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THURSDAY 3 APRIL 2003 __________ Members present: Mr Roger Berry, in the Chair __________ RT HON PATRICIA HEWITT, a Member of the House, Secretary of State, and MR GLYN WILLIAMS, Director, Export Control Organisation, Department of Trade and Industry, examined. Chairman
(Ms Hewitt) We have had a look at that, Chairman, and in particular I think it is right to say that in America, where they do have a somewhat different approach to extraterritoriality from ourselves, they do have extraterritorial controls on trafficking and brokering in everything, in all military equipment. We have had a look at it and our judgment is that it simply does not work. As far as I know there has not been a single successful prosecution under the American brokering law either for brokering offences carried out within the United States or for offences carried out overseas. There was a very interesting report last year from the Fund for Peace, which is a very well respected American NGO, it actively campaigns for tougher controls on the arms trade, and in that report they said that they were very concerned about the general ability of the American authorities to operate and enforce this extraordinarily wide system of controls. Indeed, the report went on to say that while the American law on paper is as comprehensive and as far reaching as it possibly could be, it will only ever be as good as its enforcement, and the report says the enforcement is nil. I have to say I am not interested in writing a law that looks wonderful on a piece of paper or in a headline, I am interested in a law that will actually have some practical effects. (Ms Hewitt) As I say, the American administration has a different attitude towards extraterritoriality. It is a matter that we are discussing with them at the moment on the Sarbanes-Oxley Act. The Home Office has set out very clearly guidance on when extraterritoriality should apply. We have drafted our proposals to be fully consistent with those guidelines. The idea that one would have extraterritorial controls that would require, for instance, a British citizen who has been resident in Australia for 15 years, also working for a completely legitimate company that is working in full accordance with Australian law, also to be licensed under UK law, I just do not think makes sense and I do not wish to put the overstretched resources of my department into trying to enforce something that will not make a jot of difference to the evil that we are trying to control here. Sir John Stanley (Ms Hewitt) What we are trying to do here is to extend extraterritorial controls to three categories of activity that we just want to stop completely. One is the export and use of torture equipment, and I will come back to that one in a moment. The second one is the export of military goods to embargoed destinations. The third one is the trafficking in long-range missiles. On those three categories, which may have some boundary problems, and you raised one in relation to long-range missiles, they nonetheless are fairly clear. (Ms Hewitt) I will come back to that one. We think everybody all around the world can understand very clearly that these are serious offences, that they are internationally condemned and abhorrent and, therefore, to traffic or broker in them would be something that is likely to be subject to control. Once you go beyond that into the entire category of any military equipment, including small guns, I think first of all you go way beyond the guidelines that we have set out on when we think extraterritoriality is justified, secondly you make the practical implementation of controls quite impossible, as I was indicating a moment ago. On the issue of small arms, although quite clearly a handgun can be used for the most appalling purposes, and we know very well the effects of kneecapping in Northern Ireland, we would not define a hand gun per se as torture equipment. As far as the trafficking in small arms is concerned, I think we have helped to lead the way to cope with the trafficking of small arms and light weapons. Just this year, in January we brought together representatives of governments and NGOs from around the world to work on how we can get stronger commitments to the UN programme on small arms. We are not, I am glad to say, a major exporter or manufacturer of small arms, but I would not see them as being caught within the ban on torture equipment per se. (Ms Hewitt) Well, I do not actually accept that, Sir John. We take this enormously seriously. We have put a huge amount of time and effort into thinking this through. We are out to consultation at the moment. I think we had an earlier date for this appearance and I am sorry I was not able to appear but I was very clear that I wanted to come before the Committee before the consultation on our draft Orders expired. We are out to consultation on all of these draft Orders and obviously if people come back and say "This is an incomplete list and for the following reasons you should have other things included on it" we will look at that very seriously indeed. (Ms Hewitt) I wonder whether Mr Williams would like to comment on that because I am not aware of the detailed thinking on that one. This may be partly a question of practicality. You laugh, Sir John ---- (Ms Hewitt) I think the general reason is that long-range missiles, in other words missiles defined as more than 300 k, are much more capable of being used for external aggression which we are particularly concerned with in the context of regional conflicts. It has been a central part of the criterion for arms controls that we introduce and secure agreement in Europe that the use of arms for external aggression and their use in a situation that would exacerbate regional conflict is something to which we pay particular attention. That is the background to that policy. (Ms Hewitt) Yes, of course it is. Part of the export control operation that we already have, and which we are strengthening further with this new Act, is precisely designed to limit and to prevent the proliferation of weapons of mass destruction of all kinds. Chairman: You referred to the fact that the UK is not a major producer or exporter of small arms but we are talking about brokering and that is something entirely different. We are talking about UK citizens and companies brokering deals that may result in small arms being in the hands of terrorists or conflict zones and so on. Martin, you wanted to pursue that? Mr O'Neill (Ms Hewitt) Let me just make it clear that of course the controls that we are introducing through the Act on trafficking and brokering include controls on trafficking and brokering in small arms and any other kind of military equipment where any part of the transaction, including an e-mail, a fax, a phone call, any part of it takes place within the United Kingdom. So we are catching an enormous range here. It is one way in which we are very significantly strengthening and extending the reach of our present controls. On the issue of a register of brokers, we have had a very careful look at this, and I know it is something on which the Committee has previously commented. We will be holding information on everyone who applies for a licence, both for exports and for arms trafficking and brokering activities. We will use that database for our own licensing and enforcement processes and we will share it with other international authorities so that we can get effective international enforcement. Publishing that as a sort of register of government approved brokers would not actually help to provide for stricter scrutiny of their activities. It would certainly add to the bureaucracy of the scheme, which I am concerned not to do. I just do not think that it would actually help us in the purpose for which we pass them on. Mr O'Neill: I am not quite sure that I am really in order to ask this question but I will nonetheless. Chairman: If you are not I will try and stop you, Martin, if I am able to. Mr O'Neill (Ms Hewitt) Mr O'Neill, I do not accept that. As you rightly say, you and I, and several other Members of this Committee, all fought that election on the basis of a manifesto commitment that said we would very significantly strengthen our controls particularly on trafficking and brokering, and that is what we are doing. The reach of this new Act and these new Orders is absolutely immense because not only do we have full extraterritorial controls on trafficking and brokering in relation to embargoed destinations, long-range missiles and torture equipment, we also have this new control on trafficking and brokering in any military equipment whatsoever where any part of the activity takes place within the United Kingdom. That means, and frankly we have been criticised by industry for this, a huge extension of the licensing system and the record-keeping system that goes with it for enforcement purposes to companies and activities that are completely legitimate and which I think all of us would accept as legitimate to provide for the military needs of legitimate governments. I think that is absolutely the right thing to do but I do not think anybody should pretend that this is a modest step forward that does not fulfil our manifesto commitment. It is a very, very big step forward indeed. Chairman (Ms Hewitt) I do not believe that is the case. I know that suggestion has been made, I saw it again in the Financial Times this morning. I simply do not accept that is the case because if any aspect of trafficking and brokering takes place in the United Kingdom it will be caught and if the trafficking and brokering is wholly outside the United Kingdom but is involved with embargoed destinations, torture equipment or long-range missiles then it is caught in any case. (Ms Hewitt) The thinking behind that, Chairman, is our view of extraterritoriality is absolutely on the lines, and it is a cross-government view that was set out in the Home Office memorandum, in the Home Office guidance. If one tries to go completely extraterritorial on all military equipment then what we end up having to try and catch, but in reality simply could not, is UK persons wholly living abroad engaged in entirely legitimate transactions, not involving long-range missiles, not involving embargoed destinations, not involving torture equipment, and doing so in countries that have their own controls on the export of military equipment. I do not believe that that is justified in principle, it is wholly inconsistent with the view that we take on extraterritorial legislation, it would make it impossible for us to criticise governments who we believe go much too far in their attempt to apply extraterritorial controls to our citizens and companies. I think wrong in principle and wholly unenforceable in practice. Mr Hamilton (Ms Hewitt) Because bribery of government officials is a criminal offence in just about every country in the world. It is something which is never justified. It is, quite rightly, subject to international condemnation and, indeed, to stronger international action whereas selling of small arms, although we are all rightly concerned about the use of small arms for quite appalling purposes, is sometimes justified. It is simply not the case to say that selling or brokering of small arms is always wrong, always evil and should always be prohibited. If it were we would have put it on the list of the three things that we are actually seeking to outlaw completely, but it is not, it falls within that broader category of military equipment that may be legitimate or may not be. That is where you need to have a control system and that is why we have such strong export controls but you cannot say that you are just going to ban the whole thing. Chairman (Ms Hewitt) This comes back to the point about extraterritoriality. As we say in the Home Office guidelines, extraterritoriality should apply to the most serious offences which are subject to almost universal international condemnation where everybody would know that they were committing an offence. Because in many cases it is quite legitimate and lawful to sell small arms or other military equipment it simply does not meet that definition, whereas selling torture equipment or selling military equipment to an embargoed destination quite clearly does meet those criteria. Mr Hamilton (Ms Hewitt) Bribery and broader corruption has a quite appalling effect in Africa and is responsible for a very large part of the poverty in Africa. Small arms have an appalling effect in those regional conflicts. The way we can deal with that, and as I said we are not, I am glad to say, major manufacturers or exporters of small arms, is working with the international community, in some cases through adding to the list of embargoed destinations, in which case small arms to those destinations is caught by our full extraterritorial control, in other cases by intervening to prevent the conflict in which small arms and other equipment are doing such appalling damage. Of course, that is precisely what we did in Sierra Leone. (Ms Hewitt) Yes, yes we are. Sorry, I just want double-check that. Yes, the answer is both international and national embargoes. (Ms Hewitt) I think it is perfectly reasonable that where we have a national embargo on a destination which is not itself subject to an international embargo, that is something that we publicise pretty extensively. We would say we are going to stop trading military equipment to that destination and in that situation we would want to have full extraterritoriality. It is when you move into the area of military equipment to non-embargoed destinations, which will sometimes be completely legitimate and lawful, and sometimes not, that we think we simply cannot go for full extraterritoriality for all the reasons that I have tried to set out already. Mr Jones (Ms Hewitt) We have not begun to work out in detail what it would cost, how many more staff we would need and all the rest of it, assuming we were actually going to try and enforce it. The reason why I do not think we would need to go down that path is because we have already done a partial regulatory impact assessment for what we are proposing. There are concerns, as I think the Committee will be aware, from industry that because the new controls cover every aspect of legitimate defence and military business we have under-estimated the costs: the complexity of record-keeping and all the rest of it. That is one reason, of course, why we are consulting both on the audit and on the regulatory impact assessment. What is crystal clear is that if you were to go for full extraterritoriality of everything then the costs would escalate very, very fast indeed. Mr Lansley (Ms Hewitt) As I have tried to indicate, I think this is a matter both of principle and of practical enforcement. As far as the principle is concerned, this is about where it is right to apply extraterritorial controls. The Home Office guidance talks about serious offences subject to general international condemnation where the offender could reasonably be expected to know that was an offence. There will always be some boundary problems here but it seems to me that in the case of a national embargo, although by definition that is not an international embargo, it is quite legitimate for us to say that for a UK citizen anywhere to breach a UK embargo is a serious offence and one to which extraterritoriality should apply. I think it would be a bit odd to have a national embargo and a system of extraterritorial controls and not to marry those two things together. That is something that we can explore further in consultation but I feel quite comfortable with putting the boundary there rather than saying it is only in the case of European and international embargoes. Ann Clwyd (Ms Hewitt) I think, as I said earlier, there is right across the world condemnation of torture and of trade in torture equipment. There is then the problem of defining exactly what you mean by torture equipment. We take a view on oversized handcuffs that we would not want them to be used for the purpose of leg irons, we regard that as an unacceptable practice, certainly when we look at export controls for oversized handcuffs or export licences we look very closely at whether there is a risk they would be used for the purpose of leg irons. I accept in the United States they take a different view of these matters and we will continue to enforce our view of those oversized handcuffs. As far as small arms go, and the broker in South Africa you were referring to, it comes back to the earlier point I was making, that trade in small arms and, more broadly, any other military equipment is sometimes hugely damaging, wrong, and to be condemned. Certainly in the case of the use of small arms in many of those African conflicts that will be the case. In other cases it is perfectly legitimate, and if it concerned an export directive from the United Kingdom we would licence it. You cannot draw a boundary round it, as you can with torture equipment, and say, "In our view this is always wrong", because it is not, and that is not the view we take. (Ms Hewitt) For the purposes of our controls we will define it, Parliament will define it because it will be set out in our orders and our guidelines. (Ms Hewitt) I think it is going to be tough, it comes back to the point I was making earlier, the scope of the new act and the new orders is very large indeed. Of course where the offence is committed wholly or mainly abroad it is going to be more difficult to get the evidence. We may well come up against problems of extradition and we will do our best with that. Part of what we are doing by working with other governments, working with the NGOs, is building more of a consensus on this to try and strengthen our hand when it comes to enforcing these new controls. In some cases our own embassies and high commissions will be able to get the information that they need, in other cases we will be very dependent on NGOs or on law enforcement authorities in other countries. We will need to build that co-operation and share information in order to be able to make this work in the way that you and I want it to work. Sir John Stanley (Ms Hewitt) We will look at that very, very closely. This is part of the value of having all this consultation on all these orders. Your starting point is absolutely right. One of the reasons why we value the military and defence industry in our country is precisely its ability to equip our armed forces with some of the best military equipment in the world, and that must remain the case. The Export Control Act itself provides for a Crown immunity, but it is quite true that in the consultation document we do not particularly look at MoD contracts as such. What I would say is that where the MoD, in other words the Crown, is exporting goods that are already in its possession it would not need a licence to do so. We will look very carefully at the point that is being made, that we would not be able to make a telephone call to Basra, because that is certainly not the intention, and if that has inadvertently happened in the drafting we will have to change it. We will need to look at that in a bit more detail. (Ms Hewitt) I would be delighted to do that, Sir John. Mr Hamilton (Ms Hewitt) Obviously all of the European Union countries, including the new member states, are committed to assessing export licence applications under the European Code of Conduct and the common criteria. The non-European Union countries are those that we believe have robust and long developed export control systems but basically follow the same core principles. If there are suggestions that we have not got that list quite right that is something that we will look at as we respond and reflect upon the consultation. (Mr Williams) I will have to look at Switzerland. That list is based on the existing Government Open General Licence. (Ms Hewitt) We will have a look at that and any other comments we get on the list. (Ms Hewitt) We have had a look at this very carefully, we do need to be able to rely on the export control systems of other countries that have both robust export control systems in place and are close allies. It is this Committee that has often praised the robustness and transparency of the American system of export controls. Chairman (Ms Hewitt) Let me say I do not think I in any sense misunderstood the Committee's position, I was simply going to say what I think is the case, the Committee has praised the robustness of the American system, indeed I think you just used that very phrase. I was going on to make the point that you have just made that the decisions in certain cases are not the same, they will make a different decision in some cases from the decisions that we would make. I do not think we can try and catch absolutely everything or impose our own policy on every other country. The other point that I would make, of course, is that traders operating out of countries where we have put in an open general licence will still be subject to those countries' export controls. There may be a few situations, Mr Hamilton has rightly identified one, where that country's export control system would license an export that we would not ourselves license but that is not the generality of cases. Mr Hamilton (Ms Hewitt) We consider every application on a case-by-case basis in very strict conformity with the consolidated criteria. I would not want to try and give you an answer on a hypothetical case but we would look at it in line with those criteria, including of course the risk of use of the equipment for repression or in situations that would exacerbate regional conflict. Ann Clwyd (Ms Hewitt) On the issue of prior parliamentary scrutiny, of course this is an issue, I am afraid, on which the Government and the Committee will simply have to agree to disagree. We have spelt out our position and our reasons for it in several different responses to the Committee's reports. (Ms Hewitt) We can continue to discuss it, but I fear, at the moment anyway, we are likely to continue to disagree on it. When it comes more generally to the issue of open general licensing, again we have taken the view because the new trafficking and brokering controls go so wide and would catch almost every activity of every perfectly legitimate aerospace and defence company in our country, it would be quite impossible to try and run the whole thing on a system of individual licences and the whole system would grind to a halt and therefore using a system of open general licences, specifying what is permitted, specifying the record-keeping that is needed seems to us to be the sensible way forward on that, but it is something we have specifically invited views on. Rachel Squire (Ms Hewitt) You are absolutely right that if the subsidiary is not directly controlled by a parent company in the United Kingdom then it would not be covered by these new controls. I know that there have been concerns about it. There will be situations where the relationship between the parent company and the subsidiary is such that it would nonetheless be covered. If, for instance, the parent company puts a customer in touch with its subsidiary abroad but the parent company itself directly benefits from that introduction then that would be caught. In other words, if the parent company stands to profit directly from the deal that is being done with the subsidiary then our controls would apply because they would apply through the parent company, as it were, to the subsidiary but if the subsidiary company is entering into a deal that is wholly abroad and does not directly return a profit to the parent company then it would not be caught and this really comes back to the discussion about extra-territoriality. That seems to us to be both the legal position and the right approach to take to that extraterritoriality. (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. (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 (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. (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 (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. (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 (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. (Ms Hewitt) Only, as I was saying earlier in the discussion around the subsidiaries, if the parent company was not controlling that whole activity. (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 (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 (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. (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. (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. (Ms Hewitt) I think that is exactly what we are doing. Rachel Squire (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. (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 (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 (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. (Ms Hewitt) Of course, that was simply referring to the costs of the individual licences. (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. (Ms Hewitt) I am not at this point going to try and put a macro figure on it but what I would say is, first of all, there is a very high degree of compliance from British companies with our export control processes. That in turn reflects the fact that they have already got, for the most part, good systems in place and trained staff to deal with applications. This is not a completely new system where you have got to take staff and train them from scratch to operate a new system. There will certainly be some changes. There will be situations where an individual licence will be required where it is not at the moment. There will be situations where registering under an open licence will be required where it is not at the moment. There may be some additional record-keeping - that, as I say, is an open question at the moment - but I think some of the more frightening figures that are being suggested, and might be implied by the piece of arithmetic you have just given, would be wide of mark. (Ms Hewitt) We are of course going to implement the Act. We would not have passed it if we did not intend to implement it, but we are looking for the simplest and most cost-effective way of implementing it not only for the companies but for ourselves. Perhaps Mr Williams would like to add something on that since he is dealing with it. (Mr Williams) In the RIA we have tried to estimate the number of new SIEL applications that we would get under the new controls on electronic transfers of military goods. We came up with a fairly low figure of new applications, around 100 to 300 a year, and we based this on looking at the number of SIEL applications that we get at the moment for exports of military technology as opposed to military goods which are in the low hundreds, the rationale being that electronic transfers are going to apply to military technology obviously in electronic form, so if you want to use that as a precedent the numbers seem fairly low, bearing in mind that if you already had an export licence for the export of military goods that automatically applies to electronic transfers that take place in respect of those goods as well. What we are looking at here in terms of the licence applications are the ones that are in addition, where it is only technology transfers. In terms of the trafficking and brokering, we looked at numbers of licences which countries like the United States and Germany had issued, which are surprisingly low, particularly for the United States. As the consultation has unfolded industry is clearly telling us that we have significantly under-estimated the figures and they are coming up with various scenarios in which licences may be required. We will have to look at those figures afresh in the light of their representations. (Ms Hewitt) We will certainly look at that. The industry is already drawing that point to our attention. This discussion absolutely underlines the point I was making earlier about the practical as well as the in principle arguments as to why it would be most unwise to try and seek to extend the reach of these controls extraterritorially to all military equipment and not simply the three categories that we identified as meriting extraterritoriality. Assuming that one intended to implement such controls the costs would be astronomical. Mr Jones (Ms Hewitt) I have to say that I do not think this is an area where we will gets lots of training companies or consultancies moving in, for the simple reason these are highly specialist companies, working in a very specialised, high technology, competitive, global market place, who are more than capable. They already meet their own skills requirements. I agree with your general point, we do not want to see either jobs or training activities being undertaken for wholly pointless bureaucratic purposes. The way that we are trying to design the administration and enforcement of the new controls is precisely to focus on the real problem areas and ensure that there is legitimate activity that none of us would have any concerns about, which can carry on in compliance with the law but unimpeded by a great deal of bureaucracy. (Ms Hewitt) I am going to turn to Mr Williams on that because he runs the section of my Department. We already have an enforcement team but we may need to increase it. (Mr Williams) Compliance in terms of cost there are extra elements, we will need some extra staff to process the new applications in the first place in all of the departments concerned. We have a compliance team which visits companies to check on their compliance with open licences. We may want to augment that team, going back to the training point, they do not just go in as compliance officers and auditors they also try to help companies with their system. We have a help line as well. I have two members of staff who are at the moment engaging with companies and helping them prepare. Enforcement in terms of prosecutions is done by Customs & Excise. (Ms Hewitt) We will have a look at that. If you look at page A 19 and A 20 Customs & Excise say there will be an additional cost but they estimate it modestly at round 200,000 or 300,000 a year, that includes trade enforcement activities. Clearly as we get more information from industry if we then think that we are going to need a larger enforcement team those costs will be looked at correspondingly and we will need to reflect that in the revised RIA. (Ms Hewitt) That is a very important point. Last year we handled over 10,000 applications. In the past our performance has not been as good as it should be. What we have done, not just within my Department, but the Foreign Office and MoD as well, is to look over the last year at how we can make the whole process more efficient. Inevitably there is a lot of to-ing and fro-ing between different government departments and the Foreign Office and posts abroad, and that is where a lot of the delays come from. We looked at how we can make it more efficient and we have also made a huge effort to deal with the backlog of cases that had arisen. We used to have 104 cases that were over 12 months old, which, not surprisingly, gave rise to a great deal of frustration and anger in industry. We now have no cases over 12 months old, and we are working to get it down to deal with the ones that are between 6 and 12 months old now. I would be very concerned, indeed, if we found ourselves back in that situation with a lot of backlogs of applications. By going through this very careful process of working with industry to understand how we enforce this in the simplest possible way and concentrate our efforts on where there are real problems and on the minority of people who are deliberately flouting the law, seeking to do things we do not want them to do, then we can prepare our own system and resources and make sure that we do not end up with that backlog building up again. (Mr Williams) I am acutely aware of the dangers that you point to, if there were to be a huge increase in the number of licence applications that would give us a lot more work. This comes back to the theme that the Secretary of State has been emphasising, that we should not try and bite off more than we can chew, certainly in the initial phase. (Ms Hewitt) It has been an on-going review which, as I say, is already producing results in terms of a faster export system, but we do have a cross-government review going on and we should have conclusions by the summer and I will announce them when we do. (Ms Hewitt) I do not think we have looked at that yet but that might be desirable. Ann Clwyd (Ms Hewitt) That is certainly an argument we have heard and we have had a look at, but, I am afraid, our experience is the more people engaged in this the more to-ing and fro-ing there is and the longer it takes. I fear this is one we are going to go on disagreeing about for some time to come. Chairman: On a different matter, Sir John Stanley and Piara Khabra. Sir John Stanley (Ms Hewitt) I am not a lawyer and I might let you have a more detailed note on this but I believe the Act and the draft Orders we have made do indeed cover transport and precisely the case that you have just outlined, in other words, a British transport company that is engaged in the supply of goods that ends up in an embargoed destination, which is what Sierra Leone is, because what we have done in the Act and what we have done, if you look at the Draft Trade in Controlled Goods (Control) Order, in Section 3 of that where we talk about directly or indirectly supplying or delivering --- (Ms Hewitt) It is G2, it is the Trade in Controlled Goods (Control) Order and it is Section 3 (2) where we talk about "no person shall supply or deliver, agree to supply or deliver or do any act calculated to promote the supply or delivery of restricted goods ... "et cetera et cetera. That in a sense exactly parallels what we were talking about earlier on extraterritoriality. In other words, where there is a supply of arms to an embargoed nation or a supply of torture equipment or of long range missiles to any destination, then we will control any activity that facilitates those activities, and that would include transport but it would also include the provision of banking or insurance services or other activities coming from a British company that are ancillary to those three categories of supply. (Ms Hewitt) My lawyers tell me that I should be wholly satisfied but I will keep probing on this subject. It might be helpful if we sent you a legal memorandum on how we think the chain of activity will be caught by the Act and Orders as drafted. Mr Khabra (Ms Hewitt) Where we are talking about supply of arms to embargoed destinations or torture equipment or long-range missiles, then the combination of the extra-territorial controls on trafficking and brokering and the controls on transport, finance, insurance, advertising and other ancillary services, I think those two things between them will catch exactly the kind of activity that you are concerned about. Sir John Stanley (Ms Hewitt) I will certainly let you have that further memorandum. Again, I would draw the distinction between a British company or a UK person engaged in transporting arms to an embargoed destination. That we will catch. If have you a British shipping company that routinely carries perfectly legitimate aerospace components that are being exported under a perfectly legitimate export licence then we are not going to try and control that activity, we do not want every shipping company, every airline, every bank all having to apply for licences under this Act. I think there are some people who would like us to extend the Act in that way, but I am glad that you and I do not wish to do so. Mr Jones (Ms Hewitt) I believe they would be because we are talking there, as I said, about the extraterritorial reach of the Act to any UK person wherever they are in the world engaged in these three destinations. (Ms Hewitt) Let me double check that point, if I may, and I will come back to you with clarity on that point. Chairman (Ms Hewitt) Can I say, Mr Berry, I am very, very grateful to the Committee for doing that and doing it in this time scale. I am not going to promise in advance we will accept everything you say but I hope we will be able to do so, and I am sure you will offer us extremely helpful and practical advice on how we make sure we get this right, because we are all committed to making this work. Thank you. |