Quadripartite Select Committee Written Evidence


Appendix 19: Further memorandum from the Defence Manufacturers Association

AWARENESS

  Over a period of some eight weeks from mid-January to the end of February 2004 a small DMA, DTI, HM Customs & Excise team, with a couple of helpful appearances early on from the MoD(UK) and FCO, travelled well over five and half thousand miles (ie more than the distance between London and Los Angeles!) to brief over 700 representatives from UK firms in 13 different locations around the UK, from Exeter to Glasgow, Belfast to Duxford, on the new Export Control Act 2002, which will be coming into force on 1 May 2004.

  This highly ambitious and exhausting roadshow, which began in London on 15 January was jointly organised by the DMA and the DTI, with assistance from a range of other national and regional bodies scattered across the UK, to provide awareness of the new Act and its implications for UK firms and to help British Industry to frame implementation and compliance procedures to meet their new regulatory requirements from 1 May. It built upon the success of the previously successful roadshow similarly jointly organised by the DMA and DTI in October 2002 to April 2003, which was attended by some 650 people around the country. This means that the DMA and DTI, at their own various events, as well as participation at those organised by other bodies, have now between them briefed some 4,000+ people around the country (as well as overseas) since the Act received Royal Assent in July 2002. It is hoped that these considerable efforts will have enabled those affected by the new regulations to be in a better position to be adequately prepared for their implementation.

  One of the clearest lessons to come out of the roadshow is the need for even more efforts to have to be made to spread awareness not just of the new regulations, but of the existing export control system, as well amongst UK companies, as there is still much confusion in many firms on fundamental aspects of the British export control system, and many common misconceptions. We understand that the Communications Unit within the DTI's Export Control Organisation is seeking to address this perceived need in a very constructive way.

  Attached is a brief summary from the Society of British Aerospace Companies (SBAC) which consolidates the awareness findings of a survey which it recently undertook of a cross-section of its Members.

  We hope that our efforts will have helped to promote a greater widespread awareness of the new regulations within the UK, although the issue of promoting awareness amongst those British nationals overseas who may be affected by the "restricted goods" trade controls is one which still, in our view, needs to be addressed. For the most part companies now appear to be much more relaxed about the practicality of complying with the new regulations, although on the roadshow we did occasionally come across some whose views differed from this generally positive line (including one company at the Exeter briefing who asked: "Does the DTI realise the complete paralysis of all commercial activity here in the UK that will result from the imposition of these draconian controls by the British Government's thought police?") Such views are now in the minority!

LACUNAE IN THE ECA

  Identified Lacunae in the Export Control Act 2002's Secondary Legislation, include the following:

    1.   Software

    The legislation explicitly (articles 6 & 7) purports to control the electronic (intangible) transfer of software. However, it fails in this objective, for technical reasons. Since software is defined for the purposes of the Export of Goods, Transfer of Technology and Provision of Technical Assistance (Control) Order 2003 as, "means one or more `programmes' or `microprogrammes' fixed in a tangible medium of expression", it is axiomatic that anything which is intangible cannot be "software" for the purposes of this Order.

    2.   Electronic and Non-Electronic Transfer of Software and Technology and End-Use Controls

  Here again the apparent legislative aim has been frustrated by the drafting, this time imposing a potential burden on both legitimate industry and on government whilst leaving the area of risk unregulated. Articles 8 and 9 seek to impose controls on the electronic and non-electronic "transfer" of software and technology in an "end-use" context. Article 8(1) has the apparent effect of requiring a licence for the electronic "transfer" of software or technology to a person or place in the United Kingdom in an end-use context. The DTI has now informed us that this will require a UK company wishing to hold technical discussions with MoD(UK) on a WMD detection programme to have an export licence for such discussions, since the transfer would be from a person in the UK to a person in the UK, with reason to believe that the technology would be used outside the EU by our own Armed Forces. The lacuna in these provisions arises from the definition of "transfer". Article 2 defines "transfer" as, "transfer", in relation to any "software" or "technology", means the "transfer by any electronic" or "transfer by non-electronic means"(or any combination of electronic and non-electronic means) from a person or place within the United Kingdom". Since it is clear from the definition of transfer that the transferor must be within the United Kingdom, the objective of controlling the actions of UK persons outside the UK has not been met. In short, a legitimate UK company would need a licence in the circumstances outlined above to discuss with our own MoD a defensive system for use by our own forces personnel—whilst, however, a disaffected UK person acting whilst. outside of the EU could communicate with whomever in an "end-use" context envisaged by this Order yet remain beyond the reach of this legislation. Which is the activity that poses the greater risk? It appears that the legislation, if it were compared to a weapon, succeeds in leaving the target unscathed whilst causing considerable collateral damage.

INTERPRETATION

  It is clear that the DTI's interpretation of the new legislation has "varied" in certain instances from time to time. This has resulted in certain comments being made by companies about the apparent lack of total certainty about what is export controllable activity. One company at one meeting with DTI expressed this as "how long did it take for the DTI team to become confident enough in knowing their own regulations to decide how they would be implemented? Are they expecting industry to devote the same amount of time to this activity? If they are not then how can they expect industry to comply with the law in a way that will guarantee their employees do not go to prison?" The lack of consistent interpretation on some areas of the new regulations has resulted in unease being expressed by firms as to what might happen if or when these interpretations change again at some future stage. Companies need to know, with certainty, what the law is, if they are to be expected to abide by it.

Impact of export controls on UK Industry's competitiveness—

  There is a common feeling within many companies that the additional burden of export controls under the new regulations will result, of necessity, in them having to employ more staff to deal with export control issues, which, in turn, will increase their overheads, having an impact on their general competitiveness. Certainly we know of at least one (SME) company which operates at the component level who stated some years ago that it was having to decide not to compete for some potential business opportunities at all because, with the high value of the £ sterling, it was having to cut its prices to rock bottom to have any chance of winning contracts, and in certain cases if they factored in the overheads costs of applying for licences then their bids would not be competitive enough to win, whilst if they did not do this they might win the contract, but when the actual overheads were then added it would not have made any commercial sense.

HMG's interpretation of the EU Code of Conduct—

  There is a general perception within UK Industry that the British Government's interpretation of the EU Code of Conduct (and EU Embargoes) is amongst the strictest of EU Member states. Certainly comments have been made in the past specifically with regard to the embargoes currently in place on the People's Republic of China and Cyprus.

EXPORT CONTROL LEGISLATION

SBAC Associate Member Telephone Survey

  Twenty SBAC Associate Member companies were surveyed. The sample is statistically robust percentage of all associate members and a random sample of types of business.

  Returns were based on a telephone questionnaire directly mainly to export; sales or marketing personnel who were responsible for company compliance. In a few cases, MDs took the call. Duration was between 5 and 10 minutes with respondents also given an opportunity to expand on the issues covered by the questionnaire.

  The main results were:

Awareness and briefings

    —  two firms were not aware of the issue until SBAC contacted them. The rest were at least aware of the legislation, most were familiar with the changes in the legislation;

    —  10 had used DTI website or briefing sessions;

    —  four had attended DMA briefings; and

    —  two had used SBAC routes.

Costs

    —  All of the companies that were aware of the issue and which were involved in defence business were incurring some costs either directly in terms of contracted training and other manpower training costs.

    —  One company estimated immediate direct costs at £0.5-0.75 million. Others were estimating in the region of £5-50,000 K.

    —  Most were allocating between 2-3 man days and 2 man weeks depending on size of company for training.

General Comments

    —  A certain degree of resignation in coping with more regulation but general willingness to get on with things and work with DTI compliance team to establish sound processes such as buying clean lap tops for foreign visits.

    —  A small number reported real difficulties especially with foreign based subsidiaries and additional complications in applying for licenses.

    —  This included one company that felt that it was at a commercial disadvantage compared to its European competitors.

Comments on results

  So far so good seems to be the rule, with many firms waiting for a compliance visit to see how they shape up. While there have been no real delays in getting licenses, there is a concern that things might get worse, but we will have to check again after the legislation has been in force for a period.

March 2004




 
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