APPENDIX 6
Supplementary memorandum from British
Defence Manufacturers' Export Licensing Group
We would like to take this opportunity to thank
the Committee for inviting us to give evidence last Thursday,
on UK Industry's views on the Government's proposals for the Secondary
Legislation associated with the Export Control Act 2002. We welcomed
the chance to air our views and concerns on the Government's proposals,
as they currently stand, and hope that the airing of these comments
may have helped the Committee, at least to some extent, in forming
its own views on these proposals.
Serious, probing questions were asked during
our evidence session by the Committee Members, particularly with
regard to the issue of the potential burden on UK Industry of
the proposed new controls. We would like to take this opportunity
to respond to these observations and queries:
Numbers of additional licences and burden
We would entirely agree that the proposed new
controls on intangible transfer of technology will, almost certainly,
not result in a huge number of additional new export licence applications
being raised by Industry. This intangible activity will mostly
be associated with projects for which the UK firms involved will
have export licences covering tangible/physical transfers, which
the DTI has stated will be amended/issued also to encompass intangible
transfers. Therefore, we do not envisage many additional licence
applications having to be made. There may be an issue of timing,
since licence cover for intangibles may need to precede cover
for physical exports. Since OIELs take so long to negotiate (an
average of 6 months) they may need to be preceded by SIELs to
cover intangible transfers preceding delivery of the main order.
But, at present, we do not know what scale of additional activity
this will represent. Much depends on when in the marketing to
contract to delivery process the licensing requirement is deemed
to apply.
However, this has never been our main point,
with regard to intangible transfer of technology. Government
is keen not to increase the overall volume of licence applications.
However, bearing in mind the greater potential burden of record-keeping,
particularly in relation to intangible transfers, the volume of
administration involved will be dramatically greater. It
is this burden and not just the volume of licences that is the
truer indication of the workability of the legislation.
There is evidence that the Regulatory Impact
Assessment (RIA), as published, has seriously underestimated the
ratio of intangible to tangible transfers, which paragraph 6.9
suggests might vary between 2:1 and 10:1. Even this higher figure
now, following discussions between the DTI and Industry, appears
to be very significantly too low. Intangible transfers throughout
the Defence Industry will be measured in millions annually.
Most of these will be covered by the proposed technology OGEL,
which means that it is the record-keeping requirement that
is critical. It would be quite impractical to keep records
in the detail set out in the draft orders (eg paragraph 13 of
Annex F) for transfers on that scale. In this context, it is worth
drawing attention to the last sentence of paragraph 6.13 of the
RIA:
"One company which had already implemented
a system in anticipation of the new controls found that requiring
employees to keep detailed records of each email transaction proved
to be impractical for individuals where emails are sent frequently."
Industry would wholly endorse this conclusion.
So, we were pleased to note, did Patricia Hewitt when she gave
evidence to the Committee on the afternoon of 3 April.
The issue of the potential number of additional
new licences which will be applied for, and what we believe to
be a major underestimate of the scale of this which the DTI has
made, concerns the proposed new trade controls. As Patricia Hewitt
hinted at during her evidence session, since 30 January we in
Industry have been involved in a number of detailed meetings with
DTI officials to discuss the current proposals. It has become
clear from our discussions that, when drafting the proposals,
the DTI officials did not have a clear enough perception of the
nature of UK Industry's activities which may be caught by the
new controls. Again and again we have been able to raise scenarios
arising from our normal, everyday commercial activities which
will be caught by the new controls, but which the DTI had not
taken into account when coming up with their estimates of numbers
of additional licences which will be needed. This clearly indicates
that the current DTI estimate 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. Illustration
of this, dealing merely with the activities in the UK of foreign
firms, let alone our own companies, can be made merely by consideration
of the numbers of overseas industrialists who attend major exhibitions
here in the UK, such as the biennial Farnborough International
Airshow and Defence Systems & Equipment International (DSEi)
defence exhibition, which are held in alternate years.
FARNBOROUGH INTERNATIONAL
AIRSHOW
This takes place in every even numbered year
(currently in July). The latest event was on 22 to 28 July 2002
and the next is due to take place on 19 to 25 July 2004. In 2002
there were some 1,260 exhibitors from 32 nations (635 of which
were from overseas) and some 290,000 attendees, including 44 military
delegations and at least 15 other overseas delegations. Overseas
exhibitors came from the following countries outside of the proposed
scope of the OGTL: Brazil [2 exhibitors], Chile [1], China (PRC)
[3], Czech Republic [9], Israel [2], Korea (RoK) [1], Lithuania
[2], Poland [4], Romania [9], Russia [40], South Africa [1], Singapore
[3], Switzerland [8] and Turkey [2]. In addition there were some
291 US exhibitors (whom we note merely in response to the NGOs'
proposal to remove the USA from coverage of the proposed OGTL).
DEFENCE SYSTEMS
AND EQUIPMENT
INTERNATIONAL (DSEI)
This takes place in every odd numbered year
(currently in September). The latest was on 11 to 14 September
2001, and the next is due to take place on 9 to 12 September 2003.
In 2001 there were some 664 exhibitors from 21 countries (50%
of these exhibitors were foreign firms), and 15,000 visitors from
68 countries, including 59 official delegations from 45 countries.
For 2003 we understand from the organisers that some 900 exhibitors
and 25,000 visitors are expected to participate. In 2001 overseas
exhibitors came from the following countries outside of the proposed
scope of the OGTL: Israel [10 exhibitors], Singapore [2], South
Africa [27], and Switzerland [2]. In addition there were some
46 US exhibitors.
All of these overseas visitors at the above
events will have to ensure that they have adequate trade licence
cover from HMG to allow them to undertake their commercial activities,
discussions and negotiations which are the cornerstone of these
exhibitions in the UK. It is inaccurate to believe that all that
takes place at such exhibitions is merely "general advertising
or promotion", as exempted from licensability under the DTI's
proposals. We believe that much commercial activity which takes
place at such events (eg carrying forward negotiations or the
signing of contracts) will be caught by the intended provisions
of 4.1, 4.2 and (especially) 4.3 of the proposed Trade in Controlled
Good (Control) Order. In addition, we understand from the DTI,
that exhibition organisers for the above events could require
trade licences for any meetings that they arrange between the
overseas delegations and the non-UK exhibitors, at the request
of either party. Therefore, just in terms of additional licensing
work associated with trade shows in the UK alone (which is just
a very small area of affected activity), we would argue that the
DTI's estimated figure of 250 additional trade licences per annum
is wholly inadequate.
The sheer complexity of modern global business,
and the potential impact of the proposed trade controls on this
can perhaps be exemplified by the attached (at Annexes B and C)[25]
schematic representations from an SME Member company of the DMA.
These represent an actual case study of a business deal in which
this SME is currently involved, detailing the nature of its supply
chain relationships. The example "Trading Contract"
schematic (Annex B) 25 shows the typical linkages which would
appear on a long-term (3-5 year call-off contract), including
the links with Shippers/Freight Forwarders/Carriers etc.
As you will see, it is ever bit as complicated
as one for the larger prime contractor type programmes—with
one important exception—the overseas suppliers might well
not be on the list of approved countries and, therefore, OGELs,
OGTLs and Project Licences would not necessarily cater adequately
for such contracts. In addition, the company has produced a second
schematic (Annex C) which translates the linkages into Export
License requirements as are current, and it identifies the probable
"new" trading control impact on such deals.
Training requirements
Whilst we acknowledge that comments were made
by the Committee suggesting that we had overstated the potential
training needed by defence companies of their staff arising from
the proposed new controls, we believe that it is not wholly appropriate
to draw a linkage between the compliance needs of defence firms
and those of companies involved in the financial services sector.
Even then, it can be seen, from reports like those in a recent
edition of The Times (Insurers inundated with FSA paperwork
http://www.timesonline.co.uk/article/0,,5-637243,00.html—The
embattled life insurance industry is struggling against a mountain
of regulatory paperwork which insurers say is adding heavy costs
at a time when the finances of many companies are severely straightened)
that even this proposed option would be less than burden-free.
Again, however, much depends on what will be required of industry
to demonstrate compliance. We firmly believe that a more effective
compliance system will necessitate the training, at least to a
basic degree, of all relevant staff within companies, to ensure
that they are fully aware of their responsibilities under the
new controls. We fear that any company which was deficient in
introducing such awareness training could be regarded by the export
control compliance staff within the DTI as being in breach of
their own compliance responsibilities.
US "Trafficking and Brokering" controls
During the oral evidence session, and in particular
during the session by the UK Working Group on Arms, Committee
members were interested in discussing the export controls situation
in the US in general, and with specific regard to the USA's "trafficking
and brokering" controls. We therefore thought it might be
useful to provide some further information (at Annex A) on the
US situation from the perspective of US industry and UK industry
involved in the US. It might also be worthwhile, in the context
of US brokers, pointing out that the Committee heard evidence
from the NGOs that there are 250 brokers registered under ITAR
(we understand from a US legal contact that the latest figure
is, in fact, some 280). This serves to quantify the extent to
which the US regulations are disregarded, unless one actually
accepts that Worldwide there are only 250 entities trading in
US defense articles who are caught by the provisions of the US
regulations! One US legal contact has pointed out to us that,
strictly speaking, any US legal firm or lawyer which gets involved
in ITAR-related business should be registered as a broker under
the US regulations in that they undertake activities on behalf
of clients to facilitate trade. However, we understand that, in
fact, there are, at present, NO US legal firms registered
as brokers. One major reason for this is that the US requirement
for all registered brokers to have to complete and return full
annual reports of their activities would completely compromise
and breach the attorney/client privilege of confidentiality. If
the US legal profession holds the US regulations in such contempt
(apparently imperviously), this seriously undermines the proposal
to use their control system up as a model. Far from being a model
of how it should be done, the ITAR demonstrates what happens when
such controls are not introduced in a meaningful way.
We hope that the above additional comments may
be of interest to the Committee.
Annex A
COMPANY A—UK
FIRM WHICH
HAS A
MAJOR US PARENT
COMPANY
We very concerned over the wording of proposed
legislation in this area. We have similar issues as a result of
the US version. Our Corporate HQ guru actually sent me the following
advice:
"The law that caused section 129 of the
ITAR to be written (Arms Export Control Act) is truly a horrible
piece of legislation. Section 129 is less restrictive than the
law. Having read the law I do not see how it could ever be enforced
as written. Its original purpose was to have a law that would
capture those that put together arms deals for the bad guys. It
got out of hand and was enacted without the defense industry commenting.
The last thing you need in the UK is anything that looks like
that piece of crap. We are registered as a broker with ODTC, more
CYA than anything else."
Training costs are similar to those we guesstimated
for Intangible Exports, which came out as:
— Awareness training for all staff
£30k
— Detailed training for key staff £15k
— Record keeping set up cost £50k
We do not really regard ourselves as a Broker
but, if the legislation is poorly worded, we could get caught
when our Business Development staff pass on leads to other Companies
in our group. Clearly, our Companies based in the US could be
caught by this when present at Farnborough International, DSEi,
etc.
COMPANY 2—A
US LEGAL FIRM
WHICH SPECIALISES
IN EXPORT
CONTROL ISSUES
The "trafficking and brokering" controls
are almost certainly the least understood and, as a result, least
observed aspect of the ITARs.
The test for a broker under ITAR Section 129.2(a)
is whether the person acts as an agent for others in negotiating
or arranging contracts, purchases, sales, or transfers of defense
articles or defense services in return for a fee, commission,
or other consideration. ITAR Section 129.2(b) defines "brokering
activities" as acting as a broker as defined in ITAR Section
129.2(a), including the financing, transportation, freight-forwarding,
or taking of any other action that facilitates the manufacture,
export, or import of a defense article or defense service, irrespective
of its origin.
Under the ITAR, a "broker" includes
any US person, wherever located, and any foreign person located
in the United States or otherwise subject to the jurisdiction
of the United States who engages in the business of "brokering
activities." ITAR Section 129.3(b)(3) exempts air carriers
and freight forwarders who merely transport or arrange transportation
for licensed USML items, as well as banks and credit companies
that merely provide commercially available lines or letters of
credit. However, banks, firms, or other persons providing financing
for defense articles or defense services are covered if they or
their employees are directly involved in arranging arms deals.
Certainly, any US or foreign person who brokered
an arms transaction for a commission while attending a US arms
exhibition would fall under the very broad net these regulations
cast. Indeed (and please don't laugh), the phrase "any foreign
person . . . subject to the jurisdiction of the United States"
arguably covers even non-US citizens brokering an arms transaction
involving solely non-US defense articles, if the transaction would
materially affect the national security or foreign policy of the
United States. The coverage of ITAR Part 129 is so "grey"
that some US commentators argue that even a foreign consultant
under a non-contingent retainer to a US defense firm to advise
on the defense needs of his or her country is a "broker"
for purposes of ITAR Part 129 because the consultant is ultimately
facilitating specfic arms transactions for a fee, although the
consultant may never actually communicate with any one within
his or her government about the company's products.
COMPANY 3—US
LEGAL FIRM
(EXTRACT FROM
AN ARTICLE
IN THE
BERKELEY JOURNAL
OF INTERNATIONAL
LAW, IN
2001)
Since the enactment of the Brokering Amendment,
however, not one individual or company has been prosecuted or
even indicted for a violation. This may be due, in part, to the
law's novelty, but the statute suffers from at least three major
impediments to holding violators accountable: (1) inadequate and
ineffective procedures for administering the law; (2) practical
challenges of enforcement; and (3) a specific intent requirement.
As the law is currently being offered as a model on which other
governments and international institutions could base their own
brokering regulations, an analysis of the US law's weaknesses
is timely . . . Even if government agencies were set up to implement
the brokering law, these agencies would not solve the problem
of extraterritorial enforcement.
The Brokering Amendment likely provides for
extraterritorial enforcement and comports with the constitutional
requirements. Nonetheless, the need for overseas investigations
and extradition makes extraterritorial enforcement practically
impossible . . . Constitutionality aside, extraterritorial jurisdiction
remains difficult to enforce. One reason is that there are no
guarantees that other countries will accept jurisdiction. In response
to extraterritorial enforcement of US antitrust laws, for instance,
many countries enacted statutes blocking US attempts to gather
information and evidence abroad. A US official has suggested that
some smaller countries may perceive US extraterritorial enforcement
of brokering laws as an unfair imposition of US laws . . . Another
reason for the difficulty of enforcement is that indictment for
a brokering violation requires evidence of the crime. Where brokering
occurs outside US borders, the US Department of Customs may have
to conduct investigations abroad to gather enough evidence to
support the indictment. Although tools for overseas investigation
do exist, their scope is limited and they leave much of the investigative
process to informal information exchange. For example, the International
Criminal Police Agency (Interpol) maintains several databases
on arms trafficking. Member countries use the databases to locate
fugitives, yet Interpol generally does not conduct independent
investigations of potential arms export violations or other criminal
activities . . . Enforcing the brokering regulations extraterritorially
also requires extradition of brokers indicted for violations.
Extradition can only occur when the following conditions are met:
(1) the US has jurisdiction over the subject matter and the person;
(2) the US has an extradition treaty with the country to which
the request is submitted; (3) the treaty lists the offense with
which the individual is charged as extraditable; and (4) double
criminality exists, ie the offense is a crime in both the requesting
country and the country receiving the request.
COMPANY 4—US
LEGAL FIRM
SPECIALISING IN
EXPORT CONTROL
ISSUES
Figuring out the nitty gritty—how and
when you must to comply with the brokering provisions in the context
of your business—was extraordinarily difficult. The writing
and structure of this provision is so horrendously twisted a regulatory
scholar could write a treatise on what these few pages could possibly
mean. Rather than figuring it out, many companies coped instead
by dismissing the provisions out of hand as inapplicable to them
with a "we're not brokers" attitude.
11 April 2003
25 Not printed. Back
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