Quadripartite Select Committee Written Evidence


Appendix 4: Memorandum from the Defence Manufacturers Association

  We would like to thank the Committee for its letter of 22 October, seeking addition comments from witnesses on the Government's proposals for the Orders under the Export Control Act 2002. In your letter you stated that:

    "In the light of the evidence that you submitted on the draft secondary legislation, the Committee would welcome your comments on the Government's response and on the secondary legislation itself. Have your concerns been met, in part or in full?"

  Despite that fact that most of the documents relating to the new regulations have still not been uploaded onto the DTI's website (as at 10.00 on Tuesday 4 November), as expected, I will still try to pass on what comments I can. What I have seen has not really been in a timescale to have allowed me to have adequate time to go through the documents properly and thoroughly, but I would like to pass on the following initial comments to the Committee on our current (limited) assessment of the new Secondary Legislation, etc.

  We still have a number of concerns about the Government's proposals, as we understand them, but believe that some (or even perhaps many?) of these, as expressed in our previous submissions may have, at least in part, been met by the DTI. Given the DTI's interpretations of the new regulations, as outlined in the various supplementary guidance notes associated with the new Orders, and the scope of the new Open General Export Licences (OGELs) and the Open General Trade Control Licence (OGTCL) which the DTI is planning to issue, we now believe that much of our previously expressed concern about regulatory burden on Industry has now probably been eased, although not completely extinguished. However, only practical experience with the implementation of the new control regime will give us any truly accurate assessment of whether this is, indeed, the case.

  I would like to submit the following comments, which are based around the Government's response to the Committee's Report, which I hope may be of some assistance to the Committee.

  Recommendation One—Introduction: The Government states that there will be a review of the new legislation "within three years of the new controls coming into force", which means sometime before 1 May 2007. We would sincerely hope that, should clear evidence present itself to the Government before this time of any practical difficulties with the implementation of the new controls, the Government will be prepared to expedite this proposed review to seek to address any such problems that do arise.

  Recommendation Three—General Considerations: For some reason the Government has failed to mention in its response to the Committee that the maximum penalty for deliberate evasion of the new regulations has been increased to up to 10 years in prison and/or an unlimited fine.

  Recommendation Four—General Considerations: We consider it to have been an immensely regrettable lost opportunity that the Government did not take advantage of the chance created by the perceived need to replace the UK's existing export control legislation to undertake a "starting with a blank sheet" total "blue sky" review of how the UK undertakes export controls to identify if there might be another, better and more efficient way in which this can be done. We still believe that the Registration route is one which deserved greater consideration.

  Recommendation Five—Arguments for further control: trafficking and brokering: We are a little confused by the Committee's suggestion in this recommendation: all licences are treated strictly on a case-by-case basis by the British Government, and, therefore, it is very difficult to have a system which only seeks to control deals which "if conducted in the UK, would not be granted a licence" [note: this same comment also goes for the wording in Recommendation 6]. We are also deeply concerned and confused by the Government's response which states that, with regard to "Restricted" Goods: "licences will not normally be granted for any trade in these types of equipment"—whilst this may, indeed, be true of "torture equipment" and the supply of military equipment to embargoed destinations, we seriously question whether this will also be true of long-range missiles and UAVs, and their component parts, and vast majority of trade in which is perfectly legitimate and responsible.

  Recommendation Six—Arguments for further control: trafficking and brokering, We agree with the assertion of the Government in its response that the new controls should (at least in theory) catch much of the activity which everyone agrees must be controlled and curtailed . . . as well as considerable areas of perfectly legitimate commercial activity. We agree that there would be immense practical difficulties in trying to extend the extraterritorial controls which the Government is proposing to encompass other areas of technology. One of the issues which is frequently raised and which we do seriously believe needs to be addressed is that referred to on numerous occasions to argue in favour of greater extraterritoriality, which, we believe, is greatly over-simplified: this view contends that all an arms dealer has to do is get on a train or plane to Lille (or anywhere else overseas) and do the deal from there. This wholly fails to recognise that it is almost completely impossible to arrange a deal with one action—be it one phone call, one e-mail, one fax or one face-to-face meeting. Putting any deal together takes many actions, talks, discussions and negotiations with all parties involved, over a period of time. With trafficking and brokering deals at the very least a broker will have to negotiate contracts with both the supplier and the customer. Under the provisions of 4.3 of the proposed Trade Order (contained within the 30 January consultative document), the Act will catch the following:

    "Subject to the provisions of this Order, no person shall in return for a fee, commission or other consideration—

    (a)  do any act; or

    (b)  agree to do any act,

    calculated to promote the arrangement or negotiation of a contract for the acquisition or disposal of controlled goods where that person knows or has reason to believe that such a contract will or may result in the removal of those goods from one third country to another third country."

  Thus, unless the individual involved was constantly flitting about overseas (picking up huge frequent flyer points!) to make sure that each and every single one of ALL of his actions associated with putting such a deal together (no matter how small and seemingly insignificant they might seem to be—eg arranging with the customer for a time and date on which to meet) were undertaken outside of the UK, he would still be caught. This would be impossibly inconvenient for them, and totally insupportable. There is a valid argument about British persons based permanently overseas, or who are currently based in the UK but will, as a result of the new regulations, seek to move their operations overseas, but the scenario raised by critics of such brokers merely flitting to and fro between the UK and somewhere overseas to do their business transactions is not a valid or realistic one.

  We also totally support the Government's comments about jurisdictional difficulties—whilst the UK does have extraterritorial controls in some areas (eg paedophilia, drug smuggling, bribery and corruption), these are always in areas where this activity is quite clearly, and universally accepted as being, illegal and concerns total prohibitions on these activities. The exporting of defence equipment is not prohibited or illegal, but is controlled, sanctioned and licensed approved, by the relevant national Governments around the world. What proponents of extraterritoriality in export controls are urging is the adoption of a totally unprecedented arbitrary extension of the UK's jurisdictional controls. As the NGOs have stated in the past, under UK law: "you need a licence to get married, drive, go fishing, watch TV, compete in boxing matches, practise medicine, run a raffle, sell alcohol, busk, own a shotgun, run a bookmakers and fly"—but for which of the above licensable activities would a British person need a relevant UK licence if they wanted to undertake these actions entirely overseas?

  Recommendation Seven—Arguments for further control: trafficking and brokering: Whilst we would agree with the Committee that there probably is enough international consensus on the illicit trade in small arms, for the Government to have considered making these also "Restricted" Goods, it must again be recognised that any controls introduced will not just impact on the illicit trade, but also on legitimate trade, and, therefore, jurisdictional problems could arise in this. We fully support the Government that multi-lateral action is undoubtedly the best way to proceed in this, and that a unilateral approach is futile.

  We are deeply concerned that the UK Government may not have been liaising with its overseas counterparts to get some form of undertaking from them to recognize and respect UK trade licensing decisions. In the past there have been some jurisdictional conflicts between countries over defence exports— this has arisen when a nation has sought to export technology or materiel which it has acquired from another nation to a third country. In such cases there is a binding contractual obligation on the first customer to seek permission from the original supplier before passing these technologies on to any third party. In the case of the new UK trade controls there appears to be absolutely NO contractual obligation of any kind on the Governments and suppliers in the other countries concerned to respect UK licensing decisions. Without such undertakings, UK licensing decisions will be toothless and ineffective in curbing proliferation. As a result, if an overseas company involved in the supply of long-range missiles (for instance) which employed a British person was to seek to export to another nation, and had its UK trade licence turned down, it is almost impossible to conceive that this firm will actually respect this decision, but far more likely that the British person involved will simply be side-lined and cut out of the loop with regard to this deal (possibly including dismissal from the company, if his continued employment is deemed to be too problematic), so that this deal can proceed without UK interference. Thus, the supplier will still supply the goods and the customer will still buy the goods, and nothing practical or positive to curb proliferation will have been achieved. For the new controls actually to be effective and have a practical impact on proliferation, the UK Government must seek to get other national Governments to undertake to recognize and respect its trade licensing decisions.

  Recommendation Eight—Arguments for further control: trafficking and brokering: We very strongly query the tone and wording of the Government's response to the Committee. Whilst it is perfectly fair and accurate to say that trade in "torture equipment" and military materiel to embargoed destinations is: "reprehensible in most countries and this trade could be reasonably identified in advance as that which would not generally be granted a licence in the UK", we very seriously question whether this is, in fact, true in the case on long-range missiles, UAVs and their components. We also question why trade in such long-range missiles, UAVs and their components have been identified by the Government to be "activities of greatest concern". We believe that the inclusion of long-range missiles, UAVs and their components within "Restricted Goods", and the decision that the definition of these should not correlate with that of the Missile Technologies Control Regime (MTCR), which sets parameters based on range and payload, has been a decision taken at the instigation of some elements within Government. Yet, if one actually stands back and thinks about it, this inclusion is truly quite bizarre! The introduction of the T&B controls has arisen from reports of the activities of the likes of Miltech (Rwanda), Sandline (Sierra Leone), and some others, and the resultant natural pressure on HMG to be seen to be trying to do something about these illicit gun runners. We are unaware of any such notorious cases involving LRMs or UAVs or shady gun runners hanging around on street corners in Africa approaching passers by and saying "Psst . . . wanna to buy a Tomahawk Cruise Missile?" Yet the activity which is the subject of the very highest public profile and concern about the activities of illicit traffickers and brokers (ie small arms and light weapons) remains in the "controlled goods" category, whilst a sector which has no such track record (of which we are aware) gets put into the "restricted goods" category. Maybe HMG knows something that we don't! The inclusion of UAV technology is especially unfortunate as this has been clearly identified (including in the Government/Industry Aerospace Innovation Growth Team initiative) as being one of the key growth technologies for the future.

  Recommendation Nine—Arguments for further control: trafficking and brokering: We have noted the concerns of the Committee, and others, with regard to the extension of the new regulations to catch various peripheral activities, such as transportation. We have also noted the Government's intentions to introduce controls affecting some of these activities in certain circumstances. This will raise another difficult matter, of course, which will be the DTI's own need to seek to bring the new controls to the attention of everyone who will be affected by them. This will be an especially difficult task given the fact that the new Trade Controls on "Restricted Goods" have an extraterritorial nature, and will apply to any "British person" (as defined by the DTI, and encompass such peripheral activities as:

    —  The provision of legal services (controlled and restricted goods)

    —  The provision of financial services (restricted goods only)

    —  The provision of insurance and reinsurance services (restricted goods only)

    —  Transportation services (restricted goods only)

    —  E-business portal websites (controlled and restricted goods)

    —  Offset (controlled and restricted goods)

    —  Consultancy services (controlled and restricted goods)

    —  General market and promotion services (restricted goods only)

    —  Advertising services (restricted goods only)

  We can only hope and pray that the DTI has already set out a truly effective awareness raising and training strategy to address this need, and the Government's duty of care to its citizens around the World.

  Recommendation Ten—Arguments for further control: Licensed production Overseas: We totally agree with the Committee's recommendation that there should be an assessment of the Secondary Legislation and its effectiveness in curbing undesirable overseas licensed production deals. In addition to the Government's own accurate comments on the potential impact of the new intangible transfer of technology controls on licensing production overseas, it should also be pointed out that the Trade Controls may also have an affect on this. To allow licensed production to take place some transfer of technology must occur, and this would be covered under the new Act, as the Government has asserted.

  Recommendation Eleven—Arguments for further control: Licensed production Overseas: We understand that the Government is, indeed, seeking additional information from exporters on export licence application forms to address this.

  Recommendation Twelve—Minimising the burden on business: We were very grateful that the Committee took such strong interest and note of the concerns that Industry had expressed on this, and that it sought to support these with the Government. I can confirm that, as the Government has stated, there has been continuing liaison with Industry. This liaison has been intended to assist the DTI to pilot and refine its proposals for the practical administration of the new controls, and to address any Industry concerns or confusion on how the new controls will actually operate in practice, by ensuring clarity of the Supplementary Guidance Notes. This liaison was merely concerned with the operational workability of the proposed new controls at the practical implementation level and was not, in any way whatsoever, involved in framing or advising on legislative policy.

  Recommendation Nineteen—Minimising the burden on business: There has been much discussion with the DTI on the issue of the UK's licensing system, as opposed to that of other nations. For instance, under the US system, it is the nationality of the recipient of information which dictates licensing regardless of their geographical location, whilst in the UK system it is the geographical location, regardless of the nationality of the recipient. This direct dichotomy between these two systems does not necessarily bode well for smooth working between these egocentric licensing regimes.

  Recommendation Twenty—Minimising the burden on business: We agree with the Committee that foreign visitors to the UK must be subject to British regulatory control. There will be very real practical difficulties for the Government in policing and enforcing the controls on foreign companies. Auditing the records of overseas companies who are affected by the UK's controls will, for one, pose a major practical difficulty. The sort of level of information which the DTI's auditors normally want to see from companies is going to encroach dangerously far too close to a definition of state-sponsored commercial espionage for the taste of many overseas firms. Clarification is needed from DTI on plans for compliance visits to overseas firms/individuals—who is going to undertake this, what are the resource implications, and will the same organisational mechanisms exist for such compliance visits as for those undertaken here in the UK? How is it proposed that the activities of UK nationals overseas will be audited? Given that individual employees may, whilst compliance officers are "checking their knowledge", inadvertently admit to having, equally inadvertently, violated the controls, why should they agree to such interviews or audits? What provisions will the DTI be making to ensure that overseas parties are offered adequate training in rating goods against UK controls (in their own language, of course)?

  Recommendation Twenty-One—Minimising the burden on business: We welcome the Committee's recognition of the importance of UK trade fairs to British firms, and the potential danger that the new regulatory framework could act as a disincentive to overseas organizations to attend such events, which are crucial for the British SME community, in that they act as a cost-effective "shop window" to potential customers overseas. We can only hope that this does not prove to be the case, as a result of practical experience with the new regulations. Certainly we believe that the value and attraction of participating at events such as the Farnborough Airshow for those overseas firms involved in the production of "Restricted Goods", especially long-range missiles and UAVs, and their component parts, whose "speculative marketing and advertising activities" will be caught, will be hugely diminished unless they are happy to be subject to the UK's bureaucratic controls.

  Recommendation Twenty-Two—Minimising the burden on business: Industry is still deeply concerned about how it is going to address the awareness raising and training issue with all staff affected by the new regulations within their companies. We cannot even begin to imagine how some other sectors who will be impacted by the new controls, and to whom export controls will all be totally new (eg Academia, Insurance and Advertising service providers) are going to begin addressing this issue. It must also be pointed out that the issue of regulatory burden does not only concern the effort involved in applying for additional licences, but also the record-keeping and compliance mechanisms associated with the new controls. Only practical experience in the operation of the new controls, and liaison with the Compliance Unit staff who undertake the audits of companies will truly indicate how great a burden this will be for both Industry and Government.

  Industry has repeatedly expressed great concern about the length of time that the Government has been intending to propose for the implementation period, during which firms will have to seek to introduce the necessary compliance mechanisms, undertake the essential staff awareness training and apply for the licences that they will need to have in place when the new regulations actually come into effect (on top of all of the extant workload which must continue as normal). We are deeply concerned as to whether all of this will actually be achievable by the stated 1 May implementation date, but the DMA and the Society of British Aerospace Companies (SBAC), in particular, have promised to work closely and constructively with the DTI, and other trade bodies, on doing the very best we possibly can to try to facilitate and achieve this. Nevertheless, this will be a very difficult target to meet.

  We remember that Mr O'Neil, in particular, rigorously queried our expressed concerns on the possible level of additional bureaucratic burden resulting from the new control system, and repeatedly quoted the DTI's own figures that only some 400 new additional licences (representing an increase of only some 10% on 4,000 applications, he stated) would be needed per annum, as evidence of the extent of our exaggeration. Therefore, it is with some degree of self-justification that we note that the DTI's new Regulatory Impact Assessment now estimates that the likely number of additional new licences which will be needed per annum may be up to c.2,500 (representing a 22% increase on 11,000 applications), thus indicating that the DTI, itself, now admits that the previous figures produced, which Mr O'Neil had quoted to contradict our contentions, were out by some 625%! We can only hope that the new figures do not also prove to have been similarly significant under-estimates.

  Recommendation Twenty-Three—Minimising the burden on business: Again we note the Government's assertions about the expeditious introduction of the new controls on the supply of military goods to embargoed destinations, and query how, exactly, the Government is going to undertake the necessary awareness raising and training of all those British persons around the World who may, potentially, be affected by these new regulations.

  Recommendation Twenty-Six—Other considerations: We would add that US re-export concerns, under that country's "deemed export" provisions, could make it highly problematic for any Parliamentarians or Committee Members who are either foreign or dual nationals from being allowed sight of any technical information on an item of US military technology for which a licence (either export or trade) has been applied for. In such circumstances someone would have to apply for an export licence from the US Government for this technical information to be allowed to be passed on to that foreign or dual national, whoever they may be. These US controls also have a very interesting potential impact on the employment of non-UK nationals within the British Government departments (DTI, MoD, FCO, DfID, etc) who may have sight of such US-sourced technical information in support of a relevant licence application!

  Recommendation Twenty-Seven—Other considerations: We fully support the Government's stance on penalties, which the Committee has also endorsed.

  Recommendation Thirty-One—Other considerations: Whilst we have not yet had adequate time to peruse the new Orders thoroughly, we do note that the Government's assurances that "The scope of the Orders has not changed" needs to be carefully examined, as it might be slightly disingenuous. For instance, we note that, under 4.5d of the Trade Order, "reinsurance services" are now mentioned as being exempted from the controls on controlled goods, which means that they will be caught under the controls on restricted goods. Similarly the inclusion of long-range UAVs, and their components, alongside long-range missiles, as items on the list of restricted goods did not really raise itself in the 30th January consultative document. We will need to spend some time very carefully perusing the new Orders to identify other amendments which have been made.

  We hope that the above additional comments may be of interest to the Committee.

November 2003




 
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