Examination of Witnesses (Questions 20-39)
THURSDAY 3 APRIL 2003
MR MIKE
MCLAUGHLIN,
MR DAVID
HAYES, MR
TIM OTTER
AND MR
BRINLEY SALZMANN
Mr O'Neill
20. Do you actually think the authorities will
necessarily prosecute for phoning Basra and giving technical advice
in the middle of a war? (Mr McLaughlin) It is self-evident
that the answer is that I would not expect it to happen and the
answer is "no". What I was highlighting was the fact
that there is, if you like, a technical or legal breach and, whilst
we might have every confidence that you, the Government, will
not do such a thing, I cannot account for civil litigation.
Sir John Stanley
21. I do not know if any of your colleagues
want to respond to my original question. (Mr Hayes)
The issue Sir John raises is probably of a slightly different
relevance in the context of coalition warfare in that, whilst
an export may be in support of forces operating in the theatre
and indeed in forces directly supporting and working with British
forces, it may not actually be for the British forces themselves.
Potentially, yes, I would agree with your comment that there is
a need to address this in the legislation in the round rather
than in the specific context of Crown exemption. (Mr Otter)
It does not just stretch to the armed forces. It may well stretch
to protecting and defending the civil infrastructure, which is
the equipment, and that may well have defence connotations about
going in to protect the civil population. Many countries have
civil defences; we do not in this country. We got rid of that
some long time ago. Civil defence and police have equipment requirements
to protect people that are very similar to those of the armed
forces. I stress the point about allies as well.
22. Can I return to your original comments on
trafficking and brokering. I just want to be clear on this. As
far as your Association is concerned, am I right in saying that
your concerns on the really quite limited trafficking and brokering
provisions in the secondary legislation are limited to what you
say in the section in your paper headed "Clarification"?
We have already referred to the lack of clarity you see in Annex
G. Can I be quite clear that there is nothing further in that
area that is causing you concern in these draft secondary legislation
provisions, is that correct? (Mr McLaughlin) The short
answer is: no, I do not believe it is. There are other issues
that cause some concern. I can think of an example. In a partnership
programme or partnership project, if the control, if that is the
right word, is exercised from, let us say, the UK but there are
suppliers and partners in other countries, then I ask myself the
question: how will the extra-territoriality provisions apply if
you happen to have, for example, a Spanish partner? If the expectation
is that someone in the UK can control his shipment of goods as
part of this joint programme, assuming he had a Spanish or an
Italian, whatever nationality you like, licence in place, then
I am not quite sure in my own mind how any enforcement process
would happen if the programme is controlled in the round from
the UK. The commercial dealer can say, "The programme director
is in the UK and these various partners will make these various
components and ship them to wherever", but the actual control
of that activity going direct from a supplier, even within the
EU to somewhere, is outside, I would judge, the practical control
of the UK-based programme director. There, for example, is another
concern.
Mr Colman
23. Mr Salzmann, on page 2 of the memorandum
you gave us, in the paragraph on the burden of training, you claim
that all 310,000 staff in the UK defence industry require the
suggested training on their responsibility under the new legislation.
It is rather like Mr O'Neill was suggesting: it is exaggeration
in terms of the new number of licence applications. Are you suggesting
there that the catering staff or the cleaners are going to require
training in this? Is this not, surely, rather like the situation
in the financial services industry where you have a compliance
officer and an adviser in each company to whom individuals could
go to ask for advice—and I see you shaking your head—and
to get information on what can and cannot be done before in fact
you send the information abroad, and that this can in fact be
done in this way? Why are you suggesting this should be such a
complicated or time-consuming undertaking that is being proposed
within this new secondary legislation? (Mr Hayes) It
is actually quite the opposite to that, Mr Colman. At the moment,
the situation you describe is quite true in the sense that in
the world of tangible exports there is effectively a choke point
within most organisations with a person well versed in the export
control legislation. All exports can be routed through that person
and controlled to a very high degree. Move to the world of intangible
exports and that situation changes dramatically. I am not suggesting
for a moment that we do not believe the controls on intangibles
should be put in place. Industry does indeed fully support that.
The question is one of implementation. But you move away from
the choke point situation whereby all of your controls can be
applied at that choke point to a situation where anyone within
the company with access to a fax machine, telephone, computer,
shared data environment or telephone conferencing facilities,
can be an exporter. Therefore, they have to have at least an awareness
of what constitutes an export and what does not; what is control
and what is not. The training commitment therefore does extend
to anyone with access to technical information and those facilities.
It does not only extend to UK employees; it extends to all employees
of the company worldwide who might visit the UK and whilst here
make contact with their offices back in their home country because
their intangible transfers from the UK will be subject to UK law
whilst they are here.
24. In my parallel example of a compliance officer
within any financial services company, which is in a sense similarly
dealing with intangibles but is able, if you like, to cope with
the regulatory framework as to what can and cannot be done, is
that not a situation that has been working in Britain over many
years? Therefore, you again are grossly exaggerating the impact
of this legislation? (Mr Hayes) Not being an expert
in financial services, I would not like to comment on that. (Mr
McLaughlin) I think the issue is, in part, one of scale. I
accept your point about the way the financial services industry
is regulated. As my colleagues have said, at the moment most of
the industry is regulated through a number of choke points where
we have experts who monitor and do the right thing. To give you
an example from the company that employs me, we have 16,000 desktops,
all connected to the company network Any one of those 16,000 owners/users
of those desktops could make an intangible transfer.
25. In the same way as the financial services
industry? (Mr McLaughlin) Yes. To ensure compliance,
we are already working on a programme of training for those 16,000
people and/or a combination of IT control by key word recognition,
by all sorts of things being examined in some detail. Either way,
I would like to link the response that I am making to the earlier
response I gave to Mr O'Neill about the cost of compliance, if
we can put that in inverted commas. In an industry or a major
client with a large number of employees, the scale of the cost
of compliance is beginning to run away . We will have to have
very expensive, clever IT provision and/or we will have to have
training programmes, otherwise we could not as a company—and
I think this applies generally—put our hand on our heart
and say we are doing our best and making our best efforts to comply
with this new legislation.
26. At the moment, the movement of stocks and
shares and of financial advice has been controlled and has been
policed and has been done. That has been coped with and it has
not required massive training, if you like. An individual visits
the client's offices in each company; he is set the rules and
everyone knows where to go in terms of getting the advice. You
do not think there is in fact a basis on which this legislation
would work in the same way and be coped with? (Mr McLaughlin)
The short answer to that question is: yes, but not with the present
scale of resources.
27. Do you believe the idea that every single
person working in the defence industry would need that training?
Do you think that is a gross exaggeration? (Mr McLaughlin)
The answer to that depends on the DTI interpretation and application
of what I would call the compliance regime. I think the underpinning
answer, the conceptual answer, is: yes, if you have the ability
to make an export from your company's IT network where there is
licensable control of data, then you are going to have to know
from the first day that you have access to that when you sit at
your desktop and who you can send it to, who you cannot send it
to and what you can and cannot do. That is what I would judge
to be a self-evident level of commitment to a level of training
there, and quite how large is something we are all working to
get our heads around. (Mr Otter) And critically where
those individuals are at any one time because when I am seated
at my desk, it is not an export; when I go overseas, it becomes
an export. Unless every one of our 33,000 people knows where I
am all the time, they could be unwittingly committing a breach.
Rachel Squire
28. I would like to continue with the theme
of training employees all over the world and return to offset,
which you defined as where the customer demands manufacturing
or design work in their own country in return for buying the product.
That is an integral aspect of the modern global defence industry
and it is increasingly spreading into the non-defence commercial
sector, too. We accept that it is often a crucial part of any
commercial or defence export work at the moment because a country
to which you are exporting will look to share the skills and technology
and have some local employment and training provided. We referred
to it earlier but I would like to hear a little more about what
your concerns are about the effects the new controls and training
will have on offset agreements. Would you like to give some specific
examples of how you think that has a very negative effect? (Mr
McLaughlin) I understand the question but there is a very
complex answer, even if I were able to give it all. I think already
some aspects of offsets are controlled and we live with that and
do it as a matter of the daily conduct of business. The issue
I was attempting to highlight earlier, and I use offset as an
example, is one of what I would call the negotiating points that
will underpin any commercial deal when it is eventually signed
at the contract signing stage. At the risk of repeating myself,
my concern and the industry concern is whether, if you agree in
principle to a £10 million offset for example in any given
commercial deal, at that stage we already should have a trading
licence. At the moment, we will have that sort of discussion not
requiring a licence. The question I now cannot answer is whether
I would need a licence even to have the discussion about the value
of the offset. That is the first point. The second point is that
I think we are into generally less of an issue because, in the
way offsets happen, the current legislative and regulatory regime
already requires us to learn to cope with it. I can give you a
good example. We, as a particular company that does quite a lot
of business in India, the Indians would, as a matter of routine,
wish to have a discussion about offset. The offset, I should stress,
is not necessarily linked to the products that you are trying
to market. The offset can be unrelated and simply defined as a
value. If they, the country, whichever country, India in the example
I was using, already has the competence, the capability, to do
whatever the work is that we want to put there, then it is a non-issue.
We already have to cope with the licensing regime as part of this
deal under an offset agreement if we want to send a capability
to India, for example, that they do not currently have. That happens
now. The offset comment I made earlier was related to the new
trading licence requirements.
29. Can I pick up on armed forces support? Coming
back to the comments and discussion on support for the UK armed
forces, you mentioned the importance of coalition forces, allied
forces, and also interoperability. I am interested in how that
works at the moment where you have forces that do have common
equipment and are very much interoperable and the need for urgent
supplies or repairs. Is it very much a manufacturer's agreement
that cuts across international boundaries? Is it very much an
inter-governmental agreement? How do you think it would change
under the proposed secondary legislation? (Mr Otter)
There are two aspects to the answer. One is that in theory it
should be government-to-government activity. To give you a simple
example, we supply chemical warfare detectors to both America
and the UK. At the moment, the UK cannot get any batteries for
their detectors because they do not have the stock, so they are
drawing off American stock on a formal basis. Another example
is that both the Americans and the British are short of another
particular item of equipment. Neither of them have got any stock
because their defence stocks have been pared and pared. What we
have got to do is to come to the manufacturer. In theory, according
to the new regulations, we would not have been able to supply
the United States in the way that we have done, but we could supply
the UK.
Mr Olner
30. Are you really telling us that there are
no batteries for our forces in the Gulf who are in danger from
chemical warfare? It beggars belief. (Mr Otter) That
was the situation, yes, largely because the United States had
bought all the batteries. They had taken up the industry's capability
to supply the batteries.
Chairman: I regret to say that this has nothing
to do with the consultation document we are discussing but it
illustrates a problem arising from other things than arms export
controls, does it not?
Tony Baldry
31. Can we move on to record keeping? Clearly
record keeping is crucial to the administration of the orders.
The industry, not surprisingly, has asked for there to be a pragmatic
approach to record keeping. Could you explain to me what you mean
by a pragmatic approach? (Mr McLaughlin) The first
problem industry has with the consultation document is one of
definition where record keeping is concerned. The document refers
to functional record keeping. We are in a round of meetings with
the DTI to try and better understand what is meant by functional
record keeping, and so industry's answer to your question I think
will vary along a continuum that at the moment we are unable to
define. If functional record keeping gets what I would christen
a harsh interpretation and requires specific records to be kept
of every intangible transfer, major companies, whose scale will
obviously vary according to the size of the company, are going
to be talking hundreds of thousands, if not millions, of pounds
of data storage space and then retrieval systems to get those
records out every time we have to demonstrate compliance. If functional
record keeping means something less than that, clearly it will
be a less onerous burden, if that is the right word, for industry,
but the first issue for industry is to understand what functional
record keeping means. That is inextricably linked to the regime
of compliance that the DTI will seek when they come to check that
very fact, the fact of compliance.
32. As I understand it, the DTI put forward
two alternatives; one is what they describe as a prescriptive
approach, the other is a functional approach. The functional approach
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.
Are you clear, from the consultation you had, as to what information
and records you need to keep? (Mr McLaughlin) The short
answer to that is "no". I will ask Mr Hayes to pick
up that particular point. (Mr Hayes) If you look at
page F11, that actually lists the information to be kept. It is
fairly obvious that what has happened is that 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.
A good example would be at 13.2(c), the quantity of goods. In
the tangible world, fine; in the intangible world, that has little
or no meaning. But the requirements themselves are fairly prescriptive
and, if these were to be the requirements, then I think the cost
burden on industry would be considerable. The sheer volume of
records being kept would be overwhelming, both for industry and
from the Government compliance and audit point of view. That is
another example of where a transaction of concern would be lost
in a deluge of data relating to transfers which were of little
or no significance. The other issue is one of practicality. If
we turn to the trade controls, the record keeping requirements
are broadly similar in relation to the movement of goods. However,
those movements are between two countries, neither of which is
the UK. We have no power to require companies in our supply chain,
or indeed our customers, to provide those records to us. That
begs the obvious question that industry is being required to keep
these records, subject to sanctions presumably for not keeping
the records, and yet we have no means by which we can obtain that
which we are required to keep.
33. When you have raised these concerns with
the officials, what has their response been? How far have these
negotiations or consultations got with officials? (Mr Hayes)
There have been many meetings with officials. They have listened
carefully to the viewpoints that we put forward. As you would
probably expect in a consultation period, there has been little
feedback coming the other way. (Mr McLaughlin) These
various points of individual companies and various trade associations
involved will be covered or addressed in the formal responses
to the consultation document and of course the closing date for
those is 30 April. I endorse what David Hayes has said; I do not
really believe that any of us expect any substantial response
from officials in advance of the closure of the consultation document
or the consultation period.
Mr Howarth
34. May I go back because I was late arriving,
for which I am sorry. Mr Otter, you were suggesting that under
the current arrangements your ability to export to the United
States, to our coalition partners, batteries for CW detectors
requires a lengthy licensing arrangement. Is that correct? (Mr
Otter) Yes.
35. That is under the existing arrangements? (Mr
Otter) Yes.
36. Are you suggesting that under the new arrangements
that position would be made worse? (Mr Otter) It would
be made worse.
37. That is a rather severe accusation to make. (Mr
Otter) It is just the way the legislation is drafted.
38. How would you like to see it improved? (Mr
Otter) I take Mr O'Neill's point of view on weapons of mass
destruction, that it might be a small element of it, but what
we are talking about here is defence against weapons of mass destruction,
and let us make that perfectly clear. Some of the catch-all provisions
that are in the document are so severe that they actually make
it very difficult even to trade and discuss things with people
like the US Government and the Danish Government, which has special
forces deployed in support of the coalition at the moment, or
would do. The definition needs to be loosened considerably.
39. Are you suggesting that our forces are at
risk, as Mr Olner was putting to you, as a result of what can
only be termed ludicrous bureaucracy and that you can supply and
the Americans cannot supply the batteries, that you are the only
supplier? (Mr Otter) I think in this new system there
is going to be far too much bureaucracy.
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