Select Committee on Defence Written Evidence


Appendix 7:  Memorandum from the Export Group for Aerospace and Defence

INDUSTRY'S ASSESSMENT OF HOW THE NEW LEGISLATION IS WORKING IN PRACTICE (ESPECIALLY ON THE INTANGIBLE TRANSFER OF TECHNOLOGY SIDE)

  The feedback that we have at present from Member companies is that, for the vast majority, there have been few problems encountered, and that the 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, working with Industry on compliance issues and organizing a series of workshops around the country to help to spread awareness of export control regulations and how to comply with them. However, there are still some glaring uncertainties in a number of the more wide-ranging aspects of the new regulations (eg on WMD for the transfer of technology and technical assistance, and restricted goods/embargoed destinations under the trade controls), and discussions between Industry and the ECO are continuing constructively to try to iron out these continuing uncertainties on a range of issues. However, we would say that some of the DTI interpretations issued could be charitably described as being so tortuous in their logic and arguments that Industry's own legal experts have had to query the actual legality of the guidance that they contain. In the absence of certainty, one cannot comply with, only try to interpret, the law, which puts smaller companies with more limited dedicated resources at a considerable disadvantage, and at grave risk of inadvertent infringement of the regulations.

  It is not just Industry which is confronted by the uncertainties arising from the immensely wide-ranging scope of some of the more extensive aspects of the new regulations, but also HMG, itself, and we know, for instance, of one example in which a British Training Team based in an allied nation overseas has felt constrained from discussing the operational use of an item of Chemical, Biological, Radiological and Nuclear (CBRN) technology with their hosts because of the possibility that this might result in the relevant supplier company falling in breach of the technical assistance provisions of the new Act.

  One area in which there has been some more critical feedback is with regard to the apparent lack of any clear, consistent and accepted understanding in the interpretation of the issue of record keeping for intangibles between the staff of the ECO's Compliance Unit, who carry out the compliance audits of companies. There does appear to be some inconsistency in the understanding of what the DTI meant by its proposed "functional approach" to this matter, as described in its own supplementary guidance documents. As a result, in some cases, there appear to be conflicts of understanding between officials and with the guidance which the DTI has issued as to what records companies need to keep in order to demonstrate compliance.

  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;

    —  For some activities it is now stated by DTI that companies need 680s, rather than export licences (although this advice would appear to be in conflict with Articles 3.3, 4.5 and 5.2 of the Export of Goods, Transfer of Technology and Provision of Technical Assistance (Control) Order 2003, which clearly state that licences are required).

  One other additional area of concern that we have regards the guidance being given to companies by DTI on the provision of technical assistance (see: http://www.dti.gov.uk/export.control/publications/sgnwmdeca2003.pdf) where it states (on page 5) that "technical assistance" can only be provided where this activity relates to existing systems. We believe that this could defeat the intended legislative purpose behind the new regulations, which surely must have been to prevent undesirable persons from acquiring, deploying and using CBRN equipment/technology. This interpretation creates the potential loophole that someone can provide all the technical assistance they want to a customer perfectly legitimately provided that they provide this prior to the client actually acquiring the goods involved.

THE CHINA EMBARGO

  Whilst we are sure that there is a perception that the Defence Industry must be lobbying in support of the proposed lifting of the embargo on China (as exemplified in a letter from Graham Watson MEP in the Financial Times of 10 December, in which he states: "No doubt several member states will face heavy lobbying from their industrial-military conglomerates while Beijing launches a charm offensive from the other end in support of lifting the arms embargo in place since the Tiananmen massacre of 1989") the true situation is much more complicated than that. Sensitivities mean that it would be very difficult, and unwise, for anyone, claiming to be speaking on behalf of all or part of British Industry, to state publicly a stance one way or the other on this matter. However, we are certain that the perceived concerns of many that the lifting of the embargo could result in a flood of new business opportunities for the supply of defence equipment and technology to China are (at least as far as the UK is concerned) completely unfounded, as we are completely confident, based on the many practical experiences of our Members, that HMG's interpretation of the EU Code of Conduct can be thoroughly relied upon to prevent any deals which would previously have been caught by the embargo from receiving licence approval after this has been lifted.

THE LIFTING OF THE LIBYA EMBARGO

  Similarly, whilst we are certain that there will be considerable potential and wide-ranging requirements for the supply of export licensable material to Libya, many public perceptions concerning the lifting of the EU's embargo on Libya are greatly oversimplified and fail to take account of the fact that all licence applications will be judged against the criteria set out in the EU Code of Conduct—thus the lifting of the embargo will not serve as the prelude to sales of anything and everything to Libya that they might require, and we are sure that there would be considerable difficulties for UK firms to obtain export licences for the more sensitive types of goods and technologies (eg weapons systems, riot control equipment, etc). Our standard advice for any UK firm considering doing business in Libya (and China) is always to seek 680 clearances beforehand, to avoid nugatory effort. The continuing US embargo on the supply of any goods or technologies on their Munitions List will also need to be borne in mind by UK firms wanting to sell equipment containing any US Munitions List content, such as components or sub-systems.

THE ITAR WAIVER

  Our assessment is that any ITAR Waiver for the UK is now likely to be some way off, at best, due to continuing political opposition on Capitol Hill. The proposal contained in the FY05 Defense Authorisation Bill, passed in October 2004, for there to be introduced an expedited licensing process for the UK has yet to be described in any detail as to how this will work in practice, or what the "special circumstances" are under which this expedited process will not be used. Without this basic information we are unable to give any kind of assessment as to what benefits these proposals will create, whether they might not be so beneficial that the proposed ITAR Waiver would now be redundant, or whether this proposal is merely insubstantial window dressing.

THE GOVERNMENT'S RESPONSE TO OUR PREVIOUS EVIDENCE

Is UK Industry is being disadvantaged in China vis-a"-vis our EU competitors and is the UK's interpretation of the EU Embargo on China more strict than other EU members?

  We feel, with hindsight, that perhaps it might have been more politic for us to have described the UK's interpretation of the EU Embargo as being "exemplary", rather than "more strict", as we are certain that HMG could not have taken issue with that! We can provide the Committees with case studies to demonstrate the reasons why many British companies feel that a number of other EU Member States have different and more industry-friendly interpretations.

Are the German licence requirements for exhibitions as strict as the UK ones and does the German system allow the issuing of export licenses over the phone?

  Whilst the Government has sought to take issue with these observations, we will be delighted to provide definitive and unequivocal evidence that the German system does, indeed, allow German companies to obtain temporary export licences for exhibitions overseas simply in the course of a telephone call, even including for the most sensitive of goods to quite sensitive regions.

Are France's NBC licensing requirements in the non-military sector as strict as the UK ones?

  Again, we will be delighted to provide evidence to the Committee to support our previous comments.

Is there a lack of consistency in EU Members' control lists?

  Whilst there are some discrepancies in the various EU Member States' control lists (which we have highlighted before), perhaps a more pressing inconsistency is in the various, and varied, national interpretations of what constitutes "specially designed or modified" for military use, which can result in some national regulatory bodies ruling that items are not even licensable whilst others (including our own) would rate them as being licensable and almost certainly refuse the subsequent licence applications.

  We have a number of case studies reported to us by Members that we can give to back this up:

  Case One: A British company was refused an export licence by DTI for the supply of a particular system to India. The Indian customer reported that a French subsidiary of a US company had picked up business associated with the supply of the same system, and then rubbed salt into the wound by gleefully remarking that they did not need an export licence from the French authorities at all. "We are definitely being penalized as a result of being British!"

  Case Two: A member company has detailed the experience of an affiliate business based in another EC member state exporting goods, components of which were licensed as being military from two other member states (one of which was the UK)—thus strongly suggesting that the final goods were themselves, at the very least, modified for military use—to China for end-use by the Chinese military. The company which supplied the final goods made enquiries with its national government regulatory authorities, which concluded that the goods were "No Licence Required" and, even more bizarrely, that they were not caught by the military end-use control in EC Reg 1334/2000 because they were not military—this shows a fundamental lack of understanding of that provision. The final goods would have required a licence as military if exported from the UK, whilst conversely they will not even show up as a controlled export in the records of the member state concerned, as it was ruled that no licence was required. This serves to demonstrate both widely differing interpretations of the controls at a fundamental level and of the EU embargo on China. It reinforces the point that the UK Government interprets both much more rigidly than some other member states of the EU, resulting in disadvantage to British industry.

  Lack of harmonised control mechanisms on technology have also been noted by a number of our companies.

  Case Three: "We have seen absolutely no evidence of any kind of a European company controlling the release of Controlled Technology to the extent required under UK Export Control Regulations. We find that we have a real "issue" when applying the UK Export Control Law—particularly with respect to information exchange (tangibles and intangible data)—our EU and US (and other friendly nation) customers do not understand (and feel quite upset as customers) when visiting UK (or when giving our presentations to them), when we say we cannot give them immediate responses to their questions—but instead we now feel obliged to say "if you send me your request by letter with an End Use Certificate, I might get you an answer in about three to four weeks time." None of our EU customers appear constrained in this way, and cheerfully hand over documents, diagrams and drawings without demur as soon as we ask for them! We have never been asked to put our request in writing or to provide an `end use' statement before they give us data."

Does the UK have a stricter interpretation of the EU Code of Conduct than other EU states and is there inconsistent interpretation of the EU Code of Conduct across the EU?

  In response to the Government's response to the comments which we had made, one company's observation is:

  "In simple terms rubbish—but is difficult to prove without name dropping other EU companies with whom we collaborate"

  Case Four: "In 2002, we were approached by FIAR (now Galileo Avionica) to supply radomes for their Griffo radar to be fitted to the PRC `Super Seven' fighter aircraft, for launch customer Pakistan Air Force. Applications were made to the relevant DESO directorates for 680 Authority to Promote in April 2002. A negative response was received in February 2003, citing Criterion 4 as grounds for refusal. In the meantime FIAR had located an alternative source in Italy who proceeded with radome qualification and supply."

  Case Five: Earlier this year a British company applied for a 680 for the supply of armour tool kits to Indonesia, and was informed that the answer was "no go". The proposed customer informed the UK company that they had been told that there would be no problems in obtaining the necessary materiel from a competitor in Belgium, instead.

  Case Six: "During our last meeting I raised the issue of a French Company receiving Export Clearance for a similar product where we had been refused. We had been approached by a Danish Company to supply NBC Filters to the Pakistani Navy. This was for eight vessels, five built in Pakistan and the remainder in China. I was not hopeful for clearance!!! When I raised the question on the inquiry some months later I was informed that a French Company, SP Defence, had received approval to supply. This information came to me from the Danish but I have no reason to doubt the validity. The Pakistanis were particularly keen on our equipment, not only was it competitively priced but was technically superior to the French system."

  Case Seven: "Proof is a difficult thing to obtain. However, one can cite examples were one feels bound by HMG. On almost every occasion when we have tendered overseas and the tender has required a sample, we have to go through the export licence system. This, as you know is between 20 to 30 days long. Yet our competitors seem to be able to submit samples straight away. How can they do this? Do they have a slick export licence system? Or are they simply putting samples on carriers without an export licence? Both are difficult to prove, but I know that we are always last to provide samples, and this can not help us."

  Case Eight: "In respect of the export licence issues our experience recently shows that we find long delays in the granting of export licences for the issuing of export licences for personal body armour to be given to a major British private security company operating in Iraq. These delays, as can be appreciated, can endanger the lives of British personnel in such a hostile environment. We are all well aware of the consequences when our British soldiers did not get body armour. I find it hard to accept when a valid end user certificate is issued, and such equipment is for British personnel that such considerable delays occur endangering lives, as well as encouraging the placement of orders to other countries who can issue licences in a more prompt manner."

Discussions with MoD (UK)

  In response to HMG assurances that licensability of technical discussions with MoD(UK) would be a very rare occurrence, a panel of Industry experts was consulted, whose conclusions were:

  1.  There is a significant possibility a transfer will take place when two knowledgeable people have a technical discussion but a mere discussion itself will not constitute a transfer, unless a transfer does take place. Whether or not a transfer takes place is therefore a matter of fact and depends on the circumstances of each individual case. This needs to be considered in the light of whether or not what is transferred is licensable in order to determine the need for a licence. The definition of "technology" is very wide and catches just about everything.

  2.  In general terms, the purpose of having a "technical discussion" (or any other type of discussion for that matter) is to transfer information from one party to one or more others. It may be that there is an exchange of information and it flows both ways. A potential problem is that a discussion between two knowledgeable persons at a level that does not require a licence may move into areas where a licence is required as the exchange of information develops and is aggregated. The definition of "information" is very wide and will include views, beliefs, opinions etc as well as "hard" information such as facts, knowledge and data.

  3.  There is a presumption that a "technical discussion" will be between two or more "technical" people, all of which will understand what is being said and thereby allowing transfer to take place. You cannot have a "technical discussion" between, say, a technical specialist and an accountant; one will not understand the other and the discussion will fail. A licence would not be required in this instance as no technology/information would be transferred!

  4.  Articles 8 and 9 are silent on timing of the discussion/transfer and some of the advice given by DTI to Industry to date is irrelevant. It all depends on what is said; when it is said and the knowledge of who said it does not impact on the need to obtain a licence.

  Given the above, the advice from this panel of Industry experts is that it would be prudent for companies to have a licence in place before entering into any dialogue with MoD(UK) where licensable technology may be discussed.

  It should also be noted that DEFCON 126—International Collaboration, is included in all study/development type contracts. This gives MoD(UK) the right (subject to third party rights) to copy any information supplied under the contract and "issue for the purpose of promoting the establishment of an International Collaboration Agreement and for the purposes of technical oversight of an International Collaboration Agreement made". Companies should be very careful about this because it introduces a presumption that MoD(UK) will disclose outside of the UK/EC, information supplied under a contract and for which a licence may be required. The DEFCON also contains a compulsory licensing clause, which may conflict with the requirements of the export controls regulations.

  Attached, at Annex A, is a separate paper further discussing the issue of the licensing of exports or transfers to MoD(UK) in greater detail.

  We really cannot understand, from a logical point of view, why there is not some kind of exemption for the supply of equipment and technology to our own Armed Forces and why, even if HMG is right that such circumstances might be quite rare (which we question), there are any circumstances in which companies should need such licences or what loophole such an exemption would create. Surely a licence is only meant to be required when there might be a threat of proliferation and the authorities might refuse to issue a licence—but under what circumstances would approval for the supply of goods or technology to our own Armed Forces ever be refused? If the answer is "none", then what is the point and surely this whole bureaucratic requirement is merely a total, nugatory waste of everybody's time?

  Case Nine: One Member company has reported that it has developed a new CBRN technology which its legal experts have insisted that the company cannot even discuss with MoD (UK) without having to apply for a licence as, at present, they have no contract with MoD(UK) and, therefore, this is outside of the scope of the OGEL Exports or Transfers in Support of UK Government Defence Contracts.

Have the new UK regulations imposed a significantly greater record-keeping and training burden on Industry?

  The simple answer is "yes". The response of one company to the HMG's denials of the increased burden is: "Rubbish—the new regulations are significantly increasing the paperwork burden when going overseas. Our senior management, engineers, marketing and sales, agents and representatives find the regulations difficult to understand and the lack of examples of what is and is not controlled technology disappointingly obscure. Because of the uncertainty and a natural desire not to be inadvertently caught `offending' we are seeing a marked reduction in the use of lap tops overseas, with consequent detrimental impact to our efficiencies, customer relationships and long term business interests. Our management, engineers and marketing and sales think it lacks total proportionality. In imposing an over strict regime on all strategic exports UK government is in danger of missing the ones that really matter. It would have been better to concentrate on that which really worries them and we could all be able to recognize and work hard to eliminate them. The experience gained in just how little actual, practical control there can be on the totality of military exports will allow those determined to by-pass the system to do so with confidence. The system needs to be simplified."

  The three authoritative estimates that we have received to date from companies on actual costs of implementation, during the six month implementation period alone, came out at: £0.5 million, £0.5 million and £1.8 million, respectively.

Are there any examples of there being inconsistency or uncertainty in any advice that it is being given to companies by DTI

  We are aware of a number of instances of this, but perhaps one of the most telling was the following:

  Case Ten: This concerns a company which applied for a trade control licence for an item caught under the "restricted goods" classification. The DTI officials at first tried to reassure the applicant that no licence of any kind was needed in this case, and it took the company's highly knowledgeable Export Control Compliance Manager's enormous persistence and refusal to accept this ruling, that she knew was incorrect, and several phonecalls, before the DTI officials realised that they were, indeed, wrong and that a licence was needed. Of course, worryingly, a less knowledgeable company might have taken the DTI's original verbal reassurances at face value and proceeded with the activity without a licence.

THE DTI'S COMPLIANCE ASSESSMENTS

  We believe that more resources need to be put into the ECO's Compliance Unit—the staff here are excellent, high quality, professional and highly knowledgeable, but are faced by an extremely heavy workload, which is increasing.


A GENERAL ASSESSMENT OF GOVERNMENT EFFECTIVENESS IN EXPORT CONTROLS

  We do appreciate that the UK's system is, in some aspects, better than many other nations', although, there is still room for improvement and, naturally, for those companies who face the frustrations of having to deal with some of the less efficient aspects of it, this does not bring much solace.

  One area of concern is with regard to the efficacy and user-friendliness of HM Customs & Excise. One company has reported to us the following case study, which leaves a lot to be desired:

    "I was granted a temporary export licence for one item for Portugal, in support of a tender. I read the conditions of use and understood them to mean that I was to attach the export licence to the box so that HM Customs and Excise could process it when it passed through their hands. I duly informed FedEx that this parcel was export licensable goods and the licence was attached. FedEx told me to ring the customs at Stansted, as this is their despatch point, and inform them of this parcel. What follows is the shortened version of events! This chap said that the conditions of the licence said that my local officer must process the licence and this was not him so it must be some one in Liverpool. He could not give me the number so I called the HM Customs help line.

    HM Customs Help line: Sorry Sir, Liverpool does not have a local Office, you will have to ring HM Customs Oxford.

    HM Customs Oxford: After the chap picked himself up from the floor, due to laughing at the thought that Liverpool did not have a HM Customs office and that the National Help line had given me his number, he gave me the Liverpool number.

    HM Customs Liverpool: Sorry mate, we only deal with containers here, you will have to ring HM Customs in Leeds.

    Me: By now I was a little frustrated. I am keeping to the law. I have applied for and obtained an export licence and merely wish to send the sample legally. However, it was up to me to get the licence processed and I am receiving no help from HM Customs. After a call to DTI to see if there is any other way that this situation can be managed, DTI inform me that it is my responsibility to get the licence processed and they could only recommend that I call the HM Customs help line. This is clearly not "joined up government"! So I rang Leeds

    HM Customs Leeds: I got through to the wrong person but I was assured that he would get someone to ring me the next morning. So now I have lost a day. All the work and effort done to obtain an export licence as quickly as possible is being made a mockery of. Our competitors have their samples in place but I can't send mine, why? Administration.

    HM Customs Leeds, next day: At last someone who knew what was going on. This lady confirmed that she was the Local officer for the Port of Liverpool and that the Liverpool number that I had called was for Seaforth Container Base HM Customs and that there are actually two HM Customs offices in Liverpool. So much for the Help line! By rights I have to keep the item in a place were it can be inspected for three days, while the local officer, from Leeds, comes to inspect it.

    HM Customs Liverpool: A chap rang me to say that Leeds had asked him to process the export licence, so I duly took the documents and box to the HM Customs at Queens Dock, got the paperwork processed, rushed back to the company and called in FedEx. The parcel was duly picked up and delivered and we are awaiting the outcome of the tender.

    It is impossible to say whether this lack of joined up government offices has been a threat to the tender or not. All I can safely say is that it clearly did not help. Another conclusion which must be drawn is that many other businesses simply cannot be using export licence for samples, etc or not following the correct procedures. This is drawn from the thought that surely, if they were, FedEx, DTI and HM Customs would be more au fait with the necessary procedures and should have appropriate mechanisms in place?"

  We have knowledge of other instances of a very similar nature.

  The current export control system is only really effective against those companies and individuals who operate within the system. For instance the DTI's website is a great depository of knowledge and guidance . . . for those who know that it is there and that export controls affect their activities, but it does little to get to those who are less well informed. The current system puts the non-compliant at a commercial advantage over the compliant. HMG must be persuaded to get its act together in export control matters. The current system, and the seemingly ad hoc and uncoordinated way in which HMC&E officers around the country implement the regulations are: undermining the role and authority of export control compliance managers within companies with their colleagues in other disciplines/departments; undermining the procedures that compliance staff are trying to put into place; wrecking the credibility of compliance staff and the regulations with their other colleagues elsewhere; and giving other staff the innate perception that export controls are just a farce. This does not help the situation or encourage compliance.

  We are deeply concerned at announced proposals for staff cut backs within both the DTI and HM Customs & Excise, and how they might impact on the country's strategic export control system. At present there is a widespread perception within most of Industry that the export licensing system is actually currently working probably more efficiently and expeditiously than at any time in living memory—we would not wish to see any retrograde steps occurring as a result of Treasury-induced cuts based purely on financial considerations. Either the British Government really believes in effective strategic export controls (as it publicly states it does) or it does not, and we fear that actions (in terms of the Treasury-inspired cuts) speak louder and more eloquently on where the Government's real priorities lie than mere reassuring platitudes. If some existing staff in both organisations really are surplus to requirements at the practical working level for the existing range of export control related work that they undertake, then surely they could be effectively redeployed on "missionary"-type work to undertake the proactive seeking out of companies and individuals who currently operate outside of the system, and make them aware of their responsibilities under the UK's regulations. We believe that this would be beneficial and constructive and demonstrate a true commitment by the British Government in recognition of the vital importance of strategic export controls.

  Industry is extremely keen to continue to work constructively with the Government to help it to undertake the vital task of framing and implementing a more effective regulatory system to deal with the critically important area of strategic export controls, I would reiterate that we fully support the Government's intentions to ensure that the UK has one of the most effective and comprehensive export control regimes in the World. We will happily contribute constructively in any way we can towards trying to achieve this aim.

Exports Director



 
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