House of Commons - Foreign Affairs

Select Committee on Foreign Affairs First Joint Report

5 MINIMISING THE BURDEN ON BUSINESS

67. Industry's initial reaction to the Government's consultation document has been strongly stated. The Defence Manufacturers' Export Licensing Group (DMELG), representing exporters within the Defence Manufacturers' Association (DMA), has written of its "grave concerns" about the proposals and claims that they "could be disastrous".[67] These concerns focus on the resource implications of the proposals, rather than the principle behind them.

68. We are sympathetic towards the needs of industry and have no desire that it should be swamped by unnecessary bureaucracy. We also agree that there are areas of the Government's proposals that are unclear and that could be usefully refined. It is in everyone's interests to devise a system of control which targets as effectively as possible irresponsible proliferators, without imposing an intolerable burden on industry more generally. But industry cannot reasonably expect an extension of the Government's export licensing system to impose no burden at all.

69. We investigate in this section the extent to which industry's concerns are justified. We look first at the question of clarity: what do the proposals actually mean for business, and is clearer definition desirable on the face of the legislation? We then turn to the Government's proposals for open licensing, which are intended to reduce some of the burden on business of applying for individual licences. Record-keeping will be a requirement under open licences, however: how can this be carried out in a way that meets the information needs of the Government without leaving industry having to log every e-mail? There are particular problems with electronic communications in knowing when an export is taking place: how can these be resolved? How will the controls work in practice at events such as trade fairs? What will be the training implications of the new controls for industry? Are the proposed timetables for the implementation of the legislation appropriate? Finally, is Government resourced and ready for the increased administrative burden?

Clarity

70. Lack of clarity is one of industry's principal concerns about the Government's proposals.[68] The DMELG claims that the proposals are "phrased far too vaguely and loosely", and that industry would be unhappy about "relying on a pragmatic and common-sense approach by Government".[69]

71. Industry and the public rely on a pragmatic and common-sense approach by Government in many areas of life. We fail to see why such an approach should be undesirable here: it is, after all, hardly in the Government's interests to be overburdened with bureaucracy or to make life impossible for legitimate British business. Our strong impression from the oral evidence that we have heard from the DMELG is that industry is being unnecessarily worried by its lawyers about the nature and number of transactions that will be licensable under the proposals.[70] But we agree that there are a number of grey areas in the consultation document. Industry is entitled to have a clear answer to its main practical question: "when do I need an export licence and how do I go about trying to obtain and use one?".[71] Further guidance to industry would be not only reassuring but useful.

72. Industry's concerns about lack of clarity centre on the proposals for new trade controls. The Government estimates that it will receive 100-250 individual trade licence applications annually.[72] The DMELG, however, believes that this "greatly underestimates the number of licences which will have to be sought, not only by UK Industry, but also by overseas business visitors to the UK".[73]

73. The controls that the Government will apply to brokering activities are at the heart of this disagreement.[74] Under these controls, a licence would be required:

for transfers of controlled goods between two overseas countries,
for arranging or negotiating a contract for a transfer (or even agreeing to arrange or negotiate a contract), and
for doing or agreeing to do "any act … calculated to promote the arrangement or negotiation of a contract".[75]

74. The net of control is cast so widely in order to catch those involved in undesirable brokering activities—such as putting a supplier of small arms in touch with the representative of a rebel group. But an enormous range of legitimate activity could also potentially be caught. As one of our witnesses from the DMELG told us by way of example: "If you agree in principle to a percentage, or even a fixed number, in terms of values of an offset agreement, what I do not believe is clear from the consultation document is whether that has moved us from marketing to trading and whether therefore a licence is required".[76] It would certainly seem unnecessarily restrictive to require a company to obtain a licence to conduct preliminary negotiations, on offset for example, where the outcome of those negotiations was contingent on a final agreement involving the export by the same company of military equipment from the UK, which would itself require a licence.

75. The Government needs to ensure that the new controls are broad enough to catch undesirable brokering activity. But it is also essential to minimise the burden on legitimate industry. It is probably impossible to make the controls on trade any more specific without also opening loopholes to those the law is targeted to catch. Open licensing can be used to exempt transactions of little concern, as we discuss below.[77] But while industry is entitled, indeed needs, to know the "trigger point" at which a licence will be required in a variety of circumstances, this will often best be achieved through discussion and guidance. Some meetings have already taken place between Government and industry on the consultation document.[78] These would be an ideal forum to inform such guidance. We recommend that the Government, in cooperation with industry, should draw up clear guidelines on what transactions will and will not require a licence under the new controls. We further recommend that the Government should seek to ensure through these guidelines, and legislative refinement if necessary, that the number of additional individual licence applications received under the new controls remains within reasonable limits.

Open licensing

The Government's proposals

76. The Government has indicated its intention to use open licensing to ensure that individual licence applications are kept to a minimum.[79] The existing Open General Export Licence (OGEL) for military technology will be extended to electronic transfers of technology.[80] We can see no possible objection to this. In addition, the Government proposes to introduce an Open General Trade Licence (OGTL),[81] covering trade to and from a number of countries selected on the basis that they have "robust and long developed export control systems" and that they basically follow the same core principles as the UK and the EU.[82] Trade in torture equipment, land mines and long range missiles, and to embargoed destinations, would not be covered by the OGTL. But there would be no need to apply for a British licence to export machine guns from the USA to India, or to put a supplier of ammunition in South Africa in touch with a potential client in Japan.

77. The UKWG has taken issue with the list of countries included in the OGTL. It is concerned at "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 and the CAAT also believe that the OGTL should not cover trade to countries which, although not under embargo, give rise to human rights or diversion concerns.[83]

78. It is true that the United States, for example, allows the export of main equipment, such as tanks and fighter aircraft, to Israel, where the British Government would not. But we do not believe that it would be reasonable to subject British citizens to the stringent, if slightly different, export control requirements of two countries. It would also risk being impractical, given the extent of trade between the USA and the United Kingdom. The legislative proposals should aim to ensure that the trade in arms cannot escape regulation, not to impose British principles on the rest of the world. We conclude that where trade is already subject to robust and principled regulation abroad, it would be superfluous, bureaucratic and potentially anti-competitive to subject UK citizens and companies to the requirements of a second regulatory system. The basis on which the Government proposes to introduce an Open General Trade Licence seems to us to be sound.

79. We raised in evidence the question of why Switzerland was included as a permitted destination on the OGEL for technology, but was not included in the OGTL.[84] There may be sound reasons for this distinction, but we recommend that the Government explain in its response to this Report why it might be appropriate to include a country as a permitted destination on the Open General Export Licence for technology, but not on the Open General Trade Licence, or vice versa.

80. The OGTL is to include trade to and from all EU member states. While we have no objection to current EU member states falling within the scope of the OGTL, we are less certain of the robustness of the export control systems of a number of the countries due to join the Union in 2004. We recommend that new EU member states should only be included in the Open General Trade Licence when their export control systems reach a state of robustness comparable to that of existing member states.

Blue skies

81. An inventive use of open licensing will be desirable where this can ensure that legitimate business is not unfairly hampered by the strict controls designed to deter irresponsible proliferation. While companies will presumably have little trouble in acquiring open licences for the exchange of technology and equipment with partners, regular collaborators, and established clients, the danger is that the requirements of an extended licensing system may place British industry in an uncompetitive position when seeking to acquire new clients. If a British company is unable to make any commitment to a potential client without going through the process of acquiring a licence, the likelihood is that the client will go elsewhere. We recommend that the Government should consider how open licensing might best be extended to minimise the regulatory burden on legitimate business, and in particular to ensure that new business is not lost.

Record-keeping

82. The Government will require those conducting activities under open licences to keep records of those activities. The Government used the consultation period to invite views on how record-keeping should be approached for each of the new controls. It suggested two options:

a) a prescriptive approach—this would extend the current requirements for the physical export of goods, which set out exactly what records companies are required to keep and the form in which they are to keep them; or

b) a 'functional' approach—this 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.

83. The Government, recognising that there is a "trade off between flexibility and lightness of touch on the one hand and certainty for industry on the other",[85] favours the 'functional' approach, which it believes would "minimise the compliance costs for industry by allowing it to utilise records kept for business/operational purposes to demonstrate compliance with licence conditions".[86] We are inclined to agree that a prescriptive approach to record-keeping would be an unnecessary burden on business.

84. The question, however, is whether a 'functional' approach can be made to work to the advantage of both Government and business. Industry is by no means certain that this system will be as cost-free as the Government hopes:

85. The Government sets out in its legislative proposals the detail that will need to be identifiable from records held under a 'functional' system.[88] We were told by the DMELG that the detail specified is "fairly prescriptive and, if these were to be the requirements, then I think the cost burden on industry would be considerable".[89]

86. The Government's basic premise is that the records companies keep for their own purposes will also fit the Government's requirements. The Secretary of State is no doubt right that companies "are going to have pretty tough internal controls in order to protect their intellectual property, and for security reasons generally".[90] There can be little doubt that companies keep records: the question is whether these fulfil all of the Government's requirements.

87. We welcome, and we are sure that industry also welcomes, the Secretary of State's assurance that there is no question of the Government requiring industry to log e-mails or keep physical copies of them.[91] We also welcome the ongoing talks between the Government and industry on the question of record-keeping.[92] We trust that industry and Government between them can devise a pragmatic system for record-keeping which is both sufficient to show compliance and avoids imposing an unreasonable burden on industry.

88. The requirements for 'functional' record-keeping do not appear to have been adapted to the new sorts of activity that are being recorded. As one witness put it to us, "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".[93] Under the Government's 'functional' approach, the records held would need to show "the quantity of the goods"[94]—but this is a meaningless requirement for intangible technology, and, even in the case of a physical transfer, not necessarily something that a broker could be expected to know. We recommend that the Government should look again at the record-keeping requirements for intangible transfers and brokering, to ensure that they are relevant to the activities being recorded.

Intangible exports

89. While there is no room for mistake about when physical goods leave the United Kingdom, the situation is less straightforward for information held or sent electronically. E-mail can be accessed around the world. As the DMELG suggests, under the new controls a businessman logging onto his e-mails overseas could be committing a criminal offence.[95] Companies in the UK may share electronic data environments with operations or partners in other countries.[96] Industry is concerned that "inadvertent non-compliance is inevitable without procedural controls which would severely impact on the efficiency of the business as a whole".[97]

90. The moment of export of technology is not necessarily a sensible trigger point at which a licence should be required; it is rather the moment at which the technology is passed on to a third party. It would be absurd if a company employee at a trade fair in India could not communicate freely with colleagues in the UK; but it would be equally absurd if there were no sanction on an employee located abroad who passed on licensable technology to other people in the same country.

91. The problem with licensing technology in the same way as physical exports is that technology is a matter of knowledge, rather than of material substance. Does it constitute an export if a person travels abroad with technical knowledge in their head, which they then divulge to others? While the reading out of the contents of a document over an international telephone line would be a licensable activity, reciting overseas the memorised contents of the same document would appear not to be. This is illogical, and could in certain circumstances be a potential loophole.

92. A possible solution would be that technology should become licensable not at the moment of export, but at the moment that it is provided to a third party—although we are not certain whether it would be possible to implement this solution within the terms of the Export Control Act. We recommend that the Government should consider licensing transfers of technology by reference to the status of the recipient of the technology rather than merely by reference to their location.

Trade fairs

93. The Government recognises that its proposals need to take special account of trade fairs in the United Kingdom, which, as the Society of British Aerospace Companies (SBAC) notes, are of importance both to industry and to the national economy more generally.[98] Trade fairs are likely to put the Government's new system of controls to the test, both because of the quantity of business contact that occurs at such events and because many of the participants will come from, and be about to return to, a wide variety of third countries.

94. The DMELG notes that recent trade fairs in the UK have involved a large number of exhibitors from countries outside the proposed scope of the OGTL,[99] and argues that:

100

95. Trade fairs are the most obvious situation in which foreign nationals will be brought within the jurisdiction of the Government's new controls. But, as the SBAC points out, it may not be practicable for the Government to enforce these controls over foreign nationals who are only fleetingly present in the United Kingdom:

101

96. Under the Government's proposals for trade fairs, three options are presented, two of which would not require foreign visitors to trade fairs to fulfil the same record-keeping requirements as British exhibitors.[102] Both industry and NGOs seem agreed that treating foreign visitors differently from British residents would be a bad idea. The SBAC believes that this could lead to a British company arranging for an overseas entity to book and staff its stand in order to avoid the Government's record-keeping requirements—which would certainly be an absurd outcome.[103] The CAAT, meanwhile, is concerned that a lack of regulation of overseas visitors "seems to foreshadow national boundary and arms fair hopping by arms companies and dealers".[104] We are not convinced that the Government has fully considered the implications of these proposals for British citizens working abroad: why should the record-keeping requirements be different for visitors to the United Kingdom with British nationality than for foreign visitors? We recommend that the Government should ensure that foreign visitors to the United Kingdom are brought effectively within the scope of the new controls in respect of record keeping in as much as this is possible.

97. There is a danger, in the SBAC's view, that the new regulatory environment will mean that business is simply taken abroad.[105] The ECO proposes to work with the organisers of trade fairs to ensure that participants are fully aware of the new licensing requirements—which we welcome. But while exhibitors will almost invariably know in advance what physical equipment they will be bringing to such fairs, they will surely not always know what business opportunities may arise in conversation, or what deals they may wish to strike while at a fair. We recognise the great importance of trade fairs to the British defence industry. We conclude that there is a danger that the new regulatory framework will make it difficult for participants at trade fairs in the UK to take advantage of spontaneous business opportunities, and therefore that the Government needs to ensure that its licensing system does not prevent such events from flourishing. We recommend the broadest appropriate use of open licensing for trade fairs, and we further recommend that the Government should consider having a procedure in place at major trade fairs to expedite licence applications made at short notice.

Training

98. The burden of training is another point on which industry has been vociferous.[106] While physical exports can easily be controlled through a "choke point", controls on the transfer of intangible technology mean that "anyone within the company with access to a fax machine, telephone, computer, shared data environment or telephone conferencing facilities, can be an exporter". As a result, many more people within British companies, both based in the UK and overseas, will "have to have at least an awareness of what constitutes an export and what does not; what is control and what is not", so that they do not inadvertently break the law.[107]

99. Once again, the extent of the actual burden will depend on the Government scoping its controls pragmatically. We would expect exports within a group of companies, or among collaborators, to be covered by open licences. In other cases, we would expect that the export only of sensitive technology would be controlled, and that companies would already be training their staff to ensure that they did not allow such sensitive information to get into the wrong hands. We do not believe that, properly handled, the extension of this training would be either particularly complex or particularly expensive.

100. In view of the continuing uncertainty in respect of record-keeping and training, we expect to see prior to implementation of the controls a revised Regulatory Impact Assessment, agreed with industry if possible, which more accurately reflects the costs of compliance.

Timetable for implementation

101. The Government currently proposes to allow a 12-week implementation period between publishing the proposals relating to exports of goods and technology in their final form and the law coming into force. It believes that this period of time should allow industry to make "adequate preparations" for the new controls.[108] However, owing to "practicalities of processing licence applications" for trade in military goods under the Trade in Controlled Goods (Control) Order, the Government is proposing that there should be a 6 month implementation period for this Order.[109] Companies will be encouraged to submit applications as early as possible to prevent the disruption of their business. The ECO will aim to promote awareness and understanding of the new orders.

102. The DMELG does not believe that the proposed three-month implementation period is sufficient for the introduction of controls on intangible transfers of technology, because of the need within industry for training, new IT hardware, and possible reaccreditation with the Defence Security Standards Organisation (DSSO) of the MoD.[110] It has been suggested to us that a transitional period of a year would be more appropriate.[111]

103. We would not wish the implementation of new controls to be delayed for any longer than is necessary. But it would equally be foolish to introduce the secondary legislation before industry is ready to comply with it. We recommend that the Government should ensure that transitional periods for implementing secondary legislation under the Export Control Act are not unduly protracted, but that it should also consider representations from industry for a modest delay in implementation.

Government readiness

104. It might also be in the Government's own interests to countenance a slightly longer lead-in time for the new legislation. The Government does not have a good record in dealing swiftly with export licence applications.[112] Industry has frequently had cause to complain about the length of time that it takes to acquire a licence. An ability to respond at speed to licence applications will be even more important under the new controls. Conventional export licences are often sought once a commitment of some sort has already been made. New trade and technology licences may be required at a much earlier stage, when even slight delay is more likely to lose a potential client. The Government claims in the consultation document that "it is not anticipated that the introduction of new licensing requirements should lead to significant delays in the processing of licences".[113] If this proves to be true, it will be a welcome departure from past experience.

105. The Government's preparations for the new controls are based on its own assessments of how many new licence applications and queries these controls will bring.[114] If these assessments prove to have underestimated the volume of increased bureaucracy, it follows that the Government's preparations in terms of extra staff and resources are likely to be inadequate—as the Government is aware.[115]

106. The Government has recently been conducting a review of the licensing process, and, according to the Secretary of State, this is already producing improvements in efficiency on the ground.[116] We conclude that the efficient administration of the new controls will be crucial to their success. We recommend that the Government should ensure that it has sufficient surge capacity to deal with unexpected demand for licence applications and information, especially when the new controls are initially introduced.

67 Ev 33 Back

68 Q 45; Ev 33-34 Back

69 Ev 33 Back

70 Ev 3-4, Qq 13, 16, 20 Back

71 Ev 34 Back

72 Consultation document, Partial Regulatory Impact Assessment, para 8.1, p A. 19 Back

73 Ev 53 Back

74 Ev 1, Q 3 Back

75 Consultation document, Trade in Controlled Goods (Control) Order, section 4 (3), p G. 3 Back

76 Ev 1, Q 3 Back

77 paras 76-81 Back

78 Ev 7, Qq 31, 33 Back