Quadripartite Select Committee First Report


4  The Export Control Organisation

The decision not to outsource the Export Control Organisation's work

51. The Export Control Organisation is part of the Department of Trade and Industry. Its chief task is to process applications for licences to export strategic goods from the UK. On 21 July 2005 the Government announced the outcome of its review for outsourcing the work of the Export Control Organisation and it concluded "that in this particular case, there are doubts about whether outsourcing the licensing function would achieve sufficient additional benefits".[68]

52. We unreservedly welcome the Government's decision. It is significant that industry[69] as well as the non-governmental organisations,[70] from whom we received evidence, were hostile to the Government's plans to involve the private sector in parts of the Export Control Organisation's work. The UK Working Group on Arms pointed out that moving the Export Control Organisation from the public to the private sector posed a number of risks:

  • confused lines of accountability;
  • institutional and commercial conflicts of interest (real and perceived);
  • setting a bad example to states with problematic export control systems;
  • undermining UK export control outreach programmes;
  • reluctance by other states to share relevant export licensing information with the UK; and
  • harm to defence, trade and technology-sharing relationships with the United States.[71]

53. The terms of the announcement in July 2005 raised concerns that the Government's decision was finely balanced and that a complete or partial privatisation remained a possibility for the future.[72] In his evidence to us the Minister of State at the Department of Trade and Industry, Malcolm Wicks MP, assured us that there would now be a period of stability[73] and that ministers had "endorsed enthusiastically"[74] the decision announced in July 2005. We asked him about the reasons for the decision and he explained that "as the Minister responsible I feel more comfortable about this being within the domains of the public service" and that "there are certain issues for government which are so sensitive—and this is certainly one of them—where that would be my desired outcome".[75] We concur with this line of reasoning but reach a firmer conclusion. We conclude that the work of the Export Control Organisation is so sensitive and critical to ensuring that strategic exports are effectively regulated in the UK that the Export Control Organisation must remain within the public sector under government control. We recommend that the Government endorse this conclusion.

STAFFING LEVELS

54. Between 2003 and April 2006 the number of staff in the Export Control Organisation was cut by a quarter from 146 to 115.[76] By any standards this is a substantial reduction in an organisation with critical responsibilities for ensuring that strategic exports do not fall into the wrong hands while ensuring that only essential burdens are placed on exporters. The scale of the reduction begs a number of questions which we consider below.

55. First, has there been a detrimental effect on the efficiency and effectiveness of the operation of the Export Control Organisation? EGAD, whose members deal regularly with the Export Control Organisation, gave us a ringing endorsement of the Export Control Organisation's recent performance:

At present we believe that Industry is currently quite satisfied with the overall level of service being provided by HMG in the processing of export licence applications […] As this performance has been achieved at a time when there has been considerable resource pressure on those departments involved (especially the Export Control Organisation), we believe that this should be acknowledged and applauded.[77]

We received no evidence to contradict this assessment for 2005. We conclude that the staff in the Export Control Organisation and other government departments responsible for processing export licences should be congratulated on their achievements during a period of retrenchment which, we expect, was unsettling and potentially distracting.

56. There are, however, some clouds on the horizon. Looking to the longer term, the Society of British Aerospace Companies has concerns that "the reduction in the number of employees at the Export Control Organisation as a result of the Gershon recommendations […] could lead to an erosion in the quality and efficiency of administering licence applications". In addition, we noticed a slippage in the median time taken to determine Standard Individual Export Licences from 12 days in April-June 2005 to 15 days in October-December 2005[78] and we were concerned that this was a harbinger of deterioration in the service offered by the Export Control Organisation. When we drew this increase to the Government's attention, however, we were told: "due to a typographical error, the figure should read 13 days and not 15".[79] We are concerned that the published median figure of 15 days for the time taken to determine Standard Individual Export Licences for the final quarter (October-December) of 2005 was inaccurate; the correct figure was 13 days. An error of 15% in a key figure which does not appear to have been noticed until we queried it is not acceptable. We conclude that it casts doubt not only on the Export Control Organisation's systems for recording information but also whether senior management review such data. Furthermore, we conclude, if there is a substantial increase in median times taken to determine applications in 2006, even to a level within the 20 day target, that would be strong evidence of a deteriorating service by the organisation in immediate need of remedy. We conclude that we should continue to monitor the efficiency and effectiveness of the Export Control Organisation's service to industry.

57. As part of its review of export control the Government commissioned a report from ASE Consulting which reported in December 2004.[80] The report noted that once the staff cuts have been put in place, the Export Control Organisation "will always be operating close to the limit of its capacity". If it is the case that the Export Control Organisation is operating at the limit of its capacity—and given the recent cutbacks we would expect this to be the case—we recommend that the Government give an assurance that additional resources will be found by the Government to deal with any unplanned pressures—for example, an increase in applications for licences. (We also make a recommendation on safeguarding resources for outreach to overseas countries at paragraph 74.)

58. The second question we asked: is there any evidence that the Government has resorted to expedients to ensure that the Export Control Organisation meets its targets?[81] Two possible candidates were advanced:

a)  the greater use of open licences, which we consider below; and

b)  the use of pointless questions to applicants for export licences to delay consideration of licences.

EGAD explained that, if queries are raised with an applicant, "it delays the processing of the licence because the clock stops while the query has to be dealt with",[82] and the delay does not count against the Export Control Organisation's median target for processing applications. EGAD was able to cite some apparently obtuse questions which had been posed to applicants for licences.[83] It has to be accepted, in our view, that, in processing the volume of applications and in the interests of vigilance, those considering applications may on occasion ask redundant questions. We have seen, however, no evidence that the Export Control Organisation has systemically been asking futile questions to allow staff to meet targets.

GREATER USE OF OPEN LICENCES

59. Our predecessor Committees concluded in their Report on the 2003 Annual Report on Strategic Export Controls that an active drive for open licensing was underway.[84] We raised this matter with the Minister and officials from the Export Control Organisation, who neither accepted our assertion nor agreed that the data the Government supplied to us on licences supported this conclusion.[85] On the figures we were given there has been a clear downward trend in the number of Standard Individual Export Licences received, from 10,390 received in 2002 to 9,048 in 2004, a fall of 13%. The projected figure for 2005 showed a further reduction to below 9,000 applications.[86] For Open Individual Export Licences, whilst accepting that the figure for 2005 fell back from the levels in 2004, the figures for OIELs received has shown a trend upwards since 2002.[87] Our attempts to come to grips with the statistics were not assisted by the Government switching from applications received to applications processed during the evidence session.[88] We drew the following conclusions from our exchanges with the Government about the statistics on applications for licences received:

a)  they underline the points we have made at chapter 3 on the shortcomings of the presentation of the statistical data about export licences;

b)  the reduction in the number of Standard Individual Export Licences since 2002 appears to have assisted the Export Control Organisation to attain its targets; and

c)  the upward trend in Open Individual Export Licences may not have been as strong as we anticipated last year and we shall review the figures again next year.

60. There is no doubt that there are pressures towards more and longer open licences. Industry clearly aspires to open licences as "the gold card for companies".[89] Open Individual Export Licences give companies, for example, the flexibility they need to respond to urgent requirements[90] and allow intra-company transfers by international companies. We consider these to be entirely sensible and reasonable aspirations. The question of resources cannot, however, be ignored. A move to open licences in order to meet staff reductions at the Department of Trade and Industry required by the "Gershon" review would, in our view, be foolhardy and potentially dangerous. We accept, however, that there are limits on the resources available to scrutinise applications for licences and to police export control. It follows that maximum scrutiny has to be directed to the areas of maximum risk in relation to military equipment and dual-use goods. We have seen no evidence that the use of Open Individual Export Licences has allowed licensed exports to fall into the wrong hands, and we take assurance from the evidence from EGAD that Open Individual Export Licences are "considered very carefully by government officials and if there are any doubts or any queries at all, they will be rejected the Government".[91] We conclude that freezing open licences at their current levels and at their inconsistent maximum terms risks directing maximum scrutiny at exports which pose far from the maximum risk to the UK's policies on arms exports. We therefore conclude that a moderate change in the balance between open and standard licences and a change to a consistent maximum duration for all Open Individual Export Licences—for example, three years—is acceptable provided the Government can address, and assure us, on three issues. First, that there will be no softening of the criteria applied to consideration of applications for Open Individual Export Licences. Secondly, the Government provides assurance that companies are subject to rigorous internal compliance requirements and to regular audits to verify their implementation. Thirdly, the Government will address the lack of transparency in the reporting of open licences in the annual and quarterly reports on strategic export controls. As the UK Working Group on Arms pointed out to us open licences are "subject to a much lower level of transparency in, for example, the Government's annual reports than [Standard Individual Export Licences] are" and "there is no data on volume or value, there is no data on incorporation cases or what open licences are going for incorporation".[92] (We consider this matter in more detail, and make recommendations, at paragraphs 42 and 155.)

INFORMATION SYSTEMS/IT

61. The third question we asked—and to our mind the most serious—was what has the Government done to address the concerns identified in ASE Consulting's report? The report paints a picture of the Export Control Organisation that raises concerns. ASE found:

There is scope for continuing with in-house delivery of [Export Control and Non Proliferation Directorate] services. With significant investment, in terms of headcount, finance and technology further efficiencies in the licensing process may be achieved. A failure to invest and grow the function whilst meeting enforced headcount reductions will eventually result in it failing to meet its most basic functions.

[Export Control and Non Proliferation Directorate] business processes have developed and evolved over time to react to market and political needs. The Directorate relies heavily on a wide range of disjointed IT systems. [Other government departments] play a key role in the day-to-day delivery functions of [Export Control and Non Proliferation Directorate]. None of the [other government departments] have access to [the Export Control and Non Proliferation Directorate]'s IT/IS systems and there are significant obstacles to integrating business systems. The portfolios of [the Export Control and Non Proliferation Directorate]'s own IT systems need significant investment if they are to deliver improvements in productivity.[93]

62. Glyn Williams, Director of the Export Control Organisation, accepted that the Export Control Organisation's IT systems were disjointed.[94] The Minister told us that "the ECO at the moment is currently reviewing proposals to replace its main licensing database with new IT systems".[95] He also told us that the Export Control Organisation had adequate resources and that "with strong management, greater use of IT and so on, we are doing the job well".[96] We accept, on the basis of the evidence we have heard and set out in this chapter, that the Export Control Organisation is currently meeting its targets but we are concerned how in the future the Government is going to meet the challenges identified in the ASE report. Having taken a decision to keep the Export Control Organisation in the public sector we conclude that there is now a duty on the Government to provide adequate resources for its development and that it would be unacceptable to attempt to muddle through with minimal investment. As a first step we recommend that the Government set out the IT functionality that the Export Control Organisation needs and the investment required to deliver these functions with a clear plan for provision and implementation of the new information technology systems. We request a detailed briefing from the Department on its plans for information technology in the Export Control Organisation.

63. We are disappointed that the Government has not taken up the recommendation of our predecessor Committees in their last Report that it "considers inviting the Committees in the next Parliament to assist with reviewing or commenting on the specifications for new information systems".[97] We have concerns about the adequacy of the functionality of the Export Control Organisation's information systems to meet not only our requirements but also any emerging best practice for EU countries. We would be dissatisfied to be told by the Government, after the proposed upgrades and changes to the information systems had been implemented, that information—about, for example, categories of end-users, which other EU countries now provide, or is clearly on the horizon as a result of the recent review of the EU Code on Arms Exports[98]—cannot be produced because it was not included in the specification for the IT upgrade. We recommend that the Government ensure that the proposed upgrade to the information system in the Export Control Organisation meets the current best practice of EU countries and expected changes in requirements for the publication of data in annual reports.

THE "GOODS CHECKER"

64. Our consideration of IT would be incomplete if we overlooked the Export Control Organisation's new IT facility, "Goods Checker: New Web-based Search Tool", which, according to the Government, "enables exporters to identify whether goods are subject to control, and in which category of the Control Lists".[99] EGAD expressed satisfaction with the new facility but pointed out that there was a risk that it could mislead exporters—especially the less experienced—into concluding that an export licence was not needed when one was required. For example, an entry misspelling "beryllium" as "berillium" resulted in the Goods Checker advising that no export licence is required, which is wrong.[100] We are concerned that exporters, particularly of dual-use items, using the Goods Checker could, especially if they are unfamiliar with export controls, be inadvertently led to breach export control as many goods containing beryllium are subject to export control. We recommend that the Export Control Organisation address and rectify the problems which EGAD has identified with the new Goods Checker. The problem with the Goods Checker also underlined to us that outreach to industry must make clear that the Goods Checker is one of many components of a company's comprehensive internal compliance programme and cannot on its own provide the necessary assurance to a company that it is complying with strategic export controls.

COMMODITY CODES

65. The example of beryllium also highlights the difficulties that HM Revenue and Customs (HMRC) have in establishing whether goods are subject to export control. Mark Fuchter, Head of the Publications and Restrictions Policy Group, HMRC, pointed out that "beryllium can fit […] 31 Customs' commodity codes".[101] He assured us that HMRC were "alive to all the complexities and anomalies enforcing the dual-use regulations […]. Are we equipped to do it? Yes, I think we are, and we are aware of these challenges that profiles will not work as well as they will on very clearly defined items."[102] We conclude that integration of the Export Control Organisation's and HM Revenue and Customs' electronic systems, and in particular commodity codes, would strengthen strategic export controls. We recommend that the Government produce a plan to link up licensing and customs processing electronically, to standardise commodity codes and to allow HMRC to access the licensing database and expertise.

Outreach: to UK industry

66. Finally, we asked: should the Export Control Organisation switch staff and resources from other activities—for example, outreach with UK companies and overseas, which receive limited resources—to processing applications for export licences? Similarly, should HMRC switch resources from outreach to enforcement?

67. EGAD and other witnesses highlighted the extent of the lack of knowledge, and the risks of ignorance, of export controls, particularly of dual-use goods.[103] EGAD explained that "you only know you have a responsibility to report [exports subject to control] 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 [goods] you do not know anything about it."[104]

68. The Minister assured us that the Government was doing "a great deal" on outreach:

seminars, DVDs and all the rest of it. That is a very important point because I am generally aware, but not least from my work with my energy portfolio, that some of our best and most entrepreneurial companies in terms of science and technology are often preciously small and many could be forgiven for not knowing about this particular legislation. We have got to ensure that they do know about it because they could be at risk of being hoodwinked into wrong exports. We do need to reach them and we are doing our best. That is a very important point.[105]

On the number of people who had received training, he said:

since June 2004 a total of well over 1100 individuals from 461 companies have attended various seminars and training courses run by the ECO.[106]

69. We are convinced of the critical importance of outreach to industry, to ensure that industry plays its full part in preventing exports falling into the wrong hands. EGAD alerted us to a case where an attempt had been made to obtain automotive components for use in flight control systems for missiles.[107] It is vital, in our view, that government and industry take the message beyond the coalition of the willing and aware exporters—essentially exporters of military goods—to exporters of dual-use goods. If they fail, lives will be at risk and there will be demands for much tighter controls on a wider range of exports. We conclude that outreach to UK industry is critical to the operation and control of strategic exports and we recommend that the outreach programme be expanded significantly.

Outreach: abroad

70. Likewise, we consider that outreach to export control organisations overseas is vital in preventing military and dual-use goods and technologies falling into the wrong hands. We fully endorse the assessment made by the UK Working Group on Arms:

The UK is seen internationally as having one of the most sophisticated export control systems in the world. It is to be congratulated for its leadership role in providing active export control outreach support, especially in non-EU Europe but also further a field. Other states look to the UK to provide a lead in this area. Much has been achieved in improving export control regimes in a number of states in Eastern and South Eastern Europe, including in terms of persuading the various national governments of the need to de-link the arms-export decision-making process from the defence industry.[108]

71. HMRC explained to us that "the planning [of outreach] is very much driven by the Foreign Office and the Ministry of Defence".[109] When he gave oral evidence the Minister of State at the Foreign and Commonwealth Office, Dr Kim Howells MP, stated:

outreach work to promote effective export control is […] extremely important in the fight against proliferation. EU outreach activities include seminars, visits, covering topics such as industry awareness, capacity building, customs procedures and assistance with drafting legislation, which is also very important, and a good current example of EU outreach work is the EU's €1.5 million pilot project running from 2005 to 2007 on the export control of dual-use items. We have four nations identified as key partners in this pilot project: China, the UAE, Serbia and Montenegro and the Ukraine, and that is proceeding.[110]

The importance of outreach overseas was also underscored by the Minister, we note, in his speech on the International Arms Trade Treaty to the United Nations in Geneva on 23 March 2006. He observed that "the capacity to deal in practical terms with the provisions of a new treaty has also been raised" and he acknowledged that "in some cases, where export control systems are at an early stage of development, countries may need help with implementation". He declared that "the United Kingdom […] will be ready to help".[111]

72. In their evidence HMRC identified three types of activity they had carried out in the past five years:

  • [O]verseas outreach, where we will accompany delegations headed by Foreign Office and/or MoD and alongside DTI colleagues […] to various countries and those countries are chosen […] by those departments who ask us to come along to deliver, it can vary what they ask us to deliver, but it is in the area of making an assessment of that Customs' enforcement capability and export controls, probably their Customs' capability, but it might be looking more widely, it might be collaborating with DTI to look at the whole end-to-end licensing and enforcement process and to identify capacity building needs for that country and we have been to a number of EU accession countries, going back a couple of years, some trans-shipment locations, such as UAE, Singapore and Hong Kong and others, including Libya and South Africa and China.
  • The second phase is inward outreach where such states send delegations to the UK hosted by the Foreign Office or the Department of Trade and Industry and typically we will attend to give presentations on our approach to export controls, what we regard as good practice, tips and techniques. Examples there include the Ukraine, Serbia, Montenegro, Albania, Pakistan and Turkey, but we are really driven by the needs as established by the foreign office and the lead policy departments. That did include last year in our current building we hosted a one week training seminar for Libyan export control officials.
  • The third element is […] our contribution to the four international export control regimes which include elements of outreach where we are often asked, for example, diplomats we will say to us, 'We have identified some of the parties/enforcement officers attending the enforcement experts' meeting, they could do with particular reinforcement in certain aspects and can you please help out?'[112]

73. We agree with the assessment made by Mark Fuchter that outreach is "probably indispensable" and with his statement that outreach is an essential component "in trying to improve the security of the supply chain".[113] We were concerned to be informed that, while HMRC were committed to winning the battle in the security of the supply chain, they were less certain about winning the war.[114] Kevin Franklin, Director, Frontiers Customer Unit, HMRC, explained:

Certainly if you expand upon some of the things that Mr Fuchter has already mentioned, we are working very closely with the world customs' organisations on this as well and we have just signed up to a framework of standards around security and trade facilitation which has helped to cement the work we are doing on the supply chain and we are engaged with some 50 odd projects at the moment in terms of capacity building that is essential in our drive to win these battles on security issues.[115]

74. We have no doubt that the UK's and the EU's strategic export controls are enhanced through the provision of assistance to countries outside the EU to strengthen and develop their export controls. Not only will it toughen the fight against proliferation of weapons but also underpin the UK's credentials in support of the International Arms Trade Treaty. We were impressed by the range of support which HMRC does, and can, provide but concerned by the prospect that we might lose the war against those wanting to bypass effective export controls; we are not altogether surprised given the limited size of the total staff compliment estimated at between 60 and 100 full time equivalent staff.[116] We recommend that:

a)  the Government expand the programme of overseas outreach led by the Foreign and Commonwealth Office and supported by HM Revenue and Customs and the Department of Trade and Industry;

b)  review the staff and resources provided for overseas outreach; and

c)  subject to the outcome of any review of the EU pilot programme, press for a full EU programme of outreach.

In addition, to ensure that provision is made for staff and resources for outreach to overseas countries, we recommend that this work be recognised as falling within the core tasks of licensing and enforcement officers and that budgets and resources are provided for this purpose, and set out in the annual report on strategic export controls.


68   HC Deb, 21 July 2005, col 1927W Back

69   Q 25 (Mr Salzmann) Back

70   Q 82, Ev 98  Back

71   Ev 98, para 4 Back

72   Ev 98, para 5 Back

73   Q 130 Back

74   Q 126 Back

75   Q 131 (Mr Wicks) Back

76   Ev 126, para 22, Q 143 Back

77   Ev 98 Back

78   Export Control Organisation, Information on Refusal Percentages and Standard Individual Export Licence Application Processing Times by Destination: October - December 2005, http://www.fco.gov.uk/Files/kfile/refusalsprocessingoctdec2005.pdf, p 10  Back

79   Ev 167 Back

80   "Project - Review of XNP Services Final Report", ASE Consulting, December 2004, Issue 1.1, p.3; report published on the Internet in June 2005, with certain sensitive sections removed, at http://www.consumer.gov.uk/export.control/publications/xnpservicesreview2005.pdf,  Back

81   Ev 126, para 21, sets out the Government's targets for processing applications for export licences, which include:

processing 70% of SIEL applications in 20 days, and 95% in 60 days; and

processing 60% of OIEL applications in 60 days. Back

82   Q 211 (Mr Salzmann) Back

83   Qq 211-2 Back

84   HC (2004-05) 145, para 62 Back

85   Qq 148-53 Back

86   Ev 126, para 22 Back

87   Ev 126, para 22; OIELs received: 635 in 2002; 652 in 2003; 806 in 2004, and 600 at 23 November 2005 Back

88   Q 151 Back

89   Q 216 Back

90   IbidBack

91   Q 216 Back

92   Q 89 (Mr Sprague) Back

93   "Project - Review of XNP Services Final Report", ASE Consulting, December 2004, ISSUE 1.1, p.3; report published in June 2005 with certain sensitive sections removed on the Internet at http://www.consumer.gov.uk/export.control/publications/xnpservicesreview2005.pdf. See also Ev 80 Back

94   Q 135 Back

95   Q 134 Back

96   Qq 132-3 Back

97   HC (2004-05) 145, para 25; Cm 6638, p 8 Back

98   For example, monthly licensing statistics (Netherlands), detailed denial information (Netherlands), categories of end-user (Denmark, Flanders - licensing decisions are regionalised in Belgium) and data on actual exports. Back

99   Ev 126, para 25  Back

100   Q 211 (Mr Peers) Back

101   Q 369 (Mr Fuchter). A Commodity Code is a numeric description of goods that are traded. Back

102   IbidBack

103   Qq 30-1, 67 Back

104   Q 30 (Mr Wilson). See also Ev 80. Back

105   Q 176. See also Ev 126, para 26.  Back

106   Q 178 Back

107   Q 198 Back

108   Ev 98  Back

109   Q 353 Back

110   Q 302. See also Ev 163 para 1. Back

111  http://www.fco.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=1007029391647&a=KArticle&aid=1142705227449  Back

112   Q 353 Back

113   Q 355 Back

114   Q 356 (Mr Franklin) Back

115   Ibid.  Back

116   Q 340 Back


 
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