Examination of Witnesses (Questions 140-159)
THURSDAY 3 APRIL 2003
RT HON
PATRICIA HEWITT
AND MR
GLYN WILLIAMS
140. But it does in that sense mean that it
can be used as a means of avoidance when it comes to the UK controls?
(Ms Hewitt) It could be, and therefore it might well
be something we would need to look at very closely as we start
to implement the new rule.
141. Could it be you are considering looking
at what the UK Working Group suggests, that a parent company which
either openly or more obscurely, shall we say, shares the profit
from overseas trade be held to have a responsibility to ensure
that the trade conducted by an overseas subsidiary that it has
some connection with should be a matter which it can be held to
account for?
(Ms Hewitt) I am quite prepared to go on looking at
this issue but I think we will find it easier to deal with as
we look at it in practice rather than try and deal with a variety
of hypothetical scenarios.
Mr Jones
142. Can I follow up on this point. I think
you mentioned that the main parent would have to gain or profit
in some way, but surely it would be quite easy for a company to
have a subsidiary abroad and whatever element of profit it made
out of that company or its activities to divert the profits or
gains from that via a whole plethora of trusts or bank accounts
or anything like that? How would you actually see, for example,
a subsidiary of a company using that method, would that be breaking
the law?
(Ms Hewitt) I think it is very, very difficult to
respond to that on the basis, as I say, of a hypothetical scenario.
I think this is something we may well get some helpful advice
on in the course of consultation. I suspect it is something we
will learn more about as we implement the new law in practice.
Let me stress that if a parent company in the UK is actually involved
in negotiating or arranging contracts, for instance for goods
to pass between its overseas subsidiary in one country and a customer
in another country, then it would be caught by the controls as
we have drafted them. It is only when the parent company has no
involvement other than the fact that it owns the company that
we are saying our controls as drafted will not apply.
143. If you came across a situation where benefits
were actually being fed into a system which was designed to mask
the parent company benefiting, would you say that in practice
that is something you are going to be looking at?
(Ms Hewitt) I think we need to look at it. We also
need to look at what the company was doing. In a sense let me
offer you two different scenarios, one is a scenario where a parent
company in the United Kingdom wants to get involved in trafficking
or exporting to an embargoed destination and decides to try and
do that by shifting the stuff into a subsidiary, we would catch
that in any case under our existing extraterritorial controls.
A very different scenario is one where a company here decides
that the potential bureaucracy involved in our controls is so
great they are going to move production overseas, that is one
that we might be worried about, and I would certainly be worried
about for rather different reasons. We need to look at this quite
specifically as we not only design but actually implement the
new laws.
Sir John Stanley
144. Secretary of State, Rachel Squire highlighted,
rightly, one area potentially, evasion of UK export licensing
controls, namely through a creation of a subsidiary overseas.
Another potential means of circumventing UK export controls roles
is through a licensing agreement made with an overseas company
completely independent of the UK company, under which the UK's
company product is manufactured in another country and therefore
is not subject to our own controls. In the second reading debate
on the Export Control Bill on 9 July 2001 I referred to one example
of that, and that was the case in 1999 when the Turkish company
MKEK exported Heckler & Koch sub-machine guns to the Indonesian
Police, exports that most certainly would have been prevented
by the British Government. At the time when this agreement was
entered into Heckler &Koch was owned by Royal Ordnance Plc
and the Quadripartite Committee in the last Parliament, as indeed
was the Foreign Affairs Committee prior to that, was very clear
on this particular point. I will just quote what the Quadripartite
Committee said in their unanimous report at the end of the last
Parliament, paragraph 106: "We do however continue to believe
that some statutory powers may be necessary to control licensed
production overseas, and recommend that the Bill provide for such
powers to be taken in the future under secondary legislation,
to be used only if a non-statutory regime is shown to have failed".
As you know, Secretary of State, the Government in its response
said in the opening sentence: "The Government has decided
in the light of the results of the consultation not to introduce
specific powers in the Bill on licensed production overseas".
Could you set out for the Committee why the Government has declined
to take such powers over licensed production overseas, either
in the primary or the secondary legislation?
(Ms Hewitt) If I can start, Sir John, on the specific
issue of Heckler & Koch and then come to the general question.
As I understand it the licensed production arrangement between
Heckler & Koch and MKEK was established in the 1970s when
the company was wholly German owned, that was before the transfer
of ownership ultimately to British Aerospace. The licensed production
facility in Turkey, I am told, continues to be run by Heckler
& Koch in Germany. If the company here wanted to export any
goods to the licensed production facility in Turkey it would have
to have a licence from the UK Government, we have not had any
such application, but if we did it would be scrutinised extremely
rigorously against the consolidated criteria. If there are any
exports going from Germany to Turkey that is a matter for the
German Government, also operating under the consolidated criteria.
On the general issue of licensed production even under the existing
law we have I think quite considerable control over licenced production
for the simple reason that it is almost impossible to license,
particularly a new production facility, without also supplying,
exporting to that facility component parts, and sometimes production
and design technology. That, of course, would already require
a licence. We are strengthening that control in the new Act because
of the controls that we have introduced on electronic transfer
of technology, as well as transfers of technology in physical
form. Designs for the goods for which you are licensing production
is simply transferred electronically to the new company and would
now require an export control licence and continuing support,
provision of services, information, and so on, which would all
continue to need export licensing. Therefore we think we can get
the control on licenced production that we want and deal in that
way through concerns about the end user for the products produced
in the licensed facility.
145. I am aware, indeed it is in your response
to the Quadripartite Committee's recommendation, which I quoted
earlier, and indeed if I can say it on the record, you go on to
say in the Government's response: "However, the Government
observes that the Bill, and in particular Clause 2", it was
a Bill at that point, "will provide for a gap in existing
controls to be filled by allowing the introduction of control
on the transfer of military technology by electronic means".
I have looked very, very carefully at what is now Section 2 of
the Act and the wording of that, and particularly the definitions
both of transfer, transfer controls and technology, and what I
have to say I do not understand, and perhaps you can help us with
a note, is why in that critical Clause 2 the word "licence"
does not appear or "licence agreement". It seems to
me that such wording should be there on the face of the primary
legislation. I cannot believe that it is just simply by reference
to electronic transfer, there are forms of transfer that do not
have to be electronic, if somebody enters in to a licence agreement
and puts it in their briefcase and carries it to whichever country
it is it is not an electronic transfer. I do not understand why
Section 2, if that is what you are saying, does not provide a
watertight protection that the UK Government's arms export control
policy cannot be circumvented by a licensing agreement?
(Ms Hewitt) If I can come back to the issue of what
was in the draft bill, in the draft bill consultation document
we did include options for new measures that would directly deal
with the issue of licensed production overseas. We had a lot of
responses on that particular issue and in the light of that we
decided that we did not need a specific clause in the Bill referring
to licensed production overseas. One reason why we decided that
was that we could get this increased control over licensed production
because we would be controlling not only the physical transfer
of goods and technology to the licensee but also the electronic
transfer. In the case of somebody from the licensor here taking
the specification for the goods in his briefcase to the country
overseas that is caught, that is a paper transfer, that is a physical
transfer of the technology, and if it is done by e-mail it is
caught because it is electronic. We think we have very strong
controls on that. We do not think we need more in terms of the
legislation. We also did take some administrative steps, in the
export licence application form that companies fill in and we
are going to include a question on whether the goods or technology
for which they are seeking a licence are destined for an overseas
production facility and that will give us additional information
on which we can base the export licensing decision.
Chairman
146. May I ask a brief question on this point,
if a UK company wished to establish a licensed production unit
in country X but the goods and technology were transferred from
a third country, not from the UK, so our direct export control
regime would not apply, would that be caught up in the Government's
current proposals.
(Ms Hewitt) I do not think it would.
(Mr Williams) Not unless the trafficking and brokering
controls came into play because the United Kingdom company was
controlling movement from the third country to the other third
country.
147. Indeed, so the argument the Government
is using for saying licensed production is not a problem because
we can control exports and technology—and I freely admit
that is precisely what we are doing—that argument would
simply not apply if the UK company could export the technology
and/or goods from the third country? That is an obvious way of
circumventing it?
(Ms Hewitt) Only, as I was saying earlier in the discussion
around the subsidiaries, if the parent company was not controlling
that whole activity.
148. It would be daft to, would it not, because
it knows if it did not control the activity it could get round
the export control regulations?
(Ms Hewitt) If it did not control at least some of
the activities it might not get the result it wanted. Let me say
on this we think we can deal with the problem insofar as there
is a problem, and clearly there could be, but what we have also
done is suggest to our European colleagues that we actually strengthen
the EU Code of Conduct on this in order to put in an explicit
reference when governments are export licensing companies to take
account of a possible use of the export in a production facility
outside the European Union and therefore outside Europe's export
controls, and that was agreed last year. It was a political agreement
on that. We now want to get that into the next revision of the
Code on exports. Yes, you can still imagine the situation where
the subsidiary is put in the country outside the European Union
for onward transfer to another third country but, again, rather
than trying to design a more and more complicated set of regulations
and administrative procedures to capture every possible theoretical
combination of problems, we should actually implement the very
large extension of current controls that we are already proposing
and then see whether either we have got some companies simply
circumventing them or we have some other evil that we could possibly
have an effect on and stop which we have not yet caught.
Sir John Stanley
149. Secretary of State, you use phrases—and
I understand ministerial caution—like "we think",
but are you saying to the Committee that as far as you are concerned
you believe you have achieved, with the combination of the existing
legislation and the secondary legislation that we now have before
us, as far as you can, a legally watertight, preventative system
of stopping circumvention of our export controls by means of British
companies licensing production overseas?
(Ms Hewitt) I think we have got with the new Act and
the Orders very powerful controls on the supply chain on which
licensed production almost always depends. I think that will enable
us to extend the controls that already exist over licensed production
overseas because actually the best way of preventing the products
of overseas licences being used for undesirable purposes or diverted
to unacceptable end uses is to stop it from happening in the first
place. We can do that on the controls of the export of physical
technology or electronic technology and trafficking and brokering
controls.
Mr Jones
150. Secretary of State, can I come on to the
regulatory impact and cost to industry of the regulations. Clearly
there is an enormous difference between the Government's position
and the arms manufacturing industry's position on this issue.
I think from industry their main concern is that it is prohibitively
bureaucratic and expensive. Can you give us an overview of what
your position is and also whether you can reassure industry on
some of the concerns they have got, for example the concerns that
a large number of new licences would be needed to cover e-mails,
faxes and even conversations and also that even for existing licences
an enormous amount of record keeping will have to be maintained?
Could you address those issues for us?
(Ms Hewitt) Let me make a couple of points. First
of all, we will automatically extend the existing licence where
we are already satisfied by the definition to include electronic
communication, so there will be no additional application for
a company that has a licence to go through in order to comply
with the new controls. Secondly, we will make quite extensive
use, as we have indicated, of open general licences because for
perfectly legitimate trade in acceptable equipment to acceptable
countries there is no reason for us to get into a cumbersome system
of individual licensing. Thirdly, on the issue of record-keeping
we are discussing this at the moment with industry, we have had
several meetings and seminars and so on with industry, because
a huge number, millions of e-mails, faxes and phone calls will
be caught by the new controls and we do not want to tie up absolutely
legitimate companies who are complying with the law and obtaining
the licences perfectly properly with having to keep copies of
the records of every telephone call that is made, that would be
absurd, so one of the suggestions we have made here is wherever
possible we simply use the records that companies themselves keep
for their own purposes to demonstrate compliance. We have asked
the industry to come forward on some questions on that because
obviously we have no more desire than the industry does to impose
a whole raft of unnecessary bureaucracy on them.
151. Can I just raise the issue in terms of
e-mail. I think this is the one that is obviously taxing people.
Unlike, for example a letter in terms of a geographical defined
area where it comes from and goes to, there has been some concern
about e-mail, that I can send an e-mail anywhere around the world
and vice versa. What would you expect business to do to ensure
there is some type of record-keeping and record of where e-mail
transactions come from?
(Ms Hewitt) As I said, Mr Jones, that is what we are
discussing with industry at the moment because we certainly do
not want them to have to keep some kind of register of every e-mail
they have sent, that would be quite absurd, so we are looking
at this with industry at the moment. We want to keep it as simple
as possible.
152. Do you not think it is going to be enormously
complicated especially with modern technology. You can travel
around the world in different countries and receive and open your
e-mail in different countries. How do you get round that problem?
(Ms Hewitt) I think what you are reflecting here is
the fact that the controls that we are putting in place with this
new Act are indeed very, very wide. It is why I was fairly robust
on the question of fulfilling our manifesto commitment (because
I absolutely believe we are) and I believe what we are doing is
very wide indeed. Of course this issue of whether the e-mail has
been accessed in, for instance, an embargoed destination, that
is a perfectly legitimate issue, and it is one that we obviously
want to discuss with industry. Let me stress here that the vast
majority of companies in this industry want to be law abiding.
They are not in the business of selling technology to embargoed
destinations and therefore they would in any case, I think, want
to put their own controls in place, including personnel controls,
to ensure that the e-mail (which is likely to be on a company's
intranet, we are not talking about stuff that goes on a Hotmail
account) can only be accessed by people working for the company
or in some situations by their collaborators or possibly their
customers. What we would want to look at with industry is what
kind of internal controls the company has to ensure that information
that is perfectly properly being exchanged with collaborators
and with customers is not being exchanged in such a way that somebody
in Saddam Hussein's regime could get hold of it.
153. Is it your intention on this, I accept
very complex area, to draw guidelines with industry so that, for
example, as you say, a company that legitimately wants to do something
legally does not fall foul of the law by mistake?
(Ms Hewitt) I think that is exactly what we are doing.
Rachel Squire
154. Secretary of State, picking up on what
you said about the controls being very wide and the clarity of
the legislation, you will be aware of, as we have been made aware,
the concerns of the defence manufacturers over the very wide and
broad definitions at times and their deep misgivings as to how
to identify the trigger point, as they refer to it, at which normal
marketing promotional activity steps over the line to become export
licensable activity under the proposed trade control regulations.
Can we narrow it down a little bit, where a company wishes to
sell military equipment that it owns in one overseas country to
someone in another overseas country will it have to acquire a
licence before it even begins to negotiate the sale?
(Ms Hewitt) I am afraid I think the answer to that
is, it depends, because if the activity is covered by an Open
General Licence then it will have 30 days in which to register
the fact that it is actually operating under the Open General
Licence. If it is activity that requires a licence specific to
that company then they will need to apply for the licence before
they start on it. The other point I would want to make is there
is very extensive legislation. There were suggestions that perhaps
we should not control every item on the military list when it
came to the trafficking and brokering regulations. We had a look
at that in the public consultation back in 2001 and we decided
that it would just be even more confusing if you had the whole
military list for the export controls but something rather smaller
for the trafficking and brokering controls, it would be easier
to use the whole military list for both purposes. That is why
we ended up with a law that potentially catches such a wide range
of activities and in turn you need open and general licences in
order to carve out an area of perfectly legitimate business, where
we are not particularly worried.
(Mr Williams) Trafficking and brokering, if it is
trafficking and acquisition and disposal they would need a licence
before they acquire or dispose, exactly how far in advance of
the acquisition or the disposal the law would kick in is a slightly
grey area and we would want to continue to discuss that with the
relevant parties.
155. What would your view be of a company being
able to enter into a provisional agreement relating to the sale
of equipment that it owns in one overseas country to another overseas
country before actually acquiring the licence, presumably it is
a provisional agreement being reached whilst the process of applying
for a licence is still going on?
(Ms Hewitt) What we have said is that the need for
the licence would kick in at the point where there was a commitment.
This is quite a tricky area to define in legal terms and that
is why we are out to consultation on this. We would welcome the
views of the Committee as well as the views of industry and lawyers
on it. We are looking at exactly where that requirement for the
licence kicks in, because that defines the area where potentially
there are sanctions for a breach of the law, operating without
a licence.
Rachel Squire: Thank you.
Chairman
156. Could I return to the point Mr Jones made
about record keeping, it is an issue that the Defence Manufacturers
Association were quite exercised about, your document favours
a functional approach, as you describe it, to record keeping,
so that the firm can use its own internal records to demonstrate
compliance with the legislation. Do you expect the internal records
that companies keep to be sufficient for them to demonstrate compliance
or do you think that you may have to go beyond that?
(Ms Hewitt) I would be very surprised if most companies
did not already have a pretty good system, because we are talking
about companies who depend on protecting their intellectual property
rights in very expensive R&D based technology. This is not
stuff that they are carelessly sending round the world not minding
who gets hold of it, quite the reverse. In most cases I think
they are going to have pretty tough internal controls in order
to protect their intellectual property, and for security reasons
generally. That is precisely the issue that we are exploring with
the industry at the moment because we understand their concerns.
We are talking about millions of e-mails a year within a large
company and it would be simply ludicrous to require them to log
all of that or keep physical copies of them and show them to us,
or something of that kind. Let me say, what we find in terms of
compliance with the current export control system is a very high
degree of compliance. Where there is not, where we find a company
breaching their export control licence and our enforcement people
go in generally what we find is that the company does not have
decent record keeping, it is not controlling the way that its
staff are operating. We then work with them to make sure they
put those systems in place, and in our experience that is what
they do.
Mr Lansley
157. In the partial Regulatory Impact Assessment
which you published there is what is, presumably, in this sense
a draft recommendation, which is that the estimated cost to both
business and the Government as a result of the new controls are
moderate. Just taking industry for the moment, can you just tell
the Committee what conclusions you have reached about what that
word "moderate" means in this context? There is a range
of estimates offered by industry which are reflected in individual
companies, reflected in the RIA but no quantity of assessment
is offered in the RIA.
(Ms Hewitt) We have tried to spell out in draft RIA
the extent, in other words the current number of licence applications
that we are already considering, and what kind of increase that
is going to mean, given the new system that we are putting in
place. We think that across industry as a whole applying for the
individual licences we would be looking at around £50,000,
if the number of applications increased four-fold, more obviously
if they increased more substantially. That is based on an estimate
for one company that making an application for an individual licence
is in the region of £50 per application in staff time. Obviously
if that is an underestimate, then the costs of compliance with
the new system will rise accordingly. It is exactly this kind
of issue we are consulting on in the draft guidelines.
158. You are not suggesting in your reference
to the word "moderate" that industry-wide it would be
a cost of £50,000, it would be a great deal higher than that.
(Ms Hewitt) Of course, that was simply referring to
the costs of the individual licences.
159. For example, as you say, the industry has
a record of a high degree of compliance and a record of trying
to secure a very high level of confidence in its compliance. Obviously
training is a substantial part of that. What proportion of the
employees in the defence industry would require new training in
order to comply with these new requirements?
(Ms Hewitt) I do not know at the moment and that will
vary in any case from company to company depending on how they
handle their licence applications and also what judgment we end
up reaching between us on the record-keeping issue. It is, if
I may say so, exactly this kind of more detailed information we
will get by consulting on the draft RIA.
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