Memorandum from the Export Group for Aerospace
and Defence (EGAD)
AIMS OF
THE LEGISLATION
Have the Government's stated aims, purposes and
policy objectives for the Export Control Act 2002 and orders made
under the Act achieved their desired effect? More particularly:
Has the legislation ensured that the UK is maintaining
an effective system of export controls to make sure that UK involvement
in arms exports does not contribute to regional instability, internal
repression or external aggression whilst supporting a strong defence
industry and defence exports?
Following the introduction of the Export Control
Act 2002 (ECA) in 2004, the UK now has, undoubtedly, one of the
best and most comprehensive export control systems in the World,
despite some very public criticisms and comments to the contrary
from certain quarters.
Many of these criticisms from other quarters
stem from disagreements over some of the individual licensing
decisions which have been made by HMG since the adoption of the
new regulations, but it must be recognized that such criticisms
are totally unavoidable and, as with any area of Government decision
making (be it housing development schemes, road building programmes,
airport development projects, wind farm location planning, or
decisions on individual asylum status, etc, etc) some contentious
decisions, one way or the other, will always arise, no matter
what the regulations are.
The fundamental core of the legislation under
the ECA is good and has worked reasonably well in practice—Industry
has managed to cope with the introduction of the new controls
associated with the ECA, despite some aspects which have caused
not inconsiderable problems and uncertainty. We have to admit
openly that very many of Industry's previously stated direst fears
and predictions have not, in fact, arisen, especially in the area
of intangible transfers of technology. Industry has, for the most
part, coped alright with the controls thanks to the compromise
reached between Industry and Government, associated with the adoption
of the "functional approach". So, in general, the introduction
of the ECA has gone pretty well.
However, it must also be remembered that the
introduction of the regulations in 2004 has cost compliant companies
a lot of money, resource and effort, which they have had to absorb.
Those problems that have arisen have come from
the control measures introduced in some areas on the periphery
of this core, where HMG has sought to give itself extremely broad
powers to control activities which have been deemed to be of particular
concern. This includes, especially, the CBRN sector, and the "restricted
goods" and embargoed destinations trade controls, etc, where
some feel that a lot of disproportionate effort, pain and uncertainty
has been caused in relation to perceived gains—we strongly
believe that the controls in these areas need to be comprehensively
reviewed in 2007.
Has the legislation reduced trade in military
goods and technology where it is undesirable without also discouraging
trade that the Government wishes to promote?
The UK Defence Industry is not clear as to how
effective the regulations have been, in practice, in curtailing
the sorts of proliferation trade which the Government regards
as being undesirable. However, we believe that HMG now has at
its disposal, through the ECA, a legislative tool which should
enable it to act against those activities which it does wish to
control and prevent from happening, and that some fine tuning
of this under the 2007 Review may further enhance its effectiveness
in this regard.
Whilst there are some concerns in certain areas
(eg the CBRN sector) that the impact on their export, and even
non-export related, trade activities has positively discouraged
potential customers from seeking to do business with UK companies,
we are still seeking to ascertain the basis for this view and
how widespread it is.
The trade controls which encompass an extraterritorial
dimension do, in our view, act as a potential discriminator against
the employment of UK nationals by firms overseas, and, indeed,
for the only UK person employed overseas whom we know of who has
actually applied for trade control licences, we understand that
his employers (a perfectly legitimate and responsible Government-owned
company overseas) quickly reached the conclusion, soon after the
introduction of the new UK regulations, that his continued future
employment was no longer desirable.
The baffling inclusion of long-range missiles
and UAVs in the "restricted goods" category under the
trade controls is having an impact on projects in these areas,
which will, almost invariably, involve international, globalised
supply chains. Certainly MBDA UK Ltd, which is the UK arm of a
multinational (UK/France/Italy) company involved, through its
Storm Shadow and Scalp EG missile systems, in this area has experienced
some particular practical difficulties at the working level.
Has the legislation impeded the illicit or irresponsible
transfer of technologies to states or organisations intent on
creating weapons of mass destruction?
We are unaware of any such evidence, although
it may well be that HMG is in a much better position to be aware
of such circumstances when this has arisen. However, in global
terms, it must be pointed out that no matter how effective the
UK's own regulations are in this, or any other sector, unless
they are matched by similarly effective regulations in other nations,
then the likes of North Korea will continue to be able to develop
their illicit WMD programmes, and to help others with theirs.
Has the legislation helped to strengthen international
regulation of the arms trade?
In the UK, yes, but globally no, due to the
sheer diversity of export control policies, systems and procedures
which are in place around the World, and which have been developed
entirely egocentrically by each nation.
Has the legislation prevented the proliferation
of weapons of mass destruction?
We have no evidence of this, although HMG may
know of instances in which UK involvement in WMD programmes has
been prevented.
Does the legislation meet the requirements of
European and international obligations such as UN Security Resolution
1540 (2004)?
We believe that the UK's regulations do meet
these obligations.
How does British legislation and enforcement of
the legislation compare with that of other Member States of the
EU?
We believe that the UK's export control legislation
and enforcement are at least comparable with those of other EU
Member States, and are probably amongst the most effective in
the World.
Is the licensing system accountable and transparent?
We believe that this is the case and that, certainly,
the level of transparency available through the Annual and Quarterly
Reports is considerable, and possibly the most open in the World.
We have to confess to being more than a little disturbed by the
changes to the ECO's website (http://www.dti.gov.uk/europeandtrade/strategic-export-control/index.html)
which occurred earlier this year, and which, in our view, make
this essential informational tool far less user-friendly and accessible,
especially for uninitiated enquirers. Whilst the ECO's website
used to be, in our view, amongst the best in the World, invaluable,
full of easily-accessible information about our export control
system and highly user-friendly, this is, sadly, no longer the
case, and much searching is now required to find the documents
which are needed, which are all still there, but not easy to find
(especially for the uninitiated). This retrograde step, which
represents a triumph of corporate branding over functionality,
is deeply regrettable.
Meanwhile the development and introduction of
the new Goods Checker and OGEL Checker compliance tools by the
ECO is to be applauded and welcomed, as was the publication earlier
this year of a new "Beginners Guide to Export Controls"
and "Compliance visits explained" manual.
The Committee would also welcome views on how
the effects of the legislation can be measured and whether there
are reliable methods of distinguishing between the "legitimate"
and "illegitimate" trade in arms and technologies.
The system works when it prevents exporters
or traders from carrying out commercial activities which HMG does
not wish to go ahead, and does not work when it fails to do so.
Exports which are undertaken within the regulatory framework,
legally, and with the necessary licences (and other documentation)
are legitimate, whilst those which are outside of the regulatory
framework are illegitimate.
Whilst much of the focus of NGOs and media is
on the overall strategic policy of what UK companies (or individuals)
should be allowed to export and to whom, and cases will arise
which can result in criticism of the Government's policy of allowing
a particular export to take place, there will always be debatable
individual cases, one way or the other, and in these instances
this is merely innate criticism of the Government's licensing
policy in approving (or refusing) a particular licence, and does
not represent "an illegitimate export". If there is
an undesirable export which does take place which, for whatever
reason, HMG is unable to prevent or subsequently pursue those
responsible (eg the Mil Tech case of brokering military equipment
to Rwanda back in 1994), then the legislation, and its systems
and procedures need to be reviewed to enhance their effectiveness
and ascertain whether it is possible and practical to close any
such exploited loopholes, which can be identified.
IMPACT ON
POLICY IN
OTHER AREAS
Does the legislation complement or conflict with
defence, defence procurement, anti-terrorist or human rights policies
and legislation?
We believe that the UK's export control legislation
should complement HMG policies in all of the above areas, and
not conflict with them. However, UK companies involved in the
CBRN sector certainly believe that our own procurement activities,
to meet the needs of our own armed forces (and also the blue light
emergency services), in this increasingly important area have
been adversely affected by the very tight regulatory framework
in which they now have to operate.
There is inherent and fundamental conflict on
very many occasions between the US export control system (especially
under ITAR) and UK/EU legislation in a number of areas, arising
especially from the USA's "deemed export" regulatory
requirements. The UK is not alone in this, and there has been
much Canadian media coverage this year (for instance see Toronto
Globe & Mail article "US Rules Snag Military Equipment
Deals—Ottawa facing `unmanageable problem,' senior procurement
official declares" of 6 October 2006) of US export control
demands conflicting with the Canadian constitution. This is an
illustration of the jurisdictional conflicts that can all too
easily occur when nations start to impose extraterritoriality
in their own regulations which are in conflict with the laws of
other countries.
Is there any evidence that the granting or withholding
of licences for the export of goods or technologies subject to
control is being used as an instrument of foreign policy?
There has always been an innate link between
foreign policy and sales of defence and other strategic goods,
and always will be—whilst Lord Justice Scott stated in his
famous 1996 report that this should not happen, this is unavoidable.
Thus, arms embargoes are imposed on countries for which no UK
defence companies have any commercial interests or perceptions
of prospective business (eg Cote d'Ivoire), for political and
foreign policy reasons, rather than to prevent potential exports
from taking place. We believe that the UK is generally less inclined
towards using its export licensing system as an instrument of
foreign policy than many other nations.
REGULATORY IMPACT
ASSESSMENT AND
THE CONCERNS
OF INDUSTRY
Were the effects of the legislation accurately
and adequately identified by the Government in the Final Regulatory
Impact Assessment
(see http://www.dti.gov.uk/files/file7886.pdfsearch=%22regulatory%20impact%20assessment%20export%
20control%22), in particular, were the costs and
benefits in the Regulatory Impact Assessment correct? The Committee
wishes to establish whether or not the legislation has increased
the burdens on the defence industry and whether it has affected
UK businesses' ability to compete with other countries' defence
and dual-use exporters.
Much of the RIA had been based on inputs provided
by Industry and, as already stated, thanks to the constructive
approach adopted in the implementation of the new regulations
by the ECO, many of Industry's worst fears and predictions of
what might happen did not come to pass.
We strongly suspect that much of the specific
topic coverage for the review will be focused on possible areas
of yet further extending and tightening of the regulations, and
we would like to see this predominance counterbalanced by a detailed
assessment of the increased burden placed in legitimate Industry,
and undertaking a cost/benefit analysis. We believe that the regulatory
impact assessment should be reviewed not just in terms of what
it has cost legitimate Industry in order to comply with the new
regulations, but also, perhaps more importantly, what effective,
practical benefit there has been in counter-proliferation terms
from their introduction. Before Industry might be prepared to
consider supporting any possible further extensions and tightening
of the regulations (which is not impossible), we would have to
be totally convinced of the real, practical (and not just theoretical)
benefits which would result from the adoption of such new measures
in terms of effective count-proliferation. It is no good imposing
yet more new, additional burden on Industry, for no good and practical
benefit, at the end of the day.
What have been the economic consequences of the
legislation, particularly what effect has there been on manufacturers?
For example, has it affected the ability of companies to enter
collaborative ventures with EU or US companies? Has the transparency
provided by the procedures given the UK an advantage or disadvantage
in competing overseas?
It has been reported to us that the new regulations
have, on occasion, been perceived to have played a part in costing
UK companies prospective sales, due to the perceptions on the
part of the customers that they have less bureaucratic hassle
with some other, alternative suppliers. We most certainly would
not want this to develop further and to become a parallel with
the existing situation with regard to doing business with US companies,
where there is an increasing trend internationally, wherever possible,
to "buy American last", due to the bureaucratic difficulties
attached with using US suppliers, goods, technology and services.
Some multinational firms in areas particularly affected could
well seek to make future decisions on the locating of investments
based on where they perceive that the business climate is most
beneficial and easier, especially in this modern global commercial
environment.
When the legislation was under consideration industry
had a number of concerns. Where these addressed and resolved?
In particular that:
— the proposals lacked clarity and
were too loosely worded; Did the Government produce guidance which
addressed industry's concerns?
— the record keeping requirements,
particularly for intangible transfers and brokering, will be burdensome;
The Government indicated that the records companies kept for their
own purposes would also fit the requirements of the licensing
regime. Did industry and Government devise a system for record-keeping
which was both sufficient to show compliance while avoiding an
unreasonable burden?
— was the record keeping required
for intangible transfers and brokering acceptable to industry
and the institutions carrying out research?
The guidance produced by HMG, with Industry
input, addressed many of the issues of clarity for companies about
what they needed to do to comply with the new regulations. However,
with the most extreme elements of the regulations, where HMG sought
to give itself the most far-reaching possible powers (eg CBRN,
and "restricted goods" and "embargoed destinations"
under the trade controls), then the continuing difficulty in clearly
observing the actual parameters of the regulations, at their fringes,
could only really be achieved with both HMG and Industry learning
as they went along and practical case studies arose. We would
hope that the review in 2007 will be able to take advantage of
the (by then) three years' worth of practical case work to provide
greater clarity in many areas. Certainly the likes of MBDA UK
Ltd, have been in the forefront of test cases to obtain clarity
on the parameters of the "restricted goods" trade controls.
With regard to record-keeping for intangible
transfers of technology, we were extremely gratified by the ECO's
adoption of a "functional record-keeping" approach.
Whilst there has been some uncertainty within companies, and sometimes
apparently within the ECO as well, as to what actually constituted
a "functional record-keeping" approach and what records
Compliance Officers should expect to see when they audit companies,
two and a half years' worth of practical experience, and the highly
welcome publication earlier this year by the ECO of its "Compliance
visits explained" manual should assist enormously in clarifying
exactly what records need to be kept by exporters.
Were the transitional arrangements adequate?
Whilst Industry would have liked to have had
a longer implementation period in which to "bed down"
the new regulations, back in 2003-04, for the most part companies
coped with the 6 months that they were given.
Has the licensing regime impeded trade fairs in
the UK?
Trade fairs are still taking place in the UK,
although it is not clear how many of the organizers have been
as au fait with the new regulations as the organizers of
the DSEi and Farnborough International Airshow exhibitions have
been. It was particularly unfortunate that some breaches of the
trade controls, involving the promotion of "restricted goods",
came to light at DSEi'05 as the organizers had been particularly
proactive and put a lot of time and effort, jointly with the ECO,
into seeking to ensure that all exhibitors and visitors were made
aware of the UK's regulations.
Those trade fair (and conference) organizers
who are aware, seek to promote awareness of the regulations to
those companies participating, whilst those that are not as aware,
naturally, will not do so. In our experience some foreign exhibitors
have had certain difficulty trying to understand and come to terms
with the UK regulations, as we are unaware of any other nation
in the World which seeks to impose the same level of control over
business dealings at exhibitions held on its territory involving
foreign participants.
We are not aware what impact there has been
on trade fairs held outside of the UK, either organized by UK-based
exhibition organizers or (where appropriate) by overseas organizers
who employ UK nationals. Hopefully they are aware and complying,
as well. Certainly the ECO should, fairly easily (and with DESO's,
UKTI's and Industry's help) be able to track down such events
(and organizers) who are affected and make contact with them.
All such trade fairs, both here in the UK or overseas, can serve
as excellent awareness raising opportunities which should be exploited.
Certainly, EGAD and the ECO have had joint information stands
at both DSEi'05 and Farnborough Airshow '06, and we are intending
on having an enhanced information stand at DSEi'07—all paid
for by EGAD.
Has the legislation had any unintended consequences?
Companies in those areas where the broadest
possible level of control has been sought (eg the CBRN sector,
and dealing with "restricted goods" under the trade
controls) have encountered compliance issues which we do not believe
had been foreseen or intended. We are certain that the need for
companies such as Jane's Information Group to have to apply for
trade control licences for the production of its publications,
where they are carrying advertising for "restricted goods",
or for companies to have to have export control compliance coverage
in place for submitting CBRN-related technical information to
our own Armed Forces (and blue light services) here in the UK,
prior to contract signature, cannot have been foreseen or identified
as having been amongst those proliferation threats which needed
to be brought under control, as aspirations for the new legislation
by HMG.
SUSTAINABLE DEVELOPMENT
Section 9 of the Export Control Act 2002 requires
the Secretary of State to give guidance on general principles
to be followed when exercising licensing powers which must include
guidance on sustainable development. Since 2002 only one application
to export arms appears to have been refused on grounds that it
was incompatible with the technical and economic capacity of the
recipient country. The Committee invites views on the operation
of the guidance, whether a test of sustainable development is
practical, whether licences have been approved which should have
been refused on this ground and whether the legislation needs
to be revised.
We do not know, or have sight of, what proposed
changes are planned for the new, revised EU Code of Conduct, which
may well seek to address the issue of Criteria 8. We do not
believe that the UK is alone in not refusing very many export
licence applications on the basis of Criteria 8, and have been
led to believe that this has, in fact, been a common experience
across the EU, since 1998. Obviously clear and concise guidance
on how to assess this Criteria and make informed judgements against
it is essential, and all EU Governments must be developing mechanisms
to try to achieve this. Hopefully, this information will be being
shared across the EU so that some form of "best practice"
can be identified and implemented in a harmonized way across all
Member States. Sustainable development is an important consideration,
which must be borne in mind by officials when assessing export
licence applications.
ORDERS MADE
UNDER THE
EXPORT CONTROL
ACT 2002
Have the orders made under the Export Control
Act 2002 been clear, well-drafted and intelligible?
We believe that they were clear, except in regard
to those areas in which HMG sought to give itself the broadest
possible control powers, where there is some confusion. Here there
are still some areas of uncertainty within the trade controls
legislation, which need to be addressed and clarified if Industry
is to have the certainty that it needs about what it has to do
to operate legally, and also to prevent illicit activities from
being able to be undertaken with impunity from the realistic threat
of successful prosecution.
To take one example, the ECO has stated that
whilst the transfer of software and technology is not controlled
as such under the trade controls, the transfer of technology can
be caught, where this is related to "restricted goods"
or "embargoed destinations", as the provision of technology
could be construed as "an act calculated to promote"
a trade deal.
However, we doubt that this interpretation by
the DTI would catch a case in which a British national overseas
was transferring the technology from one country to another (provided
that it is not embargoed), not in relation to the potential
subsequent physical transfer of the actual goods, themselves,
from one country to another, but to facilitating the setting up
of production facilities in the second (recipient) country, for
them to make the goods, themselves, where no follow-up export/transfer
of goods across international borders will be required? In this
case it will not be an:
"act calculated to promote the supply
or delivery of, any restricted goods, where that person knows
or has reason to believe that his action or actions will, or may,
result in the removal of those goods from one third country to
another third country."
However, we also note that, under "Interpretation"
within the Trade in Goods (Control) Order 2003 and the Trade in
Controlled Goods (Embargoed Destinations) Order 2004, it clearly
states that:
""controlled goods" means goods
used and unused, specified in Part 1 of Schedule 1 to the Export
of Goods, Transfer of Technology and Provision of Technical Assistance
(Control) Order 2003, the supply and delivery of which are prohibited
by this Order. For the avoidance of doubt "controlled
goods" does not include software and technology."
(Our emphasis added)
Whilst we take it that the DTI's legal experts
are certain that the above interpretation, published within the
legislation, itself, would not undermine the chances of a successful
prosecution against someone who did merely transfer technology,
rather than goods, in respect of "restricted goods",
we are not so certain that this would, indeed, be the case.
It is clear that the scope and parameters of
the existing "Restricted Goods" and "Embargoed
Destinations" controls, which have been specifically drawn
up to be as wide-ranging as possible, are not clearly discernible
either to Industry, which needs to comply with the regulations,
or to those responsible for their enforcement. For instance, to
take just one example, a clear outline of what constitutes trade
control licensable "general advertising and promotion"
is needed.
Clear and concise definitions will greatly assist
in awareness, removing uncertainty and in easier prosecutions
of transgressors.
Have those to whom the orders apply received sufficient
notice of any changes and adequate explanation of the requirements
in the orders?
HMG in general, and ECO in particular, has been
very constructive and proactive in its dealings with Industry
and very willing to discuss changes with relevant companies before
they take place. We strongly believe that the ECO, and other HMG
departments are far more approachable, constructive and user-friendly
than many of their foreign counterparts.
TRAFFICKING AND
BROKERING AND
EXTRA-TERRITORIAL
CONTROLS
The Export Control Act 2002 introduced controls
on certain trafficking and brokering, including some extra-territorial
controls on UK citizens operating outside the UK. Are these provisions
enforceable? Have they been enforced? Have they reduced irresponsible
transfers of arms and technologies? Do the provisions need to
be revised? If so, how should they be changed?
On the issue of possibly adding yet further
extraterritorial controls, we believe that HMG would be better
serving the cause of effective counter-proliferation if it made
greater effort to get more countries into the various international
regimes, including, of course, the new proposed Arms Trade Treaty
(which we support), and to begin operating more effective and
transparent export control systems of their own. In practice extraterritorial
controls are unenforceable. Some critics dismiss the export control
systems of other countries (as they frequently do our own, of
course), and demand that we should be seeking to exert some kind
of (some would say neo-colonialist) power over them to make up
for the shortcomings of their own systems. Some believe that it
is wrong in principle to seek to control the exports of other
sovereign nation states. The biggest threat, in many ways, is
that of the proliferation of extraterritorial legislations, and
the resulting multiple layers of (sometimes conflicting) regulations
with which law-abiding exporters will have to deal. It is infinitely
better to seek to encourage the adoption of best practice in other
nations and to get them to implement better and tighter regulations
themselves.
Industry agrees that the topic of extending
the fully extraterritorial controls (ie those that apply to UK
citizens operating abroad) to cover a broader range of goods is
an important one, which needs to be raised and discussed. However,
some observers are totally unconvinced that extraterritorial controls
are effective and enforceable, and believe that it merely represents
"feel good" policy, which is saved from being unjust
only by being ineffective.
We would welcome clarification from HMG on the
effectiveness of the existing extraterritorial aspects of the
ECA. We believe that it would be invaluable if the ECO could,
as part of the review consultative documentation, provide a report
on how effective and successful the extraterritorial provisions
of the ECA 2002 regulations have been in practice in the first
two/three years of their operation, to demonstrate how successfully
they have been working. This could include the publication of
details of numbers of UK nationals who have applied for trade
control licences because of their planned activities overseas
being affected by Article 3 of the Trade in Goods (Control) Order
2003 or Article 3 of the Trade in Controlled Goods (Embargoed
Destinations) Order 2004, and the numbers of licences involved.
Also, it would be useful if HMRC could report, informally, on
what efforts it has made since March 2004 to investigate and pursue
any suspected infringements of the extraterritorial aspects of
the ECA, as, if it has made no efforts to do so because of lack
of resources or the perception that it is all too difficult, then
there is absolutely no point in seeking to expand the scope of
extraterritoriality under the review.
We do have considerable problems with extraterritoriality,
both in principle and in practice. Our objection in principle
is quite straightforward. It cannot be right to impose on an individual
the law of two different jurisdictions at the same time for the
same act in the same place. We see the malign consequences of
this all the time in the export control field as a consequence
of the American so—called "deemed export" rule,
under which the US authorities presume to control the nationalities
of individuals to which US-controlled items shall or shall not
be transferred within the UK (and elsewhere), whilst, under UK
race relations (and other) legislation, discrimination on grounds
of nationality is illegal. As we have commented in the past, the
only doubt in our minds about the operation of the "deemed
export" rule, and its fundamental conflict with our own legislation,
is whether Executives from UK firms end up in jail on the other
side of the Atlantic for breaches of the ITAR, or on this side
of the Atlantic for breaches of the Race Relations Act! This potentially
affects not just defence companies, etc, but also extends into
the public consumer arena—for instance someone working at
a retail outlet who knowingly sold a PC with Microsoft software
to a customer who was a citizen (or dual national) of one of the
USA's strictly embargoed nations (eg Iran or Syria) would be breaking
US law if he/she did so, or UK and EU laws if they did not do
so simply on the basis of that person's nationality, as they would
clearly be demonstrating racial discrimination—so which
one do you want to break? (Note: For your information, MS Windows™
falls under ECCN 5D992.b.1 of the Export Administration Regulations'
Commodity Control List—See http://www.microsoft.com/exporting/basics.htm.
It is therefore subject to AT Column 1 export controls in the
Country Chart set forth in EAR Part 738Spir.) This is a totally
invidious position for anyone to have to face.
Our practical objections are equally straightforward—it
is extraordinarily difficult (or even impossible) to bring successful
extraterritorial prosecutions. It is hard to gather evidence and
impossible to compel the presence of witnesses. The Secretary
of State for Trade and Industry, then Patricia Hewitt, made exactly
this point in evidence before the Quadripartite Select Committee
on 3 April 2003 (Q 107): "[The Americans] do have extraterritorial
controls on trafficking and brokering in everything, in all military
equipment. We have had a look at it and our judgment is that it
simply does not work. As far as I know, there has not been a single
successful prosecution under the American brokering law, either
for brokering offences carried out within the United States, or
for offences carried out overseas."
In effect then, extraterritorial legislation
affects only the law-abiding, who don't break the law anyway because
it is the law, or the exceptionally stupid, whilst leaving real
criminals untouched and undeterred.
By the same token, extraterritorial legislation
can criminalise activities to which the Government does not object
and which, in some cases, it even supports. Extraterritoriality
works in an area in which there is universal condemnation (eg
paedophilia, bribery & corruption and drug smuggling), but
where the laws and enforcement capabilities of other nations may
not be effective in pursuing and curtailing these inherently immoral
and undesirable activities. This is just not the case in the vast
majority of areas of the "arms trade", in most instances
of which the proposed deals may not only be approved and sanctioned
by the local Governments involved, but even enjoy their enthusiastic
proactive support. Consider the case of a British citizen with
a job in France which involves organising the move of Scalp EG
missiles to Italy. This is not at all unlikely, since MBDA,
the manufacturer of Scalp EG, is an Anglo—French—Italian
company. It is also a crime under UK law (because Scalp EG
missiles are "Restricted Goods" under the terms of the
trade controls) to carry out such activities without a licence.
What political signal, one wonders, is that intended to give?
Which brings us to the other issue of the position
of the other national export licensing authority. In very many
cases we are not talking failed states here, but often democratically
elected and effective Governments. As it is, we appear to be recommending,
through extraterritoriality, that the law of the former imperial
power should be used to frustrate the decisions of other Governments.
Thus the assertion from some that this sounds more than a bit
fundamentally neo-colonialist in attitude.
It must also be pointed out that jurisdictional
conflicts are already taking place. Referring back to the previously
mentioned UK national who worked for a Government-owned defence
company overseas, he became aware of the extraterritorial aspects
of the UK's new trade controls back in 2004 (interestingly, from
us, and not from HMG!) He is perfectly law-abiding and sought
to remain within the regulations. He had to apply for some trade
control licences for the supply of some equipment from his company
to the new armed forces in Iraq, via the US DoD, who were purchasing
them on behalf of the Iraqis. When he had to try to get the necessary
end-user undertakings for his SITCLs from the customers, and when
he had to try to get some technical information from the US authorities
to satisfy some queries from the DTI, the response he got from
both the Iraqis, the Government which owns his company and, most
interestingly of all, from the US side, could be summarized as
being a universal raspberry, and being told that "But this
has got nothing to do with the British Government—they can
**** off!" He had the devil's own job in trying to get hold
of the necessary documentation to get the SITCLs he needed from
the DTI, and eventually, as already stated, reached a mutual agreement
with his employers that his continued future employment within
the company was now no longer viable!
Does everyone really accept the universal principal
of extraterritoriality . . . even when they are on the receiving
end? We strongly believe that if HMG really does wish to exert
extraterritorial controls in the field of export controls, then,
in order to avoid accusations of hypocrisy, it must seek to make
clear and unequivocal public statements that it, too, recognises
and fully respects any extraterritoriality exerted on the UK (and
others) by other sovereign nation states.
With regard to specific proposals for the review
of the trade controls, as previously stated to the Committee,
we are currently in the process of discussing some possible joint
proposals that we can make with the NGOs, and work on this has
been highly constructive and positive. We already have a set of
draft proposals, which we are seeking to finalise, by early in
the New Year.
LICENSED PRODUCTION
OVERSEAS
How effective are the current arrangements in
regulating licensed production facilities? Do the current arrangements
prevent arms and technology produced overseas from falling into
irresponsible hands?
As previously stated in evidence to the Committee,
there are already controls in place, for instance on the transfer
of technology and plant to allow licensed production to be undertaken
overseas. The area of licensed production is not totally outside
of control.
On the possible issue of the control of subsidiaries
of UK firms, this appears to have arisen from a fundamental misunderstanding
of the US system by the NGOs, who are the principle proponents
of this proposal. We believe that the NGOs seem to be under a
bit of a misapprehension here, looking at the idea of UK controls
being applied to foreign subsidiaries of UK parent companies,
presumably anxious to quote the ITAR as a precedent for the NGOs'
campaign to control the export activities of the offshore subsidiaries
of UK-based companies. Recent cases dear to the hearts of the
NGOs in this regard are potential exports by Ashok Leyland to
Sudan and exports by BAE Systems' South African subsidiary, OMC,
to various other, perceived contentious, regimes disapproved of
elsewhere in Africa.
Except in some fairly narrowly defined contexts,
eg the EAR anti-boycott provisions which apply to "controlled
in fact subsidiaries", US export controls do not, as such,
apply to subsidiaries of US companies. Rather, it is the case
that the extraterritorial application of US law catches non-US
subsidiaries in the same way that it catches other non-US parties. We
think it is important that we grasp here that the US model is
one of extraterritoriality not of extending US controls
to non-US subsidiaries. US controls do not apply just to subsidiaries
but to controlled items wherever they may happen to be in the
World—and, in the case of the brokering controls, to US
citizens, whoever their employer.
However, in reality, it is only really the foreign
subsidiaries (or foreign parents) of US companies who take any
real notice of the extraterritoriality provisions of the ITAR
(and fewer still take any notice of the EAR's provisions, especially
on crypto-enabled software—5D002 and its various US exceptions).
Thus, as to how seriously non-US companies take US presumptions
of extraterritoriality, that largely depends on their commercial
position, or aspirations, in the United States. Those companies
who are close to the USA commercially do take the US regulations
very seriously, even though they are a burdensome imposition.
What is the nature and extent of licensed production
overseas?
With the globalization of industrial activity,
and the increasing phenomenon of countries not wanting to be seen
merely to be markets for the goods of companies from other nations,
but as partners, the desire to see in-country industrial participation
in major programmes, especially in the defence arena, has grown.
This is reflected in the very rapid growth in offset policies
around the World.
Has licensed production overseas increased since
2003?
This phenomenon, and that of offset which very
frequently drives this, is constantly growing, as has been doing
so for the last thirty years, at least.
How important is licensed production overseas
to the competitiveness of the UK defence industry?
Licensed production, as part of an offset package,
is crucial to competitiveness. The importance of offset in procurement
decision making around the World is growing, and is reflected
by a quote from the May 2001 "Offsets in Defense Trade"
fifth annual report to the US Congress by the US Dept of Commerce
that: "The importance of Offset now transcends the traditional
technical ones [ie quality, price and delivery] in the procurement
decision making process."
Has the Government adequate information about
licensed production overseas?
As already stated, HMG already has an element
of control over licensed production overseas, for instance over
the necessary transfer of technology related to such deals.
In addition, the Committee would welcome evidence
(including specific instances) of the extent to which dual use
goods that may not require an export licence are ultimately incorporated
into military goods and, if there are serious concerns, how the
export of these goods could be controlled.
This area is very difficult to try to address
without getting caught up in minutiae, and imposing export control
regimes on exports of wind screen wipers or the fuel in vehicles'
tanks, etc, etc.
INTANGIBLE TRANSFERS
OF TECHNOLOGY/EFFECTS
ON RESEARCH
AND ACADEMIA
Are those to whom the controls on intangible transfers
of technology apply fully aware of, and complying with, the requirements
of the law? In particular, are the requirements to keep records
to ensure compliance for open licence procedures and to submit
documentation in support of licence applications workable?
The answer to this is the same as for the rest
of the regulations, in that they are workable, but need harmonization
of what is expected, in compliance terms, from companies.
Does the Government proactively police and enforce
the controls on intangible transfers of technology?
Compliance officers ask to see records of these
activities when they audit companies who are operating within
the regulatory framework.
Have the controls on intangible transfers of technology
affected academic freedoms or scientific research? Are the controls
on intangible transfers of technology adequate and effective?
If not, what changes need to be made?
We are not aware of any such effects. Enforceability
of such controls is a key issue.
ENFORCEMENT
How effectively is the legislation being enforced
against those who have no regard for the letter of the law? What
challenges are there to bringing forward successful prosecutions?
It is clear that Customs staff must be resourced
and trained adequately on export controls. If not, what is the
point in burdening a compliant Industry with all this bureaucracy
if no-one will actually check who complies and who does not? From
an enforcement point of view, the law is deemed by some to be
failing through lack of enforcement resources and commitment by
HMG, and it is no good seeking to rectify this merely by seeking
to add yet further unnecessary bureaucratic burden on a compliant
Industry, when almost no additional efforts will be taken to identify
and pursue those who are not complying with the new, even tighter
regulations, than have been with the previous ones. This is not,
in any way, a criticism of the staff at HMRC, who are professional
and dedicated, but rather of the resources that they are given
to address export control issues, along with a plethora of other
responsibilities that they have.
The UK Defence Industry is a compliant and easy
target for the British Government to pick on in an effort to demonstrate
its commitment to counter-proliferation efforts, and we would
like to see some other sectors (eg the dual-use sector and freight
forwarders/couriers) receive much more attention from the Government
than at present, if it is really serious about export controls
and global counter-proliferation.
To some, the existing laws only seem to inconvenience
the law-abiding, and represent "a collusion of the willing",
and we would like to see this review being used to rectify this.
We are totally unaware of a single legal action which has been
taken by the Government against any of the real, non-compliant
"bad guys" (despite some cases having come publicly
to light—eg Sinclair Holdings 7 and its alleged dealings
with Sudan, and TLT International and the alleged sale of electric
shock batons to Zimbabwe), and certainly we are unaware of any
cases which have been even investigated which have been of an
extraterritorial dimension, since the adoption of the ECA some
two and a half years' ago.
We would not want the seeming inability of HMG
to enforce the existing laws to be used as a justification for
pressures to tighten further the regulations, when all that is
really needed (probably) in many cases, is simply for the Government
to have the political will to implement effectively the legislative
tools that it already has at its disposal.
We would like to see much more enforcement effort
taking place (and being publicised), but also for these to be
focused in really trying to tackle the real non-compliant "bad
guys", rather than merely taking the easy option of seeking
to pick on inadvertent administrative minutiae errors from the
compliance efforts of the legitimate and law-abiding, in order
to meet targets.
We believe that the regulations must be effectively
re-focused on countering the activities of the illicit brokers
and exporters, rather than merely seeking to add yet more burden
and bureaucratic red tape onto legitimate companies who are operating
within the regulatory framework, who are the easy and soft target.
The bureaucracy involved in implementing red tape on the law-abiding
should be reduced, without the resulting creation of any loopholes,
to allow additional resources to be focused on the areas of greatest,
intelligence-led concern.
There are a number of potentially very significant
developments in Customs matters which are imminent. These include
the EU's Authorised Economic Operator (AEO) initiative and the
HMRC's National Clearance Hub (NCH), which is being created, and
is based in Salford. The latter of these, which is already being
implemented and should be fully operational and covering the whole
country by Summer 2007 will, especially when linked into the ECO's
new SPIRE electronic licensing system, potentially offer considerable
further systemic improvements to the UK's system, and is to be
warmly welcomed.
The legislation increased the maximum penalty
for breaking export controls from seven years to 10 years. What
impact has this change made?
Whilst the raising of the maximum penalties
for non-compliance did have a beneficial effect in assisting export
control compliance staff within companies to get the attention
of their colleagues on export control matters, the subsequent
dearth of any headline prosecutions featuring very heavy penalties
being imposed on transgressors has allowed this threat of potential
prosecution to reduce as an effective awareness raising tool.
Those cases which have arisen and been publicised, even though
the penalties have been quite small in comparison to those which
could be available to HMG, or which are (regularly) imposed in
the USA, have helped to grab the attention of colleagues within
companies, and we would like to repeat our plea for more publicity
to be given to HMRC's activities against illegal exporters, even
if this is merely disruptive in nature and not resulting in a
court prosecution.
OTHER MATTERS
Has the licensing regime impeded the provision
of support to British armed forces?
The creation of two new Open General Export
Licences back in 2004 (the OGEL: Military and Dual-Use Goods:
Exports to UK Forces Deployed in Embargoed Destinations; and the
OGEL: Military and Dual Use Goods: Exports to UK Forces Deployed
in Non-Embargoed Destinations) greatly eased potential problems
in this field.
Is there any evidence that the open general licences
have provided loopholes or allowed goods to fall into irresponsible
hands?
We are unaware of any cases which have come
to light where this has been the case. Given the conditions attached
to OGELs, we would assume that, if this were the case, then the
OGEL will have most probably been (illegally) misused in a way
which was in breach of its coverage and terms & conditions,
and, thus, that the exporter concerned could be prosecuted for
an illegal and unlicensed export.
Is the appeals process against refusals or revocations
of licences working satisfactorily?
As far as we are aware, it is working satisfactorily,
and we have not had any complaints registered with us by companies
about the systems and procedures involved in the appeals process,
even if they may still complain on occasion about the decision
when the original refusal is upheld on appeal.
Is communication between the departments with
responsibilities for considering applications for export licences
adequate and effective?
We believe that liaison and communication between
the various Government departments is effective. This is likely
to get even better with the planned forthcoming introduction of
the SPIRE electronic licensing system in early-2007, which Industry
very warmly welcomes. This new development offers enormous potential
systemic improvements for the whole export licence application
processing system, and is likely to reap considerable benefits
for all concerned.
In addition, the Clerk of the Committee also
raised the following issues:
There are two other matters I should mention.
In its response to the Quadripartite's last report (Cm 6954) the
Government asked for more evidence of the exporters who inadvertently
but persistently breach export controls. Can you supply more evidence?
We KNOW that there are large numbers of companies
and individuals currently operating outside of the regulatory
framework (either deliberately or inadvertently), and, whilst
we would like to congratulate the ECO, especially, for its extensive
series of awareness raising initiatives, HMG must put more effort
into awareness raising and enforcement to address this. We believe
that one promising method of doing this will be through making
greater use of regional industrial links and bodies, such as UKTI,
Chambers of Commerce and Business Links, etc—but first,
in all too many cases, these people will also need, themselves,
to be made more aware!
We have been challenged to provide evidence
that there really is a large amount of non-compliance (either
deliberate or inadvertent) which is taking place. We can assure
the Committee that, through our contacts within Industry, especially
with those who are involved and seek advice when they become aware
that export controls do, in fact, affect their activities, we
do, indeed, KNOW that this is happening. The problem for us is
that companies approach us in confidence to seek guidance, when
they become aware of export controls, and it is only by offering
a confidential helpline service, that we can encourage them to
approach us. Thus, quoting chapter and verse of companies' infractions,
to demonstrate the scale of the problem, will only serve to dissuade
others from approaching us and seeking the advice that they need
to be brought back onto the path of export control righteousness,
which we must be seeking to encourage and should have our highest
priority.
However, some evidence can be pointed to as
an indication of the scale of the problem.
During the 2002-03 and the 2004 Export Control
Roadshows which we jointly undertook with the ECO, we were constantly
coming across companies who had come along to learn about the
new Export Control Act and what they needed to do to comply, who
clearly were coming to realize at these events that they were
actually operating in breach of the existing regulations. To take
one instance, at the largest such event that we held, in Southampton
in January 2004 (attended by over 110 industrialists), we can
comfortably estimate that, from comments made at the event, at
least 10-15% of the audience had become aware of aspects of the
existing regulations that they were, inadvertently, infringing—and
this was from an audience who were aware that they were caught
by export controls.
We are sure that HMG does have information at
its own disposal, of firms who have been in existence for many
years, and who only suddenly appear on its export controls "radar
screen" when HMRC "snags" one of its shipments
through random selection or as a result of intelligence. It is
very highly unlikely that their very first export shipments will
have been caught in this way, and much more likely that they have
been making such unlicensed exports previously, sometimes (in
cases of which we are aware) for years.
When companies' shipments have been snagged,
and they approach us, or our Members, for help and advice, all-too-often,
time and time again, the discussions between us will include the
use of the phrase that: "But we have been doing this for
XX years, and never had any problems before! " which
we always advise them should not be their opening gambit when
they have their first visit by HMRC officers investigating the
case!
At another of the roadshow workshops we held,
back in early-2004, I also spoke to another gentleman, who had
come along to learn about the new regulations which were about
to be implemented, but decided that he needed to rush off, very
hurriedly at lunchtime to attend to urgent matters elsewhere,
who stated to me that his company had been exporting NBC protective
clothing for some 25 years without realizing that they needed
any export licences for this.
Perhaps the most extreme case involved an ECO
official who remarked, back in the early-1990s that one of his
colleagues had recently attended an Industry Reception in the
North of England, and, by sheer coincidence happened to get into
conversation with a gentleman from a company who had been exporting
a key component for nuclear intercontinental ballistic missiles
for some 30 years, without once having sought to apply for a licence,
or having any of their shipments ever stopped! This was not an
apocryphal story, as, a couple of years later, I happened to bump
into the legal adviser for the company concerned at another Industry
event, and he (highly embarrassingly) had to confirm the validity
of the story.
Also, sight of the Government's own published
figures, clearly indicate that something is array. For instance,
taking the 2003 Annual Report and excluding EU (then) and CGEA
(Community General Export Authorisation) countries for both military
and dual-use (the latter of which would not be shown anyway for
EU and CGEA nations), SIELs number:
Military List: 2,884
Dual-use Goods: 1,490
Even given the fact that everything "specially
designed or modified for military use" is controlled and
not everything which is "dual-use" falls within control
parameters, it still takes some swallowing that there are double
the number of military SIELs to those for dual-use goods. This
is especially so when there is broader OGEL coverage for military
goods than there is for the dual-use sector (because the ML sector
is a UK competence, whilst that for dual-use goods is an EU competence).
Also, we understand from figures from the ECO
that in the period from the start of 2004 through to 31 August
2004, whilst they had anticipated that some 20-40 companies would
register for the new OGEL: Technology for Military Goods, in fact
some 371 companies had registered to use it—we are not convinced
that all of these companies can possibly be firms who were only
and solely exporting technology intangibly, and, therefore, only
coming within the remit of the regulations when the controls were
extended to intangible transfer of technology. Logic dictates
that they were exporting technology tangibly prior to this, and
only became aware of the licensability of this activity when they
were looking into the new regulations.
Also, to illustrate this yet further, up until
December 2005, 8A002f of the dual-use goods regulations caught:
"Electronic imaging systems, specially designed or modified
for underwater use, capable of storing digitally more than 50
exposed images" (ie underwater digital cameras). In late-2005,
realising that these goods had now become increasingly popular
consumer items, it was decided within the Wassenaar Arrangement
to de-control them. However, sight of the Annual and Quarterly
Reports covering the period before December 2005 would seem to
reveal that, despite ever increasing sales of underwater digital
cameras here in the UK, there was a total paucity of export licences
being applied for by people wishing to take them out of the country
(and the EU) with them, for instance on holiday. Was really no-one
ever taking these cameras with them on their holidays . . . or
were they taking them and just unaware that they were licensable?
Secondly, the Committee may wish to pursue the
issue of end use controls on items that can be used for torture.
It would welcome a submission on this matter too.
The Industry and NGOs are agreed that there
needs to be introduced a torture equipment end-use control. We
would like to put on record Industry's support for NGO proposals
for something more effective than is currently in place to control
the export of and trade in torture equipment. We believe that
the only effective way in which this can be done is through the
creation of a torture equipment end-use control. As it is possible
to use anything for torture (eg recent reports of the use of electric
drills in Iraq for this purpose) you, therefore, need a control
mechanism in place which is able to catch anything, rather than
going down the EU's approach of trying to come up with a definitive
list of torture equipment items. Technological advancements and
new products developments, as well as the ease with which almost
any item can be used for torture purposes, clearly demonstrate
the deficiencies of adopting a finite list based approach, which
will always omit items under these scenarios.
In addition, coming up with such lists can,
inadvertently, catch other activities of less concern to Government,
if not properly framed. Named items (lists of goods) causes problems
in so much that for example, consenting adults could not export
some items (eg handcuffs) for private non-torture related, recreational
purposes. (That is a polite way of describing the sex industry,
of course.) Describing goods for the list can be very difficult.
For example the inclusion of restraint chairs or similar, could
potentially catch Children's High Chairs and Chairs for Disabled
People, unless very specifically drafted.
A catch-all for torture purposes, would in theory
anyway, only catch items being exported for the purpose of torture.
This is the only logical way in which this can be done, and is
based on existing practice with regard to the WMD and military
end-use controls. It could be easily achieved by the British Government
through the simple expedient of including "torture"
within the "any relevant use" definition of the existing
controls.
Whilst we realise that there will be the same
inherent problems with such a control as there are with the implementation
and enforcement of the existing end-use controls, such an initiative
would clearly state that the British Government is taking this
seriously and determined to do something effective about it and
to give itself the necessary legislative powers to be able to
do so.
GENERAL CONCLUSION
Much of the probable focus of the review is
likely to be mostly on areas of very little interest or potential
benefit to Industry, but merely to be in response to political
pressure from other quarters. It must be recognized that calls
from some quarters for our export control regulations to be made
ever tighter and more stringent will never be satiated, no matter
how tight and unworkable they may increasingly become in practice.
What Industry wants is good, effective, simple,
well thought-out, workable and practical legislation with which
to deal. We will happily work with Government and other interested
parties to try to achieve this in a constructive way.
November 2006
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