trade in controlled goods does not also share the responsibility to ensure that the trade is conducted in a transparent and lawful manner as would be required in the UK. The Government should examine how to develop effective controls drawing on other experience in corporate law.

Transporters

The recent reports to the UN Security Council on violations of the sanctions regimes imposed on UNITA in Angola and non-government forces in Sierra Leone highlight the role of air transport in the circumvention of arms embargoes. The UKWG therefore welcomes the Government's proposals to impose controls on UK transportation agents where the transfers are headed for embargoed destinations. However, in so doing, the Government is merely fulfilling its duty under the United Nations Act 1946, which implements binding UN resolutions relating to sanctions and embargoes.

Also welcome is the fact that controls on the brokering of long-range missiles and equipment used in torture will likewise extend to providing transport to supply the goods. However, the UKWG is disappointed that the Government does not intend to regulate the transport of arms by UK transporters of other types of conventional weapons to non-embargoed destinations. In fact, the controls proposed on trade in controlled goods to destinations not subject to embargo (and which do not consist of torture equipment or long range missiles) are "expressly disapplied" to those whose sole involvement is to provide transportation services.

There have been a number of cases where UK pilots and transportation agents have been implicated in the supply of arms and related equipment to conflict and human rights crisis zones. Under existing regulations, their actions did not break UK law, and unless the proposals on the trade in controlled goods are strengthened to include some form of licensing for those who actually transport brokered arms, they will remain above the law and potentially continue to add to the misery and suffering caused by unregulated arms proliferation.

— The Government should effectively regulate the involvement of UK transportation agents in brokered arms shipments. For each shipment, permission to transport should be contingent upon:

— an export or a brokering licence issued by the UK Government; or

— an export licence issued by the source country of the brokered goods where this is an EU member state, the US, Canada, New Zealand, Australia, Japan, Norway or Iceland; or

— a transportation licence issued by the UK Government (where neither of the previous conditions have been met).

— Transportation agents should be required to keep records of all shipments they carry out, including the source country, the authorising licence, and the transit routes and intermediate consignees.

The Government has pointed out that licensing transportation would involve practical and administrative difficulties, as the transportation industry (in particular the airfreight industry) often has a swift turnaround with tight deadlines, needing aviation authority approval within as little as two days for some charter flights. The regime summarised above would have the advantage of ensuring that arms transfers shipped by UK persons would have been licensed by a "competent" authority, while making a concession to the dynamic nature of the industry; the proposal to automatically accept export licences from the US, Canada, New Zealand, Australia, Japan, Norway and Iceland is a more permissive approach than that which is advocated for regulating arms brokers.

If the Government is unwilling to introduce such a system at this time, then as a first step it is crucial that the Government create an official register for all those UK transportation agents who wish to transfer arms. Potential applicants to the register would have to pass a "test of good character" as well as meet certain safety standards. As a condition of membership, extensive records (as set out above) would need to be kept and forwarded to the UK Government of all shipments in which UK transporters were involved, irrespective of the source of the goods or whether there was any other UK involvement. The advantages of a registration and record-keeping and sharing arrangement would be threefold:

— it would be the basis for an accumulation of knowledge about the role played by UK transportation agents in brokered arms shipments, and would thus over time provide the Government with the means to judge whether additional controls were needed;

— it would allow the Government to advise UK citizens where they were engaging in unacceptable activities and thus prevent their reoccurrence; and

— the Government could remove from the register those transportation agents it was unwilling to allow to continue operations and thus either prevent or render illegal further involvement in arms shipments.

(2) CONTROL OF LICENSED PRODUCTION OVERSEAS

Arrangements over licensed production overseas (LPO) present a significant and ever-present threat to the Government's non-proliferation goals. They have an even greater potential to undermine international stability in the medium and long term than uncontrolled finished arms exports; yet the consultation document on secondary legislation concludes that even the minimal measures originally proposed in the draft Export Control and Non-Proliferation Bill that would seek to prevent the export of technology to countries under embargo are not now likely to be adopted. The UKWG believes that LPO presents a hole within the secondary legislation that must be filled as a matter of high priority.

Introduction

As the Government has pointed out in other contexts, the nature of the defence industry has undergone significant recent change. A combination of a buyers' market and globalisation of the industry has resulted in vastly increased cross-border flows of intellectual property and production capacity. LPO, traditionally understood to consist of a defence company in one country granting a distinct company in another country a licence to manufacture a complete piece of defence equipment, for example armoured personnel carriers or submachine guns, now covers a much wider ambit of structures and activities. It could involve the setting up of a joint venture, it could involve the UK company taking an equity stake in a company in the recipient country or establishing a subsidiary. It could be for the production of a complete system or platform, or it could be for a sub-assembly or a component for incorporation into a platform back in the UK or in a third country.

Scale of LPO

The frequency of LPO arrangements is also increasing. As Major General Alan Sharman, Director General of the DMA said (in evidence to the QSC): "It is almost impossible nowadays to sell any equipment, not just defence equipment, to foreign countries without them demanding—as indeed we do ourselves—substantial offset. Invariably that involves licensed production"[10]

In the US, the State Department report on direct commercial sales authorisations for 2001 stated that "while the overall number of export licenses authorized under Section 38 has remained relatively constant at approximately 40,000 per annum since 1997, the number of manufacturing license agreements and technical assistance agreements submitted within that overall number has risen steadily each year since the mid-1990s." [11]An accompanying table shows an increase from between 1,000 and 2,000 in 1997 to approximately 5,500 in 2001.

In the UK, although precise figures are not so readily available, it would seem the trend is similar. For example, Jane's reported in 2000 that Racal had around 25 licence manufacturing arrangements with offshore licensees, including in Bulgaria, Malaysia, Romania, Saudi Arabia and "two as yet undisclosed Far Eastern Countries." [12]

The implications of LPO for weapons proliferation are greater than for standard arms exports, in two ways. There are the additional risks that:

— the arms produced as a result of the LPO agreement will be exported to states to which the Government would refuse to license exports directly; and

— the "know-how" which has been exported will itself be more widely circulated, with implications for the development of further, uncontrolled generations of military equipment.

The Government has included in the Export Control Act the power to control all methods of transferring technology, in whatever form, and last year it announced new guidelines to be applied to the licensing of controlled goods for "incorporation" and onward sale by the recipient country. This intent of the Government to keep legislative and procedural pace with industry and technological change, and the increasing incidence of LPO-type arrangements and the proliferation risk this increase poses, all argue in favour of the Government instituting a control order to regulate licensed production. However, as things stand, the Government has expressed itself satisfied that the new controls on intangible transfers of technology will be sufficient to effectively control this type of activity. This confidence is not shared by the UKWG.

History of the debate

In the March 2001 consultation document to the draft Export Control and Non-Proliferation Bill, the Government suggested that the existing system for the control of LPO needed revision and proposed two possible options for change.

Both options placed responsibility for controlling the eventual use and destination of goods produced under licence on companies rather than the Government, with companies required either to obtain specific end-use undertakings from the overseas producer or to insert a clause in their contracts providing for restrictions on re-export. The Government also stated an intention to seek reference to LPO to be included in the EU Code of Conduct on Arms Exports. Both options were problematic in that they seemed to minimise government responsibility for controlling LPO. Furthermore, it was proposed that controls apply only on the export of strategic goods to destinations under embargo, which meant that items produced under LPO would be subject to far lower standards of control than direct exports (despite the fact that, as mentioned above, LPO has greater implications for weapons proliferation than direct exports).

However, following the consultation period, even these proposals were withdrawn. The Government instead decided that no provisions peculiar to LPO were required, but rather that existing controls on physical goods, coupled with new controls on intangible transfers of technology, would suffice. This despite the fact that in evidence to the Quadripartite Committee on the draft Bill, the then Secretary of State for Trade and Industry, Stephen Byers, said that LPO is "one of those areas where I think experience shows us that we could be in a potentially embarrassing position for the United Kingdom, as a country that cares about these issues, not to have an effective regime on licensed production in place." In its report the Quadripartite Committee stated that "[w]hat is required is a system which ensures that the Government knows when a licensed production facility is being set up, and which ensures that the goods produced are not exported to countries or end-users where the UK would not licence them." [13]

Despite these comments, throughout parliamentary debates on the Export Control Bill, the Government maintained that ". . . the Bill already gives us effective powers. It provides for significant control over the practical means by which licensed production arrangements are established and maintained . . . the Bill will strengthen and make more comprehensive the UK's capacity to control the supply lines on which licensed production agreements depend." [14]

When examples were presented of LPO arrangements that had led to end-use and/or re-export which raised concerns under the Consolidated Criteria, the Government responded that the examples were either old or did not match its definition of licensed production. This response, however, was in some cases incorrect, and also failed to take into account the difficulties in accessing information on LPO deals.

For example, the Government asserted that LPO arrangements between the then Royal Ordnance subsidiary, Heckler & Koch, and Turkish company MKEK were established well before Heckler & Koch was bought by Royal Ordnance. Yet in January 1998 Jane's reported that BAE Systems/Heckler & Koch had won an US$18 million contract to establish a licensed production facility for 200,000 HK33 5.56mm assault rifles to be produced in Turkey over 10 years. The Government also stated that an agreement by GKN Defence Limited in Telford with Asian Armoured Vehicle technologies Corp of the Philippines to produce Simba Armoured Personnel Carriers did not constitute LPO, even though a number of defence publications and the DMA have described it as production "under licence".

The position of the Government fails to take account of the fact that finding detailed information about LPO is very difficult. As such, although there will be many cases of this type of production (as made clear by the aforementioned comments of Major General Sharman and the example of the number of Racal's LPO agreements), identifying relevant case studies is problematic. The Government itself must take some responsibility for this; in an answer to a parliamentary question regarding the number of Jaguar military aircraft being produced under licence from BAE Systems in India, the Minister refused to give any information on the basis that "this information is confidential between the company (BAE Systems) and the Government of India." [15]SIPRI reports that India has since 1978 ordered 128 Jaguars to be manufactured under license in India (with the most recent order, for 20 aircraft, in 2000), of which it estimates that almost 100 have so far been produced. This is of particular concern in that recent reports suggest India is interested in upgrading its Jaguars to be capable of delivering a nuclear payload. [16]

While the new controls on intangible transfers should improve to some extent the ability of Government to control licensed production, substantial loopholes remain. There are a number of additional measures the Government could take to more effectively control LPO.

Weaknesses in current proposals

— Lack of scrutiny

The Government's approach will not provide for an overall understanding of the number, type and impact of LPO agreements with a military relevance entered into by UK defence exporters. The first step to effective regulation of this area is to develop an accurate picture of its significance. This could simply be done by requiring all licensed production agreements to be licensed. While export licence applications are now required to state when the goods or technology will be for use in connection with an LPO arrangement, it is not clear how this information is to be collated or managed. An overall picture of the way that UK supply of defence equipment and technology might be impacting upon factors such as regional stability and sustainable development is impossible without an accurate appreciation of the role played by LPO.

This problem also extends to the external scrutiny of UK export licensing decisions. Current reporting of UK export licensing decisions provide no insight into the extent or nature of LPO agreements in the overall context of UK arms exports. The Government's proposals would seem to provide no additional information in this regard.

— Complete LPO agreements themselves should require a licence.

— Lack of control of intangible transfers of technology and the provision of technical assistance

The controls on intangible transfers of technology in relation to weapons of mass destruction (WMD) are fully extra-territorial, as are those on the provision of technical assistance (ie a licence is required for such transfers by all people in the UK and all UK persons wherever located). However, with regard to conventional technologies, controls on intangible transfers apply only to those located in the UK, and there are no controls placed on the provision of technical assistance. These are significant loopholes. LPO is a complex undertaking that will often involve visits by personnel from the licensor in order to ensure the effective operation of the facility. These visits may continue long after the facility is established, and may have the effect of maintaining an operation that would otherwise break down. Their licensing therefore presents an opportunity for follow-up control. This could be of particular importance when the production equipment or the components for the finished product can be sourced outside the UK.

In order to close LPO loopholes, the extra-territorial provisions applied to the controls on intangible transfers of technology should be extended to conventional as well as mass destruction technologies. Similarly, controls on provision of technical assistance should also be applied to conventional weapons, regardless of where this assistance is provided.

— Lack of control of equipment produced under licence

The UKWG maintains that the Government proposals fall short as they do not place any explicit limits upon the amount of equipment produced under licence, its use or its export. LPO deals must themselves be subject to scrutiny and licensed approval. The Government should take all possible steps to ensure that licensed production deals are subject to the same controls as direct exports. The Government should take all possible steps to ensure that overseas producers do not export arms manufactured under UK licence to destinations to which the UK would not permit direct arms exports. In the US, LPO agreements are treated as physical exports and require prior approval from the US State Department. Within these agreements, limits are placed on production levels and sales or transfers to third countries without prior US government consent are prohibited. [17]There is also provision, albeit limited, [18]for prior Congressional approval of licensed production deals. [19]

— Licensing of LPO contracts should not be given:

— where an export licence application for a direct weapons transfer would be refused;

— where the recipient state cannot demonstrate sufficient accountability in terms of export and end-use control;

— to states with a record of violating UN and other international arms embargoes; or

— where there is concern that the recipient government may licence the export of the resulting equipment to countries which the UK would not licence such an export directly.

— LPO agreements should contain a provision prohibiting the re-export of the equipment without the approval of the UK Government.

This approach would appear to fit with other aspects of the Government's recent thinking on export licensing, in particular licences issued under the Framework Agreement. [20]Under this Agreement, a single Global Production Licence (GPL) will be issued to cover all transfers that are to take place among parties to a particular co-production agreement. The idea of licensing the licensed production agreement would apply a similar logic, however it should be remembered that the signatories to the Framework Agreement are all like-minded EU member states. Licensed production arrangements may involve licensees which operate more permissive export licensing regimes, hence the need to consider tight controls on production runs and authority to re-export. Such an arrangement could prove beneficial to exporters in that the Government would be making clear the terms under which the exporter could continue to expect licences under the LPO deal to be awarded.

The concept of placing limitations on production runs and re-export markets with regard to LPO is not a new one—this already happens through the imperatives of commercial logic in other markets (eg pharmaceuticals). Uncontrolled licensed production creates new competitors, and exports jobs. In the defence industry, strategic considerations make these types of controls more important, not less. Indeed, it would seem that in terms of more complex weapons systems, defence companies are often very careful to restrict the scale of production and to maintain exclusive control over critical technologies. However, for lower-end equipment, in recent years the pressures of a buyers' market frequently involved the transfer of production capacity and capability as a carrot with which to tempt a prospective purchaser. Moreover, setting up a licensed production facility through an overseas subsidiary may in fact be a way of getting around the UK export licensing regime.

Enforcement

The Government have argued that an individual company could not be effectively prosecuted in this country, particularly if the Government of the other country had been responsible for the breach. However, we do not envisage the Government pursuing the UK licensor when the terms of the licensed production agreement are broken by the licensee (unless of course there is criminal negligence or culpability); nor is it likely that the parties in the recipient country would be pursued through the courts. But by licensing the LPO, and thereby setting out clearly the obligations that flow from such an arrangement, it would be a straightforward matter for the Government to know when to apply sanction to the licensed producers who do not honour their contract.

— If overseas producers do not honour their LPO licence, the Government should revoke the licensing agreement and refuse to provide any subsequent parts, training, advice etc. related to the agreement. Furthermore, the Government should refuse to licence any additional LPO or direct exports until such time as it is satisfied that the recipient state will ensure that all future contractual obligations will be honoured.

With this understanding, returning to the Government's original proposals from the consultation document to the draft Bill of March 2001, the role of UK companies under such a system would be to include production and re-export conditions in the contract as stipulated by the Government. Companies would then be obliged to inform the Government if aware a licensee was in breach of its undertakings. It would not be the responsibility of the UK company to prevent such a breach, but rather to report upon it when known.

Licensing LPO deals would also greatly assist the Quadripartite Committee's scrutinising role. Keeping track of individual components and elements of technology etc, which relate to LPO deals of which the Committee may or may not be aware is an extremely difficult task. It would be far easier to be advised of (and to have the opportunity to comment on) LPO deals themselves, and then to be informed when a licence for components relates to the original deal.

(3) END-USE MONITORING

The secondary legislation sets out clearly the power that licences issued under the Trade in Controlled Goods (Control) Order may be amended, suspended or revoked. This is welcome, however despite the 1997 Labour Manifesto commitment to "strengthen the monitoring of the end-use of defence exports to prevent diversion to third countries and to ensure that exported equipment is used only on the conditions under which the export licence has been granted" the UKWG is concerned that the Government has failed to introduce an effective end-use monitoring system.

The last few years have witnessed a number of incidences where arms of UK origin have been diverted for purposes or to destinations contrary to the Government's intentions.

The Government has stated that it is now taking greater consideration of the possibility of arms being diverted to undesirable users or usage when assessing licence applications, and has already put in place additional procedures to avert this. This is welcome, however the Government has decided not to introduce a comprehensive system of post-export end-use monitoring. Strengthened end-use controls at the licensing stage must be backed up with stringent follow-up checks once the equipment has been exported. Without a comprehensive system of end-use monitoring it would be impossible to know whether end-use undertakings are being broken.

The Government has stated that it does not "consider that it is either practical or useful to monitor the end-use of all military goods exported from the UK." It has made this point on a number of occasions, however most observers have never called for such a system. End-use monitoring should be prioritised to those countries and for those transfers that are in most danger of diversion or misuse, through a targeted use of limited resources against a matrix of likely risk factors, as is the case in the US.

End-use monitoring and Israel, 2002

In February 2002, during the passage of the Export Control Bill through the House of Lords, the Government said in relation to the end-use of equipment to Israel: "We have no evidence that equipment or components manufactured in the UK and licensed for export were used in the Occupied Territories during the recent violence." [21]

On 7 March 2002 Baroness Amos responded to a Parliamentary Question tabled by Lord Hylton asking whether British Embassy Staff or other UK officials had carried out physical checks in the last two years on the actual use by the Israeli forces of UK weapons, ammunition and military equipment.

However, less than a week later on 11 March 2002 the junior Foreign Office Minister, Ben Bradshaw, disclosed that: "New information has come to light that UK supplied equipment licensed for export under a previous administration and a different export control regime is being used by the Israelis in the Occupied Territories." [23]The equipment Mr Bradshaw explained, consisted of British Centurion tanks which had been modified into armoured personnel carriers by the Israeli armed forces. He went on to say that this use contradicted a written assurance from the Israeli Government on November 2000 that "no UK originated equipment nor any UK originated systems/sub-systems/components are used as part of the defence force's activities in the [occupied] territories."

Confusion has since surrounded how the information "came to light". Reports at the time suggested that an embassy official had come across the information by chance. However, in a recent evidence session to the Committee (February 2003) Mr Dowse (Head of the Non-Proliferation Department of the FCO) stated:

". . . the Israel case was a particular one where we had received certain assurances from the Israeli Government that British equipment would not be used in the Occupied Territories. We obviously then made an effort to ensure that those assurances were being met and our attaches in Israel, at considerable risk in some cases, did make tours in the Occupied Territories with this in mind."

Dr Roger Berry MP: "That is very important to this. This discovery by the Military Attaché was not just accidental "just happened to see", was it?

Mr Straw: "No"

Mr Dowse: "No, it was part of his task." [24]

These statements appear to contradict Baroness Amos's statement at the time that "British Embassy staff in Tel Aviv do not undertake physical checks on the end use of UK licensed equipment." This case illustrates the confusion and ad hoc nature of current UK end-use monitoring.

— The Government should establish a more robust system of end-use monitoring. In addition, the terms of the export licence should re-emphasise that where breaches are revealed, the licence will be revoked with all subsequent deliveries and support (eg provision of spares or technical assistance) under the relevant contract suspended and no further licences approved until such time as the Government is satisfied that the recipient will honour future contractual obligations.

11 March 2003

1 For the purpose of this submission the UK Working Group on Arms consists of Amnesty International UK, BASIC, Oxfam and Saferworld. Back

2 Brian Wood and Johan Peleman, "Making the Deal and Moving the Goods-the role of brokers and shippers", in Ed. Lora Lumpe, "Running Guns: the Global Market in Small Arms", p. 138 Back

3 House of Commons Standing Committee B, 16 October 2001. Back

4 Raising Standards and Upholding Integrity: the Prevention of Corruption, CM 4759, June 2000, Ch 2 paragraph 2.25 Back

5 Export Control Bill Second Reading House of Lords (8 January 2002) column 517. Back

6 "International Crime Threat Assessment," December 2000, http://www.whitehouse.gov NCIS data estimated that while drug trafficking was by far the most likely activity to be undertaken by organised crime groups (56% arms and munitions trading was undertaken by 10% of all organised criminal groups, and 18% of drug trafficking groups engaged in arms trading as a secondary activity. "NCIS UK Threat Assessment on Serious and Organised Crime 2000," National Criminal Intelligence Service (NCIS), http://www/ncis.co.uk Back

7 See UKWG submission to the Committees Inquiry into the draft Export Control and Non-proliferation Bill, April 2001. Back

8 Report on the United Nations Conference on the Illicit Trade in Small Arms and Light Weapons in All its Forms (UN, 2001), Chapter III, Part II of the Programme for Action, Section 14, p. 11. Back

9 Lord Bach House of Lords Export Control Bill Second Reading 8 Jan 2002, column 517. Back

10 Major General Alan Sharman, Director General of the DMA, in evidence to the Quadripartite Committee, 25 April 2001, qu. 90, http://www.publications.parliament.uk/pa/cm200001/cmselect/cmfaff/445/10425a09.htm. Back

11 Report by the Department of State Pursuant to Section 655 of the Foreign Assistance Act: Direct Commercial Sales Authorisations for Fiscal Year 2001, p. 1, http://pmdtc.org/docs/RPT655-FY2001.pdf. Back