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—
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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