APPENDIX 2
Memorandum from the British Defence Manufacturers
Export Licensing Group
The British Defence Industry has always strongly
supported the fundamental principles behind the necessity for
export controls, and absolutely recognised the need to restrain
the proliferation of military and dual-use technology to potential
undesirable customers around the World. No responsible company
would question the essential need for the UK to have a proportionate,
targeted, effective and efficient export control system, to ensure
that licensable goods and technology do not get into the wrong
hands, and for the need for our system to be able to meet modern
needs. We have also welcomed the efforts at improved efficiency
that the Government has made in recent years to reduce the bureaucratic
burden associated with export controls, both on itself and Industry,
whilst in no way undermining the effectiveness of the UK's export
control system, mainly through increasing the scope of open licensing.
Thus, Industry has warmly welcomed and supported the British Government's
efforts to try to undertake a comprehensive overhaul to bring
the UK's export control system up-to-date, through the introduction
of the Export Control Act 2002, and to seek to introduce controls
which are intended to enhance its ability to curb the activities
of irresponsible proliferators.
It was observed when the Government published
its proposals for the Primary Legislation, in Summer 2001, that
"the devil would be in the detail" with regard to the
Export Control Act 2002. Now that the draft Secondary Legislation
has finally been published by the DTI, for public consultation,
our initial reaction to what is being proposed is one of considerable
alarm. We have grave concerns about the potential competitive
implications for UK Industry of the Government's proposals as
they currently stand, which, if not addressed, we believe could
be disastrous. Comments have been made to the DMA by a number
of the export control experts within its Member firms that, in
many areas, what is being proposed by the Government is "unworkable"
and "impractical". These experts have hands-on, practical
experience of making export controls work "at the coal face"
as practitioners, and we believe that their observations need
very careful consideration and cannot be dismissed lightly. We
believe that the potential problems stem from a lack of awareness
of how Industry operates routinely in the modern commercial World,
as well as the actual practicalities of export control. As a result,
the potential implications for the normal commercial activities
of legitimate UK firms of what is being proposed have not been
taken sufficiently into account. There is a clear necessity for
the new legislation to strike a sensible balance between control
and the facilitation of legitimate business. Achieving this balance
is not just important to Industry, but also to the Ministry of
Defence (UK), by whom Industry is increasingly being engaged to
support our Armed Forces as close to the front line as possible,
and, through the use of PPP/PFI arrangements, sometimes, and increasingly,
actually owns the defence materiel being used. There is a risk
that the legislation, as drafted, could severely constrain the
future provision of such support by Industry.
Amongst our many concerns with what is currently
being proposed in the draft Secondary Legislation, are the following:
Clarification: Industry needs clarification
on many aspects of the legislation to make potential implementation
clearer and workable, and to avoid unintended consequences, such
as inadvertent illegal activity or legal action being taken against
perfectly responsible British or overseas firms with operations
here in the UK. Industry is deeply concerned that the draft Secondary
Legislation is phrased far too vaguely and loosely, and that Industry
would be relying on a pragmatic and common-sense approach by Government—a
situation which is not reliable in business terms and which would
seriously undermine the competitiveness of our Industry. The fundamental
issue for Industry is "when do I need an export licence and
how do I go about trying to obtain and use one?" Clarity
on these issues is essential to encourage and facilitate compliance
by companies and their staff, and this is seemingly totally missing
from the draft proposals. As one example, there are deep misgivings
within Industry as to how to identify the "trigger point"
at which normal marketing/promotional activity steps over the
line to become export licensable activity under the proposed trade
control regulations. The issue of a "trigger point"
also affects the intangible transfer of technology issue, as staff
will be required to make subjective interpretation on what information
is and is not export licensable. Equally, it is noted that a trade
licence should be sought before a company enters into a commitment
to undertake a deal, but there is no guidance as to how far prior
to a commitment such a licence would be required. Similarly, the
phrase "do any act" (page G.3; 4.3) is so completely
vague as to capture, potentially, a multitude of normal commercial
activity. Also, does "fee, commission or other consideration"
(page G.3; 4.3) include normal employee wages of company staff?
Resources: Industry needs a proper assessment
of the potential impact of the new legislation, both on itself
and on the Government's own resources, to help scope and manage
the enforcement of the legislation. Industry is deeply concerned
that the open-ended and loosely phrased nature of the legislation
means that the impact assessment provided is woefully inadequate.
There is a very real danger that the current proposals could result
in the law-abiding vast majority of UK defence companies totally
overwhelming the export control system with licence applications
or records, in their efforts to maintain the Industry's enviable
record of commitment to export control compliance. There would
not be not enough civil servants in the whole World to deal with
the sheer volume of export licence applications and data this
would generate in a time that would be meaningful in international
business terms. It seems more likely that the accumulation of
vast quantities of data in support of entirely legitimate business
activities would completely overwhelm the system and distract
officials from transactions of genuine concern, rendering the
controls ineffective in the desired aim of attempting to curb
the activities of irresponsible proliferators.
Burden and Training: The new Intangible
Transfers of Technology controls will essentially mean that everyone
within the UK Defence Industry with access to a PC, fax machine
or telephone will need to receive export control training to ensure
their awareness of their responsibilities under the new legislation.
This training will have to be sufficiently adequate to enable
them to be able to make judgement calls about what is and what
is not export licensable. In reality this is virtually everyone
in the Industry! So, effectively the legislation will require
the entire 310,000 in the Defence Industry, plus those in the
other affected industries, plus staff in those overseas firms
who will also be affected, to be trained. As an example, all of
the above will need to become familiar with the complexities of
the UK's Military List—not an easy task, in itself. This
will impose a huge burden on Industry. This will not represent
a one-off training activity. Average annual staff turnover in
the UK economy is 27%, which means that 27% of the employees would
need retraining every year. For larger UK companies, the cost
of training is going to be a major cost issue. However for smaller
companies it is also one of practicality. Many SMEs simply do
not have the staff or resources to manage such training requirements.
Also, the technology safeguards to filter and manage emails and
record phone calls is not a responsibility that the average SME
could assume lightly. Companies will also have to set in place
extensive training programmes for their staff to familiarise them
with the regulations.
IT Requirements: Some concern has been
expressed by IT experts that the Government's proposals might
be totally unworkable or "technically impossible" in
practice. Companies cannot rule out the possible need for simultaneous
re-accreditation of their classified systems by the relevant government
agencies, and are concerned as to whether these agencies can cope
with this potential workload within the proposed timeframe available.
Controlling electronic transmission of information raises practical
problems: with today's IT the sender of information will not necessarily
know the geographical location of a recipient, so inadvertent
non-compliance is inevitable without procedural controls which
would severely impact on the efficiency of the business as a whole.
Similarly, if a businessman logs onto his e-mails
whilst overseas, then, technically, if any of these e-mails involve
any relevant technology, he could be committing a criminal offence.
Coverage of intra-company transfers, as proposed within the draft
Secondary Legislation, will cause unacceptable practical difficulties
for companies. These difficulties arise from the fact that even
if we aim to ensure that only specific individuals have access
to licensable information—an aim that can only be achieved
by an extensive training and awareness campaign, as noted above—we
cannot guarantee with modern IT systems the geographical location
of the individual recipient when he or she accesses it.
Offset: Offset is one major aspect of
normal commercial activity, which is going to be caught by the
proposed new controls. Offset, where a customer demands manufacturing
or design work in their own country in return for buying the product,
is an integral aspect of the modern global defence industry, and
is increasingly spreading into the non-defence commercial sector,
too. Offset will be caught by the trade control dimension of the
new legislation. In reality, an overseas company that is sending
parts to another nation for a product which is governed by the
legislation because some aspect of the deal is related to a UK
company, will not care about seeking a UK license if they have
the necessary licenses from their own country. This particular
aspect makes the law totally unworkable.
Support for UK's Own Armed Forces: The
Consultative Document is not clear as to whether the new licensing
requirements will cover goods operated but not owned by the Crown,
for example equipment hired, leased or made available under PPP/PFI
arrangements. Would it cover technical information made available
to Crown employees for the support of UK equipment deployed overseas?
Or to private sector personnel carrying out the same function?
If the position is not clarified, there could be problems not
only with the intangibles controls, but also with those relating
to trade and to WMD, which do not appear to exclude the UK's own
capabilities in this area when stationed overseas, and those relating
to trade. It would be very unfortunate if UK company employees
were deterred from giving British forces deployed overseas the
support they would expect through fear of breaches of our own
laws. The whole issue of "Crown Exemption" has been
an increasingly difficult one for UK Industry for some time now,
and it would appear from the Government's proposals that the new
legislation might well make this situation even worse. For instance,
if an MoD technician seeks advice or parts from someone in the
UK on a leased piece of kit, it is possible that this "transaction"
would require a license, causing potential serious delays and
compromising the UK's effectiveness in the field. The complete
lack of any mention throughout the draft Secondary Legislation
of the complicated issue of "Crown Exemption" could,
if not addressed by the Government, result in an inability of
UK Industry to provide the essential expeditious support needed
by our own Armed Forces in overseas deployments in the future.
What we are presented with is an apparent dichotomy between a
national defence policy which requires Industry to support our
Armed Forces as close to the front line as possible (including
in the PPP/PFI continued ownership of the materiel being used),
whilst at the same time seeking to constrain that same Industry
through additional, burdensome regulatory control mechanisms.
This position is totally insupportable and could have grave consequences
for all concerned. There is a clear incompatibility with Industry
being asked to offer the MoD increasing logistics support, whilst
at the same time being subjected to ever tighter controls. When
the MoD is operating outside the UK, notably in or near hostile
areas (Iraq) the new export control regulations seemingly actually
forbid Industry sending (contractual) electronic support without
preparing licenses (+/- six months delay). This issue must be
clarified.
Record Keeping: Record keeping will have
a major cost impact and cause a reduction in efficiency and productivity
resulting in increased costs and leading to a lack of competitiveness.
To have to log all telephone conversations, e-mails and faxes
would add further cost and make the situation farcical. A pragmatic
approach is essential.
UK Industry's Ability to Support its Customers:
Product support is a major element of modern Industry's business
and is already severely hindered by export licence complexities
and bureaucracy—this will increase exponentially under the
proposed new controls.
Proposed Interim Period: We believe that
the proposed three month interim period for the introduction of
the new controls on intangible transfer of technology is totally
inadequate, as:
— For larger organizations, training
would take well in excess of three months (large primes would
probably require about 12 months).
— Some organisations will require new
IT hardware to conform (requirements specification, tendering,
purchase and installation cycle will all take much more than three
months).
— Some organisations will require (DSSO)
accreditation to operate under the new systems. Practical experience
clearly demonstrates that this is impossible in less than six
months.
Cost: Industry is very concerned about
the potential cost of implementing the legislation as drafted.
The need to keep records of individual transactions, which could
be numbered in tens, even hundreds, of thousands a year for larger
companies, and to retain them for at least three years, will unquestionably
require expensive changes in company systems. The staff training
requirements will impose a major, and continuing, cost burden
on companies. The cost to Government must surely also be considerable.
Overall Effect: Competitiveness will
be lost and nothing will be gained. The new export licence regime
will be prohibitively expensive and will cost jobs, tax revenue
and the undermine the existence of the UK's strategic defence
industry. In addition essential defence, police and counter-terrorist
technology and equipment designed for defence and civil defence
will not be available to the UK and its allies and their citizens.
The new regime will be costly, bureaucratic and impossible to
administer. A combination of these issues will inevitably diminish
the UK's world standing and hand a valuable market to competitors.
These are just some of the concerns that have
been expressed to the DMA by its Members, and other companies
within the UK Defence Industry, which we believe need to be addressed
in the framing of the final version of the Government's Secondary
Legislation, for the new control regime to be effective and workable.
We believe that it is essential for the Government to re-visit
the fundamental raison d'étre behind the proposed new controls,
and to ensure that the new regulations are actually concentrated,
effectively, on the targeted activities of greatest concern. At
present the DTI's proposals are so huge in scope as to be potentially
all-encompassing for a vast swathe of normal legitimate commercial
activity undertaken by responsible firms. This will create a much
wider-ranging impact than we are sure was originally envisaged,
when the new controls were first proposed. This will bring the
new legislation into disrepute, and deeply undermine its effectiveness
in dealing with those activities that we all want to see controlled
and curtailed. It is in no-one's interests, except possibly those
of the irresponsible proliferators, if the new controls do not
work effectively in practice, and to control illicit activities
what are needed are simple, clear, focused and concise regulations—Industry
simply does not perceive the Government's current proposals as
achieving this.
10 March 2003
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