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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