Examination of Witnesses (Questions 220-239)
MR DAVID
HAYES, MR
BRINLEY SALZMANN,
MS BERNADETTE
PEERS AND
MR DAVID
WILSON
19 APRIL 2006
Q220 Judy Mallaber: Are you saying
that always happens or it occasionally happens?
Mr Wilson: No, it happens a lot.
It is a major problem for companies, but probably Bernadette could
give you a better example.
Ms Peers: I am trying to defend
Customs here just briefly.
Mr Wilson: Not for long!
Q221 Chairman: Just tell us the truth
please as that would be very helpful.
Ms Peers: It is not always the
case that Customs lose the SIEL. The exporter gives it to the
freight forwarder who should then in the case of, say, Heathrow,
take it to Custom House where the licence is then decremented
and there is a set procedure which Customs like to see, certain
envelopes and colours and bits of paper so that they can see that
it needs to go back to the exporter. What sometimes happens is
that the freight forwarder does not do the right thing and sends
the licence with the goods so that actually it is the freight
forwarder who loses the licence and not always Customs.
Mr Wilson: From a company point
of view, your licence does not come back. You cannot get a duplicate,
so you then have to apply for a new one which (a) delays the process
and (b) confuses the figures.
Chairman: We will pursue this with Customs
when we take evidence from them.
Q222 Mr Keetch: Presumably if you
are exporting these widgets not to a different company in Afghanistan,
but to a subsidiary company of your own company or, in the French
case, to a subsidiary of the parent company you are in, presumably
the same rules apply when they are inter-company transfers?
Mr Wilson: Yes.
Q223 Mike Gapes: This question is
about how do you describe what you are exporting. If you are wanting
to avoid the control system and given this loss of documentation
because the freight forwarders have sent it on, presumably if
you define something as something minor even though it has actually
got some significance, you could carry on doing that for quite
a long time because there would be no evidence in your company
at any time because you have sent the documentation abroad?
Mr Hayes: In all probability,
people who are seeking to circumvent the export control system
are not doing it by misusing licences, but by operating entirely
outside of the system, by describing goods in such a way that
they do not require a licence at all.
Mr Wilson: It would actually require
Customs to open the box and discover that the box marked "machine
tools" actually contains machine guns instead, as a simplistic
example, because Customs do not have enough people to open every
box.
Mr Hayes: Tell me if you disagree,
David, but I do not think it would be too much of a generalisation
to say that, by and large, the misuse of export licences is unintentional,
whereas avoidance of export controls is deliberate.
Q224 Mike Gapes: Do you have any
estimate, given what you have just said about the lack of people
to open up containers, because the potential could be absolutely
enormous for avoidance of export controls?
Mr Hayes: Absolutely.
Mr Wilson: How many containers
go through Felixstowe in a day? Fifty thousand, something of that
sort? How many do Customs actually open? One? Usually, in my experience,
that is because the police have gone down there because somebody's
tracker has tracked a car to a container at Felixstowe and they
open the container and there are four or five stolen cars in it.
There are not many Customs officials at Felixstowe, a big container
port.
Q225 Chairman: We will pursue these
issues with Customs. Perhaps you would like to proceed.
Mr Wilson: OIELs and OGELs, the
reference licence use, each of those licences comes with a number
of conditions on it and Brinley mentioned that briefly in passing.
You do have to read very carefully to make sure that what you
intend to do is actually covered by the licence and that the country
you want to send it to has been covered by the licence. I got
caught about a year and a half ago because I was away, somebody
had looked at a consignment which was going to Bahrain, it was
a relatively uncontentious consignment, but it was going under
licence, and they had applied for military goods with a government/NATO
end-use to it because that seemed like a good title for a licence.
The fact that the military goods, government/NATO end-use OGEL
does not cover Bahrain had whizzed past his ear and he had missed
it. Customs did actually find that one. End-user undertakings,
I think we have mentioned. Some licences require the company exporter
to keep with the records set for the DTI, a copy of the contract
or a copy of the relevant part of the contract and for goods that
are military and in which the Ministry of Defence has a finger
in the pie, as perhaps one way of putting it, whether they are
classified, protectively marked, restricted, confidential, secret
goods or whether it is a project or something that the Ministry
of Defence has some handle on the intellectual property rights
of, a company is required to go through the Form 680 procedure
which is applying for permission to go through this exporting
process, using Ministry of Defence goods. It is a whole bunch
of administrative procedures which are not of themselves difficult,
but it is an administrative hurdle that companies have to climb
over and, unless you are thinking all the time, it is fairly easy
to make a mistake and that mistake is then picked up by the DTI
audit, so it is a nailing of the willing to the wall.
Ms Peers: Moving on to slide nine,
the difficulties with record-keeping continue. As we have already
discussed, with a standard individual export licence, that needs
to be decremented, so a copy of that has to get to a Customs office
in order for it to be decremented. That is not the case with the
OIELs and the OGELs. In those, the title or the number of the
licence is referenced on the paperwork which then the agent should
convert into the NES, the new export system, in order to declare
to Customs that these are licensable goods. A difficulty arises
in that if you are shipping shotguns, for example, ML1, that is
the classification of a shotgun, a firearm, ML1, but it is not,
it is the commodity code. The commodity code is another number
altogether which has also to be entered into the NES, so firearms
are 93-00-whatever. If the NES entry could have more flags put
into the system, perhaps there could be more cases where 93 is
picked up if it is going to, for example, Iran. Firearms to Iran—"I
think we need to have a look at this shipment". The NES can,
therefore, have flags entered into it and what we would plead
is that perhaps some more flags could be put into the system to
pick up on some of the tariff headings, the commodity code headings,
which may match the classifications in the military and dual-use
lists. It is very difficult because certain types of steel are
controlled under the dual-use list, but under the commodity codes
there are numerous headings for steel and it is finding which
tariff heading matches the actual controlled piece of steel that
is going out which could be used for something serious, so it
is a difficult issue. The NES entry, for example, if it is going
to somewhere in Europe, if you type in the controlled item to
go to Europe, it will come back and tell you that there is no
need to enter this because of the free movement of goods within
the EU, but within that you could have firearms or Annex 4 dual-use
goods which are deemed to be so sensitive that they cannot have
free movement, but if you do not know your stuff, you are then
sent away and are being told by this Customs system that you do
not need to enter these goods when in fact you do in order to
comply with export control. Once you have typed in, hopefully
correctly, all the information that you need to the NES, you then
have a couple of minutes when the system bounces back at you and
either tells you that your goods are going to go route one, and
hopefully in the case of a SIEL, a standard individual export
licence, it will go route one which means it will be looked at
and examined, or, if it is an open general export licence, it
tends to go route six which means it is not looked at. However,
recently we have had occasions where goods that have always gone
route six are now coming back as route one which means they are
being looked at, so things seem to be happening either with more
flags or Customs are doing things differently and they are stopping
more shipments from our perspective, the freight forwarding perspective,
and looking at them, so the documentation does not necessarily
stop inside the exporter's area. If they are doing their job correctly,
they are getting their freight forwarder to continue that correct
record-keeping and give copies back in order to demonstrate the
whole process correctly.
Mr Hayes: An area that will be
of particular interest, I think, is what happens to companies
on compliance audits. Any company which is registered to use open
licences with the DTI is subject to compliance visits and compliance
audits. The compliance officer will visit either alone or accompanied
by advisers from the MoD or other government departments and the
first thing they will want to do, assuming it is a first visit,
is a full-company brief as to the structure of the company, the
branches, whereabouts they are located, what business activities
they undertake, what markets they operate in, who the competitors
are, what the projects are. It is actually quite a good intelligence-gathering
opportunity. How effectively that intelligence is used is another
question. For example, if they were to visit company A and say,
"Oh, you're selling military aircraft parts to Portugal.
Who is your main competitor in this market?", and they say,
"It's company B down the road", it would be quite an
interesting exercise to have a look and see if company B has got
any export licences because an answer in the negative to that
would be quite revealing, but how effectively that is used, I
do not know. They want to look at responsibility within the company
for export controls. Legally obviously the directors of the company
are responsible for compliance with the law, but the DTI is interested
in operational responsibility, who looks after on a day-to-day
basis export controls within the company, who has day-to-day oversight
of them, how good their knowledge is of the controls, who deputises
for them in their absence, cover for holidays, et cetera, et cetera.
With knowledge of export controls, they are looking for a broader
knowledge of export controls than is strictly necessary for what
the company does, so a wider awareness than the narrow focus of
the company, particularly in areas like end-use catch-all controls
because it is no good the company focusing on widget A which they
make which is the only thing they make which is controlled, when
actually they are exporting thousands of Citroen hydraulic pumps
to a WMD project in India because their view of the controls is
insufficiently wide. On process and procedure check, they want
to make sure that export controls are woven through the business
processes. It used to be possible in the pre-intangible days to
view export controls as a funnel and, provided that you had got
control at the bottom of the funnel in the shipping department,
then you have got a compliant company. As a business process,
it was atrocious because I have actually been aware of cases where
companies have gone out marketing, taken an order, manufactured
the goods, crated them up, put them on to the shipping dock and
then somebody in the shipping department has said, "You need
an export licence for those", and when they have applied
they have not got one, so you need to be considering this at the
front end of the business process, not at the back. One major
impact of intangible export controls is if you actually turn the
funnel upside down, and most companies now have to look at it
from the point of view that anyone in their company who has access
to export licensable technology and the means to transmit that
technology to someone else needs at least a basic level of awareness
training on export controls, so they are looking at all of the
procedures right the way through from initial marketing. Let us
not forget that when you get beyond the stage of publicly available
information that you would put on to a stand at somewhere like
Farnborough, you begin to get into the area where, before you
have actually manufactured anything, you are exchanging controlled
technology, so there will be a licensable export in most cases
before anything is manufactured.
Q226 Judy Mallaber: Can I ask, as
an example in Rolls-Royce, what range of people would have this
knowledge and who would you be training up in how many departments
or do you centralise it? I have no real sense as to how widely
within a major company, such as yours, or a smaller company, for
that matter, you would expect that knowledge to be spread or specialised?
Mr Hayes: It does vary. Within
Rolls-Royce the export control structure is that export controls
globally are overseen by a Board Exports Committee that is chaired
by our chief operating officer. I head up the export control function
for Rolls-Royce globally, except for North America where, in order
to fulfil my role, you must be an American, so we have a director
of international trade compliance in the US, and we have an international
trade compliance team in the US. We have compliance managers in
our business in Germany, in our defence aerospace business in
the UK and in our marine business in the UK, and we are looking
at engaging more export compliance managers to deal with areas
like procurement and supporting the supply chain where we have
got a number of SMEs who do not have their own abilities to focus
on this area. We have trained several thousand people in basic
awareness of export controls and several hundred at a higher level.
Q227 Judy Mallaber: So, for example,
companies in my constituency which supply to Rolls-Royce and are
in your supply chain in Derby, you would be providing them with
the expertise or how much knowledge would you expect them to have
there? I have no real sense as to how many people we are talking
about needing to be involved and having that knowledge in order
for us to have an effective system.
Mr Hayes: We would hope that they
would have some. It depends. If a company in the supply chain
of a major prime has been involved in exporting before, then we
would expect them to have some knowledge of export controls themselves
because at the end of the day they are the exporter, not Rolls-Royce
or whoever the prime may be. If, on the other hand, we have a
company, an SME, who have previously supplied something into Filton
and we take them on to another project, but this time, instead
of supplying it into Filton, we need them to supply it into Rolls-Royce
Deutschland and we are asking them to become an exporter, we would
expect to need to provide them with more support than a company
with previous experience. It is a judgment call, depending on
the circumstances of the case. As to physical audit, obviously
the DTI compliance officer will want to go through examples of
the shipping paperwork and, by and large, these are experienced
people, so they will look at the physical shipping mark and in
most cases be able to pick out something that looks like it might
be odd, so the sort of thing would be a shipment under the OGEL
for government or NATO end-use going to Bahrain which would leap
out of the page at anyone who knew the first thing about export
controls. End-users that they might know about through intelligence
sources which they might not be in a position to reveal to the
company, but they are concerned about, they will take a look at
any shipments to those people. They will also want to look at
procedures for controlling intangible transfers and make sure
that what the DTI calls functional record-keeping they would describe
as recording the first of a series of transfers and the last,
so they will want to look at those procedures. They will also
now want to look at standard individual export licences where
those have been used to cover the intangible export of technology,
because in certain circumstances you need a standard individual
export licence for the export because there is no other form of
licence available, but it will never go to Customs because there
is never a physical export. The thing is sent intangibly by e-mail
and the only people who can decrement the licence are the company
concerned and the only people who can audit it are the compliance
officers on the visit. They will also want to undertake a site
inspection and a tour where they will wander around the manufacturing
facilities, talk to people on the shop floor, talk to people in
the offices and if they are nosy, like I used to be, have a look
at labels on crates and look at bits of paper that are left lying
on tables and see whether they can see anything inconsistent with
what they are being told by the company. It usually lasts most
of a day. I have known compliance visits go on longer than that
where major problems have been found and compliance officers have
decided to go back and continue beyond that, but it is actually
quite a thorough exercise.
Ms Peers: Moving on to slide 11,
once the compliances take place, the compliance officer goes back
to DTI and then compiles a report that will be circulated if there
are problems in the company. If there are no problems in the company,
it is put to one side and it is there for the next compliance
officer or the next audit. If it is found there are failings and
shortcomings, Customs will get a copy of the report and then it
is their decision what action to take. The company will get a
letter saying, "Thank you for the visit. These are the shortcomings
we found", or, "It was a very good visit", whichever,
but Customs then have the decision whether to go back into that
company and do their own audit or whether to take no further action,
whether to fine the company straight off or to bear in mind that
there could be a prosecution if it is serious enough. Government,
and Customs in particular, are joining up more and more and Customs
have formed a large business group; so instead of having a Customs
officer who looks at one thing and another Customs officer who
looks at something else and then the VAT man, they are now talking
to each other. If there are shortcomings on export control, then,
being a cynic, if they are doing that wrong they could be doing
VAT or tax or other things wrong; so Customs are now talking to
each other and could take action, starting with export control
but maybe in other areas also. Moving on to prosecution, the DTI
have published three prosecutions that have taken place recently.
It is interesting that all three cases are for military goods;
there are none there for dual-use goods or weapons of mass destruction
or catch-all because catch-all is so problematic. The prosecutions
were lengthy in one particular case and the sentence at the end
of it, in my opinion, was quite minimal for the actual offences
that took place, but at least there are some prosecutions. That
is not the answer, to prosecute people. It needs awareness at
the start, enforcement at the start and, if there is deliberate
evasion, then prosecution.
Q228 Mr Keetch: Could you tell us
what the fine was?
Ms Peers: In the case of Multicore,
he received a suspended sentence of two years and a £70,000
fine and, if he had not paid that by Christmas Eve, his suspended
sentence would be extended by a further 18 months; so if he did
not commit anything else he is still free to walk around—it
is a suspended sentence. In effect, he made numerous attempts
to export military parts to, I believe, Iran and he got a suspended
sentence. That goes beyond just Customs; that goes beyond educating
a court and a judge about how serious export control can be. It
does cost lives, and I think people forget that. As regards other
prosecutions: it was an administrative error, I believe. Part
of using one of the open generals is that you have to have permission
before you use the licence from the MoD, and the company had not
got permission before they used the licence and they were fined
£10,000. The goods that they would have exported would have
been £128,000. It is quite a small percentage of what they
would have made, but they were fined £10,000. I cannot remember
the third case, but it was not, in my opinion, a huge fine for
the circumstances of the case.
Q229 Mike Gapes: Can I get some clarification.
You refer to the report to Her Majesty's Revenue and Customs,
a decision as to whether there is no further action or a fine.
Does that mean that there is a power to impose a fine without
any reference to a court or any due process?
Ms Peers: Yes.
Q230 Mike Gapes: What is the maximum
level of fine that can be imposed without due process?
Mr Hayes: Customs has the power
to impose what it calls a compound penalty. I think there are
rules saying that they must have enough evidence to mount a prosecution
before they can offer a compound penalty, but then they can offer
a compound penalty, which essentially is the company paying the
fine. I think the maximum fine is five times the value of the
goods being exported, but there is a limit on that. It is five
times the value of the goods or—
Q231 Mike Gapes: Presumably if you
reject that, then you will be taken to court? Is it like a motoring
offence that you have got the option?
Mr Hayes: To be honest, I do not
know the answer to that. I have never come across a case where
anyone has been offered a compound penalty and declined.
Mr Wilson: The alternative is
to have your exporting privileges removed. Your ability to use
open licenses is removed by the DTI and what you are actually
doing is paying Customs for the privilege of getting your ability
back. The same principle works on the American system. It was
something I was going to come to later, but perhaps now is a good
time to take it. The Americans charge at the moment $1 million
per offence, and that is about to rise to $5 million per offence.
Ratheon were charged $25 million for passing military technology
to their Canadian subsidiary in 2004, and the alternative was:
"Either you do not export or you pay us $25 million."
Ratheon paid up. That concentrated their minds and that concentrated
the American exporting business's mind to a much greater extent.
Q232 Malcolm Bruce: What you have
just illustrated is economic protection. It has got nothing to
do with arms getting into the wrong hands.
Mr Wilson: It is perhaps not entirely
an intended consequence of the way the regulations are framed.
It is possible to breach the regulations without actually doing
anybody any great harm. Nevertheless, it is the breaches of the
regulations that are punished, not the intention to do harm.
Q233 Chairman: The contrast with
the example that Bernadette gave about the unlawful export of
arms to Iran and you get to war and you pay a fine—I have
no idea what profits were made on those transactions, but the
fine does not strike me as being a particularly high order of
magnitude—is worrying, I would have thought, a matter, no
doubt, the Committee will pursue with the appropriate people.
Ms Peers: I am not sure if he
still has the goods or not.
Mr Salzmann: Under the Export
Control Act the maximum penalty if they were to pursue it through
the court is an unlimited fine and up to 10 years in prison; so
an option exists but it is very rarely, if ever, exercised.
Q234 Chairman: Thank you for drawing
our attention to that. We had better move on; I am conscious of
the time.
Mr Salzmann: In terms of licence
production, which, of course, is a very hot topic, in our submission
of 28 March to the Committee I did try to expand on what David
Wilson said in our oral evidence on 31 January about licence production
and the need for licences to set up those licence production facilities
overseas. Certainly to supply the technology to an overseas production
facility you would need a licence and also, potentially, for the
supply of production machinery, for that production facility to
come on-line, you would need licence coverage and the criteria
would be used to assess all new licence applications before the
setting up of such production facilities. I am aware that in many
cases these are scrutinised with extreme care by the Government,
depending, of course, on the nature of the goods and the nature
of the technology which is involved. It is not necessarily quite
such an open door as many people often seem to perceive. The whole
risk of potential diversion re exports from that production facility
elsewhere is taken into account in the criteria when they consider
the licence applications which are made.
Q235 Chairman: When we questioned
the Minister about the Land Rover flat packs going to Turkey,
was that a case of licence production? It may not have been? Yes,
it was, because these were converted into motor vehicles, then
exported to Uzbekistan and used in ways that the British Government
would not approve of, i.e. against civilians last year. The response
we got from the Minister was that the issue for the Government
was whether or not the export to Turkey of the Land Rover flat
packs was a matter of concern because of a potential onward export
to Uzbekistan. We had a very ambiguous answer which we will be
pursuing further, but your understanding would be that the Government
does take into account, in a situation like that, their perception
of the ultimate end use?
Mr Salzmann: For a licence for
the goods, yes, but with flat packs for Land Rover they are not
licensable.
Q236 Chairman: They are not licensable
because they are not—
Mr Salzmann: They are bits and
pieces of components rather than anything licensable.
Q237 Chairman: Even if there is a
massive component in the final product?
Mr Salzmann: Yes, if it is not
licensable it is not licensable.
Chairman: Thank you.
Q238 Mike Gapes: The same point.
It is a question I asked the Minister and he could barely answer,
so perhaps you can tell me. Given that Turkey is in NATO, is the
membership of Turkey in NATO in any way relevant to the point
that you have just made or does it change things in any way? Would
it be easier to send such things to Turkey because it is in NATO
rather than to a non-NATO country?
Mr Wilson: It would probably be
looked at by the advisers, and they would say: "If it were
for use by Turkey we would look at it in a more relaxed fashion
than if it were to be looked at for another country", say,
but, unless it is made clear that Turkey is going to manufacture
these things locally and then sell them on, the advisers would
never know.
Mr Hayes: And, of course, it would
only be considered at all if the goods were licensable, which
in this case they were not.
Q239 Chairman: If Land Rover were
seeking to export the technology to convert the flat pack into
a military vehicle, then that technology would be licensable?
Mr Hayes: Yes.
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