House of Commons - Defence - First Joint Report

Select Committee on Defence First Joint Report

3 STRATEGIC EXPORT CONTROLS ANNUAL REPORT 2003 AND THE QUARTERLY 2004 REPORTS

24. We have tracked steady improvements by Government in the reporting of arms exports, and the Government Report for 2003 marked further positive change. The Report[17] gives specific information on SIEL incorporation licences[18] for the first time, which is particularly commendable as data for the first quarter of the year had to be collected manually.[19] A list of gifts of military equipment made by the Government also appears in the Report, as recommended by the Committees in 2003.[20] Saferworld described this as "a welcome move."[21] We are pleased to note that information on incorporation SIELs and gifts of military equipment is now available in the Government's Annual Report, and commend the effort made by the Government to produce SIEL incorporation data for the whole of 2003.

25. We noted in our last Report that information about Global Project Licences would appear in the 2003 Report for the first time, commenting:

The Government's 2003 Report refers to this development, and the issue of a licence to France, but gives no further details.[23] We recommend that the Government sets out in its response to this Report the progress that has been made on publication of information about Global Project Licences across the Framework Agreement States.

26. Perhaps the most significant development, however, has been the introduction of quarterly reporting on arms exports. Reports have been produced on-line for January-March, April-June and July-September 2004.[24] We were told by Andy McLean, Deputy Director of Saferworld, that:

27. This initiative means that information in the public domain is much more up-to-date. Until now, for example, the details of licences issued in February would not have been available until the June or July of the following year. The latest quarterly reports that have been produced (for the second and third quarter of 2004) include information on Standard and Open Individual Trade Control Licences (SITCLs and OITCLs), which we discuss in detail later in this Report.[26]

28. The Foreign Secretary was justly proud of this record when he gave evidence to us, recalling that he had shown the Annual Report to colleague Foreign Ministers to be greeted with astonishment "about the amount of detail that we are providing",[27] adding that "we now have one of the most, if not the most, transparent systems in the world."[28] The work done for us by Dr Sibylle Bauer, one of our Advisers, shows that the UK has indeed set precedents in important areas, although her paper also notes that there are areas in which the UK could learn lessons from elsewhere, which we discuss later in this Report.[29]

29. Taking these developments in reporting as a package, we give praise where praise is due. The UK is now one of the most timely publishers of information on arms exports in the EU. Furthermore, its work on incorporation licences and the publication of country of origin and destination for 'trafficking and brokering licences' is precedent-setting. We congratulate the Government on this work.

What more needs to be done

30. While there is much work of which the Government can be proud, there is still more to do. We noted the "virtuous circle" of accountability and transparency in 2002:[30]

As ever, greater accountability leads to demands for more. That is a positive development, indicating that the Government's work is not wasted—people do care, and care deeply, that the UK should operate its system of export controls fairly and in accordance with the highest ethical standards.

It is important that the Government does not fall back from its own level of best practice, but seeks to improve the quality of information that it makes available. Producing information that is clear and more difficult to misinterpret is in everyone's interests, particularly the Government's.

END-USE INFORMATION

31. We have repeatedly commented on the lack of information about the end use of equipment in the Government's Annual Reports, for example in our 2004 Report. We stated that "End use information is the key to real transparency and scrutiny,"[31] concluding that "it would be in the Government's interest to publish more information on end use."[32] Classification of licensing decisions by the nationality of destination, rather than by the nationality of recipient, continues to cause problems.[33]

32. The reasons why information on end use has become increasingly important were set out in a recent paper by the Stockholm International Peace Research Institute (SIPRI):

33. The Government has taken steps towards making this information available, as it noted in its response to our last Report.[35] Entries that could appear inconsistent with the Criteria and Government Policy (for example where Military List items have been licensed to an embargoed destination) appear with a footnote.[36] This development has been welcomed by Saferworld.[37] In addition to this, the Government told us that "following questions about licences granted for toxic chemical precursors, whose end use was entirely innocuous, the Report now provides the stated end use".[38]

34. However, there is still a risk of confusion among readers of the Annual and Quarterly Reports. We used a hypothetical example last year to illustrate the problem:

We also gave examples of real-life misunderstandings.[40]

35. In its response to our Report, the Government stated that it "has looked at whether it could provide information on categories of end users (e.g. government/non-government), but concluded that it is not cost-effective within the limitations of its current licensing databases to extract the relevant information [...] In order to achieve such a breakdown, application forms would have to be amended and the databases restructured. Neither is feasible at the moment, but, this issue is being considered in the longer term in the context of gradual improvements to databases."[41]

36. We were pleased to be told by the Foreign Office that relevant IT projects were underway. Dr Landsman, the Head of the FCO's Counter-Proliferation Department, said:

When asked if he could give us an assurance that the new software would be able to generate more information automatically, he replied:

Dr Landsman undertook to keep us informed about the development of the project.[44] The Government's latest submission to the Committees reiterated that the issue "was being considered", but added a note of caution: "there are also policy considerations that need to be resolved, concerning the level of information about end users that can be released."[45]

37. We recommend that the Government expedite work on resolving the practical and policy barriers to publishing information on categories of end user. We hope that the practical problems can be overcome during the next software upgrade. We look forward to learning of the progress of this project; we recommend that the Government considers inviting the Committees in the next Parliament to assist with reviewing or commenting on the specifications for new information systems.

TRADE LICENCES

38. Controls on the trade in military equipment between overseas countries (including 'trafficking' and 'brokering') came into force in May 2004. For the first time, licences are required to authorise aspects of this trade, which are known as Standard or Open Individual Trade Control Licences (SITCLs and OITCLs).

39. The Government's Report on Strategic Export Licences for April-June 2004 included a separate section listing source and destination countries with numbers of SITCLs and OITCLs issued, refused and revoked.[46] The level of detail has been criticised, particularly by Saferworld, which commented in its Annual Report that the information was "so limited as to be virtually meaningless."[47]

40. In its response to our last Report, the Government stated that it would:

41. We infer from the Government's response to our last Report that fuller information on SITCLs and OITCLs will be provided in the 2004 Annual Report than in Quarterly Reports. The Committees look to the Government to confirm that this is still its intention and invite it to indicate whether it would consider providing this greater level of detail on a quarterly basis.

INCORPORATION

42. As we have already noted, the Government indicates in its Annual and Quarterly Reports when equipment is being exported under a SIEL to be incorporated in another product. It does not make the eventual destination of that product public. This policy has been criticised by NGOs, including Saferworld[49] and the Campaign against Arms Trade.[50]

43. Some of the information has, however, been made available to us on a confidential basis. We have been able to examine whether there are any inconsistencies between those licences granted for incorporation and those for finished goods. However, no information is available at all on goods exported under an OIEL which are to be used for incorporation. The Government told us that "There is currently no way to identify incorporation cases from our IT system without manually screening all the applications at the time of writing the Report. In addition, the nature of OIELs is such that they do not necessarily specify end users in the permitted destinations."[51] The lack of information about incorporation OIELs is worrying, as it means we only have a partial picture of how British components and technology are being used abroad. We hope that the software upgrade currently underway can be configured so that this information can be made available to us on a confidential basis.

ACTUAL EXPORTS

44. We noted in our last Report that more should be done to collect information on actual exports, as "the very basic information provided on the value of exports is not directly comparable with the categories of goods which the Government controls."[52] This issue was discussed at a recent meeting held on a SIPRI Policy Paper on improving the annual reporting on the EU Code of Conduct on Arms Exports.[53] A study conducted prior to the meeting had shown that it was considered impossible to produce reliable figures on actual exports using customs data, and concluded that "EU member states should move towards the use of industry data, which would be more accurate and more comparable, through a COARM decision to collect industry data across the EU."[54]

45. We therefore asked the Government whether it had given thought to requiring industry to gather data on actual exports. It replied that it did "not believe it would be justified in asking industry to take on an additional record-keeping burden for this purpose, particularly given the extra work required of industry by the new export controls".[55] We recommend that the Government should keep open the possibility of asking industry to gather data on actual exports. While this would impose an extra burden on companies it would enable further and more accurate information to be made available.

Overall performance of the new export control system

46. This is our first Report since the full range of controls came into effect in May 2004. However, much of the published material we are examining predates that change. In assessing the performance of the new controls, we are therefore relying on the early impressions of Government, industry and NGOs. We hope that our successor Committees will be in a position to monitor the impact of these changes on the basis of fuller data.

GENERAL PERFORMANCE

47. We were pleased to receive positive feedback from industry on the current working of the licensing system. We were told by witnesses from the Export Group on Aerospace and Defence (EGAD) that:

At the moment the feedback from member companies is that the licensing system appears to be working more expeditiously and more efficiently than at any time in living memory. It appears to be working extremely well.[

These observations were borne out by the written evidence we received from the Government, which stated that overall licensing performance had improved year-on-year.[57] Whereas in 2002 59% of all SIEL applications that were circulated to other Government Departments were processed within 20 working days,[58] the equivalent figure for 2003 was 76%.[59] Given that this was a period of change for the Export Control Organisation (ECO), which was adjusting to the new licensing regime, this is commendable.

48. Performance on appeals is, however, still poor; the Government stated in its 2003 Report that "The Department for Trade and Industry is working with other Government Departments on adjustments to the appeals procedure and appeals processing times to improve performance against this target."[60]

TRADE CONTROL LICENCES: LOW NUMBER OF APPLICATIONS

49. We commented in 2003 that "the efficient administration of the new controls will be crucial to their success."[61] The written evidence we received from the Government showed that the processing times of trade control licences was reasonable, although the figure for SITCLs (64% of applications completed within 20 or 60 working day target as relevant) was disappointing. The Government explained this as follows: "This represents a decrease in performance caused by events unrelated to the introduction of the new controls and out of HMG's control, that is, the UNSCR on Iraq and the need to delay processing until its finalisation."[62]

50. The Government also supplied us with detailed information on the number of applications for the new types of licence between 1 November 2003 and the end of August 2004. There were notable differences between these and the revised Regulatory Impact Assessment; in particular, the number of SITCL applications was much lower than expected (81 compared to a prediction of 900-1500).[63] The Government's memorandum noted that the RIA had been revised after public consultation and that this figure was "more in line with pre-consultation estimates."[64] Indeed, the Government had commented in an earlier report that it expected 100-250 SITCL applications a year.[65]

51. We were, however, keen to explore the reasons why take-up of licences had been lower than expected. It could mean that people do not know about the new controls, or are evading them, which would be a matter of concern. It is also possible that it relates to a greater than expected use of open licensing.

Lack of knowledge?

52. EGAD was complimentary about the outreach work done by the Government so far, commenting that "staff at the Export Control Organisation are to be commended for the highly constructive way in which they have sought to implement and enforce the new regulations."[66] The Government described its various activities in written evidence to us, including awareness visits to individual companies, regional awareness seminars and liaison with the organisers of and exhibitors at the Farnborough Air Show.[67] However, EGAD emphasised that the job was by no means complete:

Deliberate evasion?

53. Concerns have been expressed by NGOs that companies have located their operations abroad in order to avoid the new controls. Robert Parker of Amnesty International noted "how hard it is to track these people down"[69] and Oliver Sprague of Oxfam commented on a case which predated introduction of the controls but illustrated the nature of that part of the arms trade:

The UK Working Group on Arms concluded that this was a powerful argument to introduce full extra-territorial controls on arms broker and traffickers,[71] something which the Committees have argued for before, and which we discuss later in this Report.[72]

54. We asked the Government whether it was aware of any firms relocating in this way. It replied that it was "not aware of any cases where businesses have relocated their operations to avoid UK controls".[73]

55. The fact that the number of SITCL licences issued is much lower than predicted in the revised RIA is not necessarily a matter of concern, and it is too early to tell what the reasons for it might be. However, the evidence we have received shows the importance of the ECO's outreach work, and the need to remain vigilant for arms dealers relocating abroad to avoid the new controls.

GREATER USE OF OPEN LICENCES?

56. The Export Group on Aerospace and Defence (EGAD) commented that an increase in the scope of open licensing could account for, among other things, the lower than expected number of SITCLs issued. Its memorandum stated that:

Whilst the numbers of actual licence applications under the new regulations does not appear to be as great as many in Industry had feared would be the case, we believe that this is because:—the portfolio and scope of the OGEL system has been noticeably increased; and for some activities it is now stated by DTI that companies need 680s rather than export licences.[

57. This is consistent with the information supplied by the Government, which noted that the number of OGEL applications between 1 November 2003 and the end of August 2004 was much higher than that predicted in the RIA, particularly in the area of military technology (371 compared to a prediction of between 20 and 40).[75]

58. We asked the Government for an explanation of these figures. It replied that it was "still too early to draw any conclusions about the level of licence applications under the new controls" but added "We believe the discrepancy between the actual numbers of applications and the RIA can be explained by industry now having a better grasp of the activities that are licensable and more importantly, what activities are covered by the Open General Trade Control Licence (OGTCL), and Open Individual Trade Control Licences (OITCLs). The OGTCL gives licence coverage for many of the routine transactions which exporters feared would require an individual licence."[76]

59. The Government added that increased use of the Miltech OGEL was "due to the success of our awareness campaign on the new controls. Companies have a better understanding now not only of what activities are controlled, but also of what the Miltech OGEL covers, and are therefore registering to use it, where previously, some were unnecessarily applying for Standard Individual Export Licences (SIELs)".[77]

60. A reply by the DTI to questions about the future of the Export Control Organisation, however, included the comment that ECO staff were now "encouraging exporters to use open licences whenever these are available."[78]

61. The Committees noted in 2003 that:

We concluded:

62. The UK Working Group on Arms stated that "If there are to be cuts [at the ECO] […] I think there is a great risk that could lead to a greater proportion of equipment going on open licences, which will of course lead to less transparency."[81] On the basis of the evidence we have received from the Department for Trade and Industry, and the statistics from the Government, it appears that there is now an active drive for open licensing. We are dismayed that this is happening in the context of resource cuts at the Export Control Organisation, and uncertainty about its future, which we discuss later in this Report. As we have noted in the past, single licences are inherently more transparent and a stricter form of regulation. We recommend that the Government should conduct an immediate review of the scope of open licensing, and that our successor Committees should examine the results of this as soon as possible.

WMD PROVISIONS: INDUSTRY CONCERNS

63. We noted in our last Report that the bureaucratic burden of complying with the new controls should be "reasonable, predictable and well understood."[82] While this appears generally to have been the case with Trade Control Licences, a number of concerns were expressed by industry. The Government had assured us that the problems had been dealt with:

64. However, the memorandum by EGAD stated that:

65. In particular, EGAD expressed concern about the following:

the OGEL (Exports or Transfers in Support of UK Government Defence Contracts) (sometimes known as the Mod Cons OGEL) covers only technical assistance and technology transfers in relation to programmes under contract to the MOD. It excludes pre-contract technical discussions.
Blue light emergency services are excluded, although there are emergency deployments outside the UK which brings them within the scope of the controls.
The narrowing of the scope of "relevant use" does not apply to equipment incorporating detection papers or other NBC detection kit, as most protective suits do. Industry therefore consider there to be an inconsistent approach between the treatment of suits and the treatment of platforms, such as ships or vehicles, which are not treated as for "relevant use" if they carry detection/identification equipment.
Support for HM ships, whose precise location in relation to territorial waters of countries covered by the OGEL may be unknown.[85]

66. We asked the Government for its comments on these points. It provided us with a detailed reply in each case.[86] At the time of writing this Report, discussions were continuing between industry and Government. NBC UK (the marketing group of UK Nuclear, Chemical and Biological Defence Capability) had submitted another detailed memorandum to the FCO seeking resolution of a number of points.

67. This is, of course, an area in which we would expect the Government to take stringent control measures. At the same time, the Government and blue-light emergency services need the highest possible capability in NBC protection and detection, and should be fostering a successful domestic industry which can provide this.

68. The fact that there are so many uncertainties about the WMD export control provisions is a matter of concern and we urge industry and the Government to resolve these issues as soon as possible.

CONCLUSION

69. The Government concluded in response to written questions that "It is too soon to draw any firm conclusions but so far the new controls appear to be working as intended and at the same time do not appear to have caused any major difficulties for either industry or government". On the basis of the evidence we have received this seems to be a reasonable, although slightly rose-tinted, assessment. We note that much has been done by the ECO to ensure that the new controls are operating well, and recommend that our successor Committees conduct a full assessment of the new export control system once more information is available.

17 Ministry of Defence, Foreign and Commonwealth Office, Department for International Development, Department of Trade and Industry, United Kingdom Strategic Export Controls: Annual Report 2003, Cm 6173, June 2004 (henceforth "HMG 2003 Annual Report"). Back

18 Those applications where the goods are to be incorporated into other goods in the end user country. See also Defence, Foreign Affairs, International Development and Trade and Industry Committees, Second Joint Report of Session 2002-03, Strategic Export Controls: Annual Report for 2001, Licensing Policy and Parliamentary Scrutiny, HC 474, para 142 (henceforth "Committees' 2003 Report"). Back

19 HMG 2003 Annual Report, page 12 Back

20 Committees' 2003 Report, para 104. See also Government Response to the Second Joint Report from the Committees, Session 2002-03, Cm 5943, page 10. Back

21 An independent audit of the UK Government Reports on Strategic Export Controls for 2003 and the first half of 2004 (henceforth referred to as "Saferworld Report"), page 29. Back

22 Committees' 2004 Report, para 22 Back

23 HMG 2003 Annual Report, page 14 Back

24 Available at www.fco.gov.uk Back

26 See paras 38-41. Back

27 Q 97 Back