Quadripartite Select Committee Minutes of Evidence

Examination of Witnesses (Questions 20-39)


31 JANUARY 2006

  Q20  Mr Keetch: So you would support—because this is a decision made by US legislators and not by the Administration, a very different position to that which we have in the UK—UK legislators having a role in trying to persuade Congressmen and Senators on the other side of the pond of the importance of this and that might be a way to go—through a treaty obligation which would not have the limitations of ITAR as opposed to what the Government has been pursuing in the last two years?

  Mr Marshall: The only comment I would make on that is I think it is very important that we take a co-ordinated approach and that the Government, Parliament and the industry speaks with one voice and seeks the same thing. Hopefully the proposals that we will be preparing are something we can talk to you about and to the Ministry and so on.

  Mr Salzmann: Also included in the co-ordination has to be US industry which also has the same frustrations.

  Mr Hoyle: Even with the best endeavours of Paul Keetch going there twice they have still refused to lift the ITAR waiver!

  Mr Keetch: I did my best!

  Mr Hoyle: We recognise that and we recognise failure unfortunately; maybe a third time you can win them over, Paul.

  Mr Keetch: At least I tried!

  Q21  Mr Hoyle: Obviously the ITAR waiver is something that is holding back the future of the Joint Strike Fighter, which is a huge investment for the UK. Do you believe that the programme is now completely at risk?

  Mr Hayes: Absolutely not. I would not even agree that the lack of an ITAR waiver in the form in which it is drafted is holding back the JSF programme.

  Q22  Mr Hoyle: Okay, I welcome that, but the whole problem is you can still go ahead with the aircraft but it would not allow you to have final assembly, intellectual rights, and you could not export or service other people's aircraft as it stands. Do you not think that is a major problem for the future of UK aerospace?

  Mr Hayes: I think that is a problem that goes beyond purely regulatory and ITAR concerns. That is probably something for other people certainly within my company and the other companies involved to address. From a purely export control point of view the lack of an ITAR waiver is not actually having any impact on the programme.

  Q23  Mr Hoyle: Just a final question. They seem to be at odds over a future STOVL version of the Joint Strike Fighter. What effect will that have on UK aerospace and in particular Rolls-Royce?

  Mr Hayes: I think we need to wait and see what the outcome of the US Defense Review is to determine what the forward path for the programme is and, in particular, the STOVL version, to be able to establish what impact that will have.

  Q24  Mr Crausby: It seems to me that the current wisdom is that ITAR is completely dead anyway. We are now being advised that it did not matter anyway, so I just wonder what all the fuss was about. We are now being told that ITAR is nothing to do with the Joint Strike Fighter and it would be no use if it was passed. I just wonder why we have had all this argument. Has it just been about pride or something? Really the bottom line is is it possible for us to secure a Joint Strike Fighter (which is clearly a bargain in financial terms because it is a cheap plane in relation to what it would cost us if we had to develop something at that level ourselves) so is it possible to purchase that and get full use out of it, or should we be considering at this point that without the technology transfer of the kind that Lindsay Hoyle mentioned that would allow us to have independence with the Joint Strike Fighter and certainly to update it, is there any point in the Joint Strike Fighter or should we go and look at alternatives?

  Mr Hayes: Just as the UK government looks at export licensing decisions on a case-by-case basis so does the US government, and there is no blanket ban on the transfer of technology relating to the Joint Strike Fighter; far from it. I do not think we said that the ITAR had nothing to do with the Joint Strike Fighter; we said the ITAR waiver was having no impact on the Joint Strike Fighter programme. The ITAR has a lot to do with the Joint Strike Fighter and we are having to deal with issues but we are dealing with the issues, and we are working within the existing licensing systems to make the programme work. Are those systems ideal? No, which is why we do need to look at the alternatives.

  Q25  Malcolm Bruce: You mentioned the Export Control Organisation and when I got wind of the fact that the Government were considering privatising it in the spring of last year I first of all tried to raise it with Patricia Hewitt who pretended that the Export Control Organisation was the Export Credit Guarantee Department which therefore enabled her to say they had no plans to privatise it. Unfortunately, the Evening Standard three days later quoted a DTI press officer who said they were investigating privatising, so I tabled a written question that Malcolm Wicks answered after the Election on 21 July saying that the plans had been reviewed and they had no plans or they were not going to take forward the privatisation. From your point of view was that the right decision?

  Mr Salzmann: Yes, we were not supporters of the proposals to privatise the Export Control Organisation and they made the right decision. We are naturally disappointed to have seen the staff and resource cutbacks which have taken place within the Export Control Organisation which, for instance, in just one area have resulted in the complete removal of their in-house capability to provide expert guidance on encryption matters, but we are supportive of the decision which has been made not to privatise the ECO.

  Malcolm Bruce: The problem really was that it was part of the attempt to reduce staffing rather than a sensible way of delivering an important and, I would argue, political service?

  Mr Hayes: Yes.

  Mr Marshall: Across the board in the DTI.

  Q26  Malcolm Bruce: Just on that point I think the staff has reduced from 156 to 117 in the last two to three years. I do not know whether there are any further reductions and you have already hinted that some services have been lost. You gave it a very good review before. You mentioned a specific point and that is one that perhaps is worth taking up. In terms of the turnaround of the service have you noticed any deterioration?

  Mr Salzmann: No, no, at the moment performance has been extremely good but we do not know what hidden stresses of the system this might be hiding. How stressed is the Export Control Organisation in dealing with the workload? Are they at maximum capacity with little capability to absorb things like holidays or extended sick leave? We just do not know.

  Q27  Malcolm Bruce: Your concern would be that it has slowed up the process; the NGOs' concern is that it has led to compromises. Perhaps it is unfair to ask but from what you have said are you aware of any compromises in the process?

  Mr Salzmann: Not that I am aware of.

  Q28  Malcolm Bruce: Apart from the loss of service to yourselves?

  Mr Salzmann: No.

  Chairman: It is very good from the Committee's point of view as well because in the past when the Committee has asked a lot of questions of government, we have been advised that it might slow down the work of the Export Control Organisation if we ask too many. Clearly this is no longer a problem and we are delighted to hear this, it is very encouraging.

  Q29  Mr Hamilton: Can we move on to the question of weapons of mass destruction and strategic export of items that might help countries wanting to develop weapons of mass destruction programmes. There are obviously two ways in which these could be controlled. One, as you know, is the list of controlled goods and the other is end-use. Really my question to you is do you feel that the end-use controls which are currently in place are adequate or should they be strengthened?

  Mr Wilson: That is a very difficult question to answer. The end-use controls as they stand are perfectly adequate. However, what is woefully lacking is public understanding of those controls because the only people who understand end-use controls as they are currently drafted are people who are intimately involved in export compliance all the time, if you like the export compliance professionals of exporting companies, who are the people you would expect to know about end-use controls. However, the problem with end-use is that people are finding ever more novel pieces of kit to take into, for example, terrorist use. An example I can give in very general terms is a colleague of mine was approached by a car dealership and told they had a very large order from a country to which they do not normally export those cars for certain components and could anybody think of a reason for this. Well, the reason was that those components turned out to be ideally useable in low-grade, low-cost missile systems and because the potential exporter had flagged up this potential concern and he had reason to be concerned and flagged it up, the export would have been controlled under the end-use control had he applied for a licence to do so. What we do not know is how many more potential manufacturers of low-grade missile systems or whatever else, are going and buying parts on the open market because if you have a UK export compliance programme and process you ask yourself for each export a series of questions which leads you to query what might otherwise be known as a suspicious export. In other words, you ask yourself a set of questions that would lead you to wonder whether or not it is being used for WMD end-use. If you do not have an export compliance process because you are not normally controlled by either the dual-use list or the military list, and therefore you have no idea about military controls, you see no reason to ask yourself those questions and therefore any such export goes completely unchallenged. That is our concern, that we do not know the scope of items that are being bought for end-use. I think the classic example is somebody from Boots the Chemist having, to their great surprise, an order of home-brew beer kits stopped because indeed those kits are caught by the dual-use regulations because they are a biofermenter of greater than a specified capacity. So while they are being exported to the Middle East for poor expats to brew their own beer they could equally well be diverted to somebody else's biotoxin programme, and that is an innate part of dual-use and end-use controls because unless you can work out in advance what the terrorist is going to use it for and therefore try and stop him getting hold of it, the control is pointless, so it does rely totally on people asking the questions and thinking "Is there an illicit use for this particular order?" But I cannot see an answer to it.

  Q30  Mr Hamilton: Presumably, if you have a suspicion you still have to report that to the authorities if you are a manufacturer or exporter?

  Mr Wilson: You only know you have a responsibility to report that if you are normally a responsible exporter and you have a compliance programme because normally you are exporting military goods. If you are a routine exporter of civilian car parts you do not know anything about it.

  Mr Hayes: In a nutshell, the system works perfectly well for people who are already inside it. People who are outside of it are completely unaware of it and therefore have never done it.

  Chairman: That is the problem.

  Q31  Mike Gapes: Is there not a problem then that as we get greater globalisation, and use of the Internet and ease of purchasing of supposedly innocent products, it is almost impossible to regulate this?

  Mr Wilson: Absolutely.

  Mr Hayes: Without looking at WMD, it is relatively easy to find material that is subject to control (because it is on a control list) readily available on the Internet.

  Mr Wilson: Like, for example, an underwater digital camera which is controlled under the dual-use list because it takes more than X number of photographs and works more than six feet under water. It has been controlled for some time but is now readily available almost anywhere.

  Q32  Richard Burden: Is there anything more that could be done then to publicise this better? If you are on the inside of the system you are subject to controls; on the outside you do not know about them. Is there more government could be doing about that? Is there more industry could be doing to get this kind of message across about these obligations, indeed perhaps organisations and bodies like your own who are experts in defence export issues?

  Mr Wilson: Certainly I feel that part of the DTI's outreach programme could perhaps be beefed up, again it would need more staff, but the DTI's outreach programme tries very hard to reach regional chambers of commerce, for example, and almost overwhelmingly the answer from regional chambers of commerce is, "no, we do not export arms". So I come back to Mr Salzmann's earlier point that because there has been continual press emphasis on arms—meaning small arms, light weapons, missiles and whatever—the things that are actually as big a risk to the security of the country are being glossed over.

  Mr Salzmann: One of the fundamental problems which exists in trying to get to the companies who are operating outside the system, who do not think export controls are anything to do with them, is how do you get to them? If you organise seminars and workshops on export controls and put out fliers about them, they take one look at it and say, "Export controls have nothing to do with me, I deal with car parts", and throw it in the bin. How do you get to them and get them to realise this is something which they need to pay attention to?

  Mr Hayes: To give you some idea of the potential scope of the problem, some years ago when Mike Coolican was at the DTI, he estimated that somewhere in the region of 35% of UK companies who should be applying for export licences are not, and that is probably still reasonably endemic.

  Ms Peers: I think another way to get the message across to exporters is if you stop their goods leaving. That comes back to enforcement, which I know is covered in the next two questions, but it is something I feel quite passionately about. If you try and stop the goods leaving which involves having Customs officers also being made aware of the types of products that could be used (and their knowledge, sadly, is quite limited) then if the goods do not leave the company loses money and that, sadly, is what companies understand. If the goods are stuck on a port somewhere or at an airport waiting for the DTI to rate goods against the end-use, or the military list or the dual-use list, they understand that it is costing them money and they then sit up and listen. That is how some of the end-use companies come into the fold because their goods are stopped. Sadly, resources in the Customs are quite low and not many shipments are stopped.

  Chairman: That is very helpful and I am glad we have had all those comments on the record.

  Q33  Robert Key: Can I ask Mr Salzmann if he believes that HM Revenue and Customs have got the balance about right between making sure that exports do not get into the wrong hands and not obstructing properly licensed exports?

  Mr Salzmann: They have a difficult balance to try to achieve given their limited resources. It is very noticeable and pointed that the new name is Revenue and Customs, and the main focus and priority is revenue generation, looking at the smuggling of cigarettes and alcohol and things of that nature. It is a very difficult balance to try to achieve within their limited resources but there are fundamental problems which are being experienced.

  Ms Peers: One of the major problems there is the new exports system. It is a system whereby people declare their goods for export and let's take an example (not beryllium because it is a good example but I will try something else) of a military item going to Italy. If you try and enter that into the new export system to say these goods are military and going to Italy, you get a declaration that tells you "declaration not required on C status consignment". These goods are going to the EU so they are in free circulation. The fact they are controlled has no relevance at all in the new export system. That to me is a major failing. If you have got a decent freight forwarder who will appreciate that these are controlled goods and could be under a SIEL, they will therefore go to Customs and try and make local arrangements to get the SIEL, Standard Individual Export Licence, declared in order that the proper process is followed. Another freight operator who sees that declaration may just send the goods on the back of a lorry or on an aeroplane to a destination in the EU and they are not recorded anywhere for Customs purposes.

  Q34  Robert Key: My constituents find it very hard to understand why it is reporters and press and NGOs sniffing around who seem to find out when things go wrong. We were told in the Government's response to this Committee's last year's report that there are just two central investigation and intelligence teams trying to police all of this but it says that "they look into all significant allegations and intelligence in relation to breaches of export controls". We keep hearing this today, that there are not adequate controls and there are not enough people in the job in Revenue and Customs to make the system work. Is that the case?

  Ms Peers: Yes, the effectiveness of any legislation—and the Export Control Act is a great example—is how well it is enforced. If it is not enforced it is like the mobile phone in the car. If I know I am not going to get stopped by a policeman then I am going to talk on my mobile. If an exporter does not think he is going to get delayed at a port or an airport, not through any fault of his own but if he has got a compliance programme in place and he does do the right thing, he hands it to an agent who gets that declaration that tells him nothing more needs to happen, then the agent is then non-compliant and the goods go and there are very few stops at Heathrow or any other port, because of lack of resources.

  Q35  Robert Key: But you also said that the knowledge of the officers on the job was limited as to what should and should not be going through or what they should be looking for.

  Ms Peers: There is a lot that could be done here also. The DTI—and I hope it still carries on—goes round ports and airports and does awareness training for Customs officers on export control. It is a tiny part of their job. They have to deal with drugs, they have to deal with tobacco which also bring in revenue. Going back to Brinley's point, it is Her Majesty's Revenue and Customs in the name change; revenue seems to be their thing. If they have no way of checking—and there are tools coming in from the DTI, for example, where they can type in accelerometer or say what the entry is but they need to know what an accelerometer can do. It is on the dual-use list and can be used for all sorts of things; it can make a missile hit its target hence it is controlled. If they do not know what they are looking at, and in the NES (New Export System) there is no flag for the destination of a commodity code, then it is difficult for them to have that intelligence. The only time certain goods get stopped on route six (route one is where declared goods are stopped and examined; route six means no checks are done and it goes through)...As a freight forwarder we know that the only time any goods under licence are stopped, not from route six but over to route one, is if they have a commodity code 93, which is arms and ammunition. It is good that those are being stopped but there are lots of other items on the control list which should be looked at also.

  Q36  Robert Key: Why does EGAD say "that there is a large amount of enforcement activity against the non-compliance which is being undertaken all of the time, but very little information on this ever gets into the public domain". Why not?

  Ms Peers: It would be one part of the problem to solve it by naming and shaming, but it is not going to solve the problem, it is just part of what could be done to improve public awareness and exporter awareness—that if they do it wrong there will be penalties or their goods will not go, and then they may sit up and listen.

  Q37  Robert Key: Would electronic licences and application-tracking facilities for exporters help?

  Ms Peers: I think there would be even less checks than there are now. I personally have concerns about it and I feel that EGAD probably would also.

  Mr Hayes: They would not help in the context of the current NES system because the current NES system is not picking up paper licences and it would not have the facility to recognise the same thing in an electronic format.

  Q38  Robert Key: Do you think it is fair to say that the general public find it pretty outrageous that the Government does not seem to be taking this seriously? There are not enough people, they are not properly trained, they are not serious about electronic tracking systems. You seem to be saying that you would welcome a general tightening up in these areas. It is no skin off your nose.

  Ms Peers: A lot of the big companies put a lot of money, time and effort into compliance and it is an expensive business training all your staff, making them aware of all the controls and trying to police it within the company. It makes little sense that the non-compliant small firms, who know nothing is going to happen, who do not bother with any additional expense and then ship their goods wherever they want to, starting off perhaps in the EU where they do not have to declare the goods, then I think there is a need for more enforcement by Customs to help the good, compliant companies to feel it is all worthwhile.

  Robert Key: Thank you very much.

  Q39  Chairman: You have all made the point about the importance of resourcing this work properly. Brinley used the phrase "limited resources" twice in two sentences which is pretty pointed. Have you any idea of the order of magnitude of, say, the full-time equivalent staff at Revenue and Customs who are working on strategic export controls? Are we talking about 300, 1,000, what kind of numbers are we talking about?

  Mr Hayes: I do not think it is something we can determine.

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