Memorandum from David Hayes
A PROPOSAL FOR
THE ESTABLISHMENT
OF AN
AGENCY TO
ENFORCE EXPORT
CONTROL COMPLIANCE
Background
During 2005 the DTI examined the possibility
of outsourcing that part of its activity which deals with export
licensing, the Export Control Organisation (ECO). This provoked
a unified response from industry, Parliament (in the shape of
the Quadripartite Select Committee (QSC), which exercises oversight
of export controls, and the Non-Governmental Organisations (NGOs)
operating in this arena. Such was the opposition, not to mention
the legal obstacles, to this ill-conceived idea that it was dropped.
Licensing is largely routine but, in sensitive cases, requires
the balancing of often competing interests with political and
national security ramifications. Such decision making is properly
the role of Government, although it must be conceded that the
back-office functions may be a less controversial area for outsourcing.
The Opportunity
Because export control is a high-profile, legislative
function, it must continue. However, the current three year review
of UK export control legislation and the doubts surrounding the
continuation of the DTI as a whole mean that a unique opportunity
exists for an innovative approach, perhaps in conjunction with
the private sector.
The concept involves the establishment of a
new, possibly privately operated, body to effectively enforce
existing legislation. Some years ago, Mike Coolican, then Assistant
Secretary at DTI with responsibility for export controls, estimated
that 35% of UK companies which required export licences were actually
applying for them, ergo the remaining 65% were (and still are)
exporting illegally. More recent, quantifiable data seems, at
least on a prima facie basis, to corroborate this estimate—herein
lay the opportunities.
The Export Control Act 2002 (the Act) is the
primary legislation covering exports from the UK. It is very broadly
drafted, enabling legislation and allows great latitude to HMG
to enact secondary legislation. Already the Export of Goods, Transfer
of Technology and Provision of Technical Assistance (Control)
Order 2003 confers rights of inspection of export records on "any
person authorised by the Secretary of State (DTI) or the Commissioners
(HM Revenue & Customs)", i.e. this can be a private body,
so authorised. All that is lacking to facilitate this proposal
is the mandating of compliance by exporters with requests from
a newly constituted body to provide information and copies of
documents and the establishing of a fixed penalty regime where
those documents reveal non-compliance or are not provided. Both
of these are seemingly well within the scope available to HMG
under the Act, requiring only secondary legislation.
Recommendation
A new body, "The Compliance Agency"
(the Agency), be established to enforce the legislation. The basic
premise is that the Agency is established to examine exports by
means of targeted, ex post facto documentary checks. The important
difference from current compliance checks is that the new checks
would be carried out not solely from the "coalition of the
willing", i.e. checking only those companies which currently
use export licences, but from the vast bulk of the total population
of export transactions recorded in New Export System (NES) (an
IT tool operated by HMRC which records almost all exports from
the UK). This means that, for the first time, a systematic approach
will be taken to examining a far higher percentage of the totality
of UK exports than is currently achievable. The export paperwork
can then be examined, remotely from the exporters' premises, and
any violations identified and penalised, such penalties being
shared between HMG and the Agency on a yet to be determined basis.
The imposition of penalties will have the political advantage
of showing that HMG is taking export controls seriously as an
aspect of global security and the "war on terror" and
is addressing the current high level of political concern which
exists globally in relation to export controls, particularly in
relation to Weapons of Mass Destruction (WMD), most of the technologies
and components of which are controlled as dual-use and not military
items.
Non-compliance exists for two reasons; ignorance
of the controls coupled with a lack of consequences arising from
non-compliance. An argument can be made that the business cost
of compliance, in terms of resource and expertise, so far outweighs
the likely cost of non-compliance that ceteris paribus
the responsible commercial decision is to be non-compliant. The
corollary is that improving compliance requires that the commercial
equation be changed.
Legislation
HMG would need to enact secondary legislation
under the Act authorising the Agency to require copies of documents
to be supplied and establishing a framework for imposing fixed
or variable penalties for non-compliant exports. It is not anticipated
that exports will be stopped or delayed; the checks may actually
take place after goods have been exported. However, this minimises
any burden on business whilst providing a penalty regime to sanction
non-compliant exports and a deterrent effect, which could be maximised
by HMG publicising the new activity. To draw an analogy, speed
cameras only catch people who break the speed limit within the
range of the camera but a deterrent effect is still claimed and
the revenue generated is substantial, even in government terms.
An appeal mechanism would be required. However,
the number of appeals is likely to be small and an appropriate
mechanism should not present any significant difficulty.
Funding & Performance
Funding for the Agency would initially have
to come from Govt and/or the private sector but it should very
quickly become self-financing and generate a significant surplus,
to be shared between the participating parties on a basis yet
to be determined.
The financial performance of the Agency will
be dependant upon the levels of penalty which HMG considers appropriate
and enacts in the secondary legislation and on the Agency's own
effectiveness in correctly targeting non-compliant exports from
the large volume of export transactions conducted daily. The latter
will depend on the quality of the initial core of personnel and
their possessing the appropriate skills within the export control
arena, which are very specialised.
Conclusion
The timing has never been better to offer a
solution which will enable HMG to claim that it is taking effective
action to enforce export controls, improve national security and
deter transgressions; whilst at the same time generating significant
revenue. Some officials of the United States Department of State
(which is responsible for all military exports from the US) privately
take the view that the only UK companies who currently take export
controls seriously are those with significant US interests. This
is a valid assessment, based on the self-evident fact that it
is primarily those companies which currently possess a significant
export control compliance capability. The affected companies do
this because the cost of non-compliance with US controls, even
for a non-US company, is commercially unacceptable. The business
opportunity lies in making the same thing true in respect of UK
export controls, the political opportunity in being seen to take
effective action against persistent offenders who seek commercial
advantage over compliant companies by acting illegally and increase
the risk of the strategic materials falling into the hands of
terrorists or "rogue" states. The appendix sets out
estimates of the likely scale of unlicensed, controlled exports
and the possible penalty income to be generated, based on example
penalties.
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