Select Committee on Foreign Affairs Minutes of Evidence

Examination of Witnesses (Questions 20-39)



Mr O'Neill

  20. Do you actually think the authorities will necessarily prosecute for phoning Basra and giving technical advice in the middle of a war?  (Mr McLaughlin) It is self-evident that the answer is that I would not expect it to happen and the answer is "no". What I was highlighting was the fact that there is, if you like, a technical or legal breach and, whilst we might have every confidence that you, the Government, will not do such a thing, I cannot account for civil litigation.

Sir John Stanley

  21. I do not know if any of your colleagues want to respond to my original question.  (Mr Hayes) The issue Sir John raises is probably of a slightly different relevance in the context of coalition warfare in that, whilst an export may be in support of forces operating in the theatre and indeed in forces directly supporting and working with British forces, it may not actually be for the British forces themselves. Potentially, yes, I would agree with your comment that there is a need to address this in the legislation in the round rather than in the specific context of Crown exemption.  (Mr Otter) It does not just stretch to the armed forces. It may well stretch to protecting and defending the civil infrastructure, which is the equipment, and that may well have defence connotations about going in to protect the civil population. Many countries have civil defences; we do not in this country. We got rid of that some long time ago. Civil defence and police have equipment requirements to protect people that are very similar to those of the armed forces. I stress the point about allies as well.

  22. Can I return to your original comments on trafficking and brokering. I just want to be clear on this. As far as your Association is concerned, am I right in saying that your concerns on the really quite limited trafficking and brokering provisions in the secondary legislation are limited to what you say in the section in your paper headed "Clarification"? We have already referred to the lack of clarity you see in Annex G. Can I be quite clear that there is nothing further in that area that is causing you concern in these draft secondary legislation provisions, is that correct?  (Mr McLaughlin) The short answer is: no, I do not believe it is. There are other issues that cause some concern. I can think of an example. In a partnership programme or partnership project, if the control, if that is the right word, is exercised from, let us say, the UK but there are suppliers and partners in other countries, then I ask myself the question: how will the extra-territoriality provisions apply if you happen to have, for example, a Spanish partner? If the expectation is that someone in the UK can control his shipment of goods as part of this joint programme, assuming he had a Spanish or an Italian, whatever nationality you like, licence in place, then I am not quite sure in my own mind how any enforcement process would happen if the programme is controlled in the round from the UK. The commercial dealer can say, "The programme director is in the UK and these various partners will make these various components and ship them to wherever", but the actual control of that activity going direct from a supplier, even within the EU to somewhere, is outside, I would judge, the practical control of the UK-based programme director. There, for example, is another concern.

Mr Colman

  23. Mr Salzmann, on page 2 of the memorandum you gave us, in the paragraph on the burden of training, you claim that all 310,000 staff in the UK defence industry require the suggested training on their responsibility under the new legislation. It is rather like Mr O'Neill was suggesting: it is exaggeration in terms of the new number of licence applications. Are you suggesting there that the catering staff or the cleaners are going to require training in this? Is this not, surely, rather like the situation in the financial services industry where you have a compliance officer and an adviser in each company to whom individuals could go to ask for advice—and I see you shaking your head—and to get information on what can and cannot be done before in fact you send the information abroad, and that this can in fact be done in this way? Why are you suggesting this should be such a complicated or time-consuming undertaking that is being proposed within this new secondary legislation?  (Mr Hayes) It is actually quite the opposite to that, Mr Colman. At the moment, the situation you describe is quite true in the sense that in the world of tangible exports there is effectively a choke point within most organisations with a person well versed in the export control legislation. All exports can be routed through that person and controlled to a very high degree. Move to the world of intangible exports and that situation changes dramatically. I am not suggesting for a moment that we do not believe the controls on intangibles should be put in place. Industry does indeed fully support that. The question is one of implementation. But you move away from the choke point situation whereby all of your controls can be applied at that choke point to a situation where anyone within the company with access to a fax machine, telephone, computer, shared data environment or telephone conferencing facilities, can be an exporter. Therefore, they have to have at least an awareness of what constitutes an export and what does not; what is control and what is not. The training commitment therefore does extend to anyone with access to technical information and those facilities. It does not only extend to UK employees; it extends to all employees of the company worldwide who might visit the UK and whilst here make contact with their offices back in their home country because their intangible transfers from the UK will be subject to UK law whilst they are here.

  24. In my parallel example of a compliance officer within any financial services company, which is in a sense similarly dealing with intangibles but is able, if you like, to cope with the regulatory framework as to what can and cannot be done, is that not a situation that has been working in Britain over many years? Therefore, you again are grossly exaggerating the impact of this legislation?  (Mr Hayes) Not being an expert in financial services, I would not like to comment on that.  (Mr McLaughlin) I think the issue is, in part, one of scale. I accept your point about the way the financial services industry is regulated. As my colleagues have said, at the moment most of the industry is regulated through a number of choke points where we have experts who monitor and do the right thing. To give you an example from the company that employs me, we have 16,000 desktops, all connected to the company network Any one of those 16,000 owners/users of those desktops could make an intangible transfer.

  25. In the same way as the financial services industry?  (Mr McLaughlin) Yes. To ensure compliance, we are already working on a programme of training for those 16,000 people and/or a combination of IT control by key word recognition, by all sorts of things being examined in some detail. Either way, I would like to link the response that I am making to the earlier response I gave to Mr O'Neill about the cost of compliance, if we can put that in inverted commas. In an industry or a major client with a large number of employees, the scale of the cost of compliance is beginning to run away . We will have to have very expensive, clever IT provision and/or we will have to have training programmes, otherwise we could not as a company—and I think this applies generally—put our hand on our heart and say we are doing our best and making our best efforts to comply with this new legislation.

  26. At the moment, the movement of stocks and shares and of financial advice has been controlled and has been policed and has been done. That has been coped with and it has not required massive training, if you like. An individual visits the client's offices in each company; he is set the rules and everyone knows where to go in terms of getting the advice. You do not think there is in fact a basis on which this legislation would work in the same way and be coped with?  (Mr McLaughlin) The short answer to that question is: yes, but not with the present scale of resources.

  27. Do you believe the idea that every single person working in the defence industry would need that training? Do you think that is a gross exaggeration?  (Mr McLaughlin) The answer to that depends on the DTI interpretation and application of what I would call the compliance regime. I think the underpinning answer, the conceptual answer, is: yes, if you have the ability to make an export from your company's IT network where there is licensable control of data, then you are going to have to know from the first day that you have access to that when you sit at your desktop and who you can send it to, who you cannot send it to and what you can and cannot do. That is what I would judge to be a self-evident level of commitment to a level of training there, and quite how large is something we are all working to get our heads around.  (Mr Otter) And critically where those individuals are at any one time because when I am seated at my desk, it is not an export; when I go overseas, it becomes an export. Unless every one of our 33,000 people knows where I am all the time, they could be unwittingly committing a breach.

Rachel Squire

  28. I would like to continue with the theme of training employees all over the world and return to offset, which you defined as where the customer demands manufacturing or design work in their own country in return for buying the product. That is an integral aspect of the modern global defence industry and it is increasingly spreading into the non-defence commercial sector, too. We accept that it is often a crucial part of any commercial or defence export work at the moment because a country to which you are exporting will look to share the skills and technology and have some local employment and training provided. We referred to it earlier but I would like to hear a little more about what your concerns are about the effects the new controls and training will have on offset agreements. Would you like to give some specific examples of how you think that has a very negative effect?  (Mr McLaughlin) I understand the question but there is a very complex answer, even if I were able to give it all. I think already some aspects of offsets are controlled and we live with that and do it as a matter of the daily conduct of business. The issue I was attempting to highlight earlier, and I use offset as an example, is one of what I would call the negotiating points that will underpin any commercial deal when it is eventually signed at the contract signing stage. At the risk of repeating myself, my concern and the industry concern is whether, if you agree in principle to a £10 million offset for example in any given commercial deal, at that stage we already should have a trading licence. At the moment, we will have that sort of discussion not requiring a licence. The question I now cannot answer is whether I would need a licence even to have the discussion about the value of the offset. That is the first point. The second point is that I think we are into generally less of an issue because, in the way offsets happen, the current legislative and regulatory regime already requires us to learn to cope with it. I can give you a good example. We, as a particular company that does quite a lot of business in India, the Indians would, as a matter of routine, wish to have a discussion about offset. The offset, I should stress, is not necessarily linked to the products that you are trying to market. The offset can be unrelated and simply defined as a value. If they, the country, whichever country, India in the example I was using, already has the competence, the capability, to do whatever the work is that we want to put there, then it is a non-issue. We already have to cope with the licensing regime as part of this deal under an offset agreement if we want to send a capability to India, for example, that they do not currently have. That happens now. The offset comment I made earlier was related to the new trading licence requirements.

  29. Can I pick up on armed forces support? Coming back to the comments and discussion on support for the UK armed forces, you mentioned the importance of coalition forces, allied forces, and also interoperability. I am interested in how that works at the moment where you have forces that do have common equipment and are very much interoperable and the need for urgent supplies or repairs. Is it very much a manufacturer's agreement that cuts across international boundaries? Is it very much an inter-governmental agreement? How do you think it would change under the proposed secondary legislation?  (Mr Otter) There are two aspects to the answer. One is that in theory it should be government-to-government activity. To give you a simple example, we supply chemical warfare detectors to both America and the UK. At the moment, the UK cannot get any batteries for their detectors because they do not have the stock, so they are drawing off American stock on a formal basis. Another example is that both the Americans and the British are short of another particular item of equipment. Neither of them have got any stock because their defence stocks have been pared and pared. What we have got to do is to come to the manufacturer. In theory, according to the new regulations, we would not have been able to supply the United States in the way that we have done, but we could supply the UK.

Mr Olner

  30. Are you really telling us that there are no batteries for our forces in the Gulf who are in danger from chemical warfare? It beggars belief.  (Mr Otter) That was the situation, yes, largely because the United States had bought all the batteries. They had taken up the industry's capability to supply the batteries.

  Chairman: I regret to say that this has nothing to do with the consultation document we are discussing but it illustrates a problem arising from other things than arms export controls, does it not?

Tony Baldry

  31. Can we move on to record keeping? Clearly record keeping is crucial to the administration of the orders. The industry, not surprisingly, has asked for there to be a pragmatic approach to record keeping. Could you explain to me what you mean by a pragmatic approach?  (Mr McLaughlin) The first problem industry has with the consultation document is one of definition where record keeping is concerned. The document refers to functional record keeping. We are in a round of meetings with the DTI to try and better understand what is meant by functional record keeping, and so industry's answer to your question I think will vary along a continuum that at the moment we are unable to define. If functional record keeping gets what I would christen a harsh interpretation and requires specific records to be kept of every intangible transfer, major companies, whose scale will obviously vary according to the size of the company, are going to be talking hundreds of thousands, if not millions, of pounds of data storage space and then retrieval systems to get those records out every time we have to demonstrate compliance. If functional record keeping means something less than that, clearly it will be a less onerous burden, if that is the right word, for industry, but the first issue for industry is to understand what functional record keeping means. That is inextricably linked to the regime of compliance that the DTI will seek when they come to check that very fact, the fact of compliance.

  32. As I understand it, the DTI put forward two alternatives; one is what they describe as a prescriptive approach, the other is a functional approach. The functional approach would allow firms to use their internal records to demonstrate compliance with the new legislation. It would specify what information would need to be kept but not the format in which it was kept. Are you clear, from the consultation you had, as to what information and records you need to keep?  (Mr McLaughlin) The short answer to that is "no". I will ask Mr Hayes to pick up that particular point.  (Mr Hayes) If you look at page F11, that actually lists the information to be kept. It is fairly obvious that what has happened is that the record keeping requirements from the world of tangible exports have been read across into the intangible world where they have a lot less relevance. A good example would be at 13.2(c), the quantity of goods. In the tangible world, fine; in the intangible world, that has little or no meaning. But the requirements themselves are fairly prescriptive and, if these were to be the requirements, then I think the cost burden on industry would be considerable. The sheer volume of records being kept would be overwhelming, both for industry and from the Government compliance and audit point of view. That is another example of where a transaction of concern would be lost in a deluge of data relating to transfers which were of little or no significance. The other issue is one of practicality. If we turn to the trade controls, the record keeping requirements are broadly similar in relation to the movement of goods. However, those movements are between two countries, neither of which is the UK. We have no power to require companies in our supply chain, or indeed our customers, to provide those records to us. That begs the obvious question that industry is being required to keep these records, subject to sanctions presumably for not keeping the records, and yet we have no means by which we can obtain that which we are required to keep.

  33. When you have raised these concerns with the officials, what has their response been? How far have these negotiations or consultations got with officials?  (Mr Hayes) There have been many meetings with officials. They have listened carefully to the viewpoints that we put forward. As you would probably expect in a consultation period, there has been little feedback coming the other way.  (Mr McLaughlin) These various points of individual companies and various trade associations involved will be covered or addressed in the formal responses to the consultation document and of course the closing date for those is 30 April. I endorse what David Hayes has said; I do not really believe that any of us expect any substantial response from officials in advance of the closure of the consultation document or the consultation period.

Mr Howarth

  34. May I go back because I was late arriving, for which I am sorry. Mr Otter, you were suggesting that under the current arrangements your ability to export to the United States, to our coalition partners, batteries for CW detectors requires a lengthy licensing arrangement. Is that correct?  (Mr Otter) Yes.

  35. That is under the existing arrangements?  (Mr Otter) Yes.

  36. Are you suggesting that under the new arrangements that position would be made worse?  (Mr Otter) It would be made worse.

  37. That is a rather severe accusation to make.  (Mr Otter) It is just the way the legislation is drafted.

  38. How would you like to see it improved?  (Mr Otter) I take Mr O'Neill's point of view on weapons of mass destruction, that it might be a small element of it, but what we are talking about here is defence against weapons of mass destruction, and let us make that perfectly clear. Some of the catch-all provisions that are in the document are so severe that they actually make it very difficult even to trade and discuss things with people like the US Government and the Danish Government, which has special forces deployed in support of the coalition at the moment, or would do. The definition needs to be loosened considerably.

  39. Are you suggesting that our forces are at risk, as Mr Olner was putting to you, as a result of what can only be termed ludicrous bureaucracy and that you can supply and the Americans cannot supply the batteries, that you are the only supplier?  (Mr Otter) I think in this new system there is going to be far too much bureaucracy.

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