Memorandum from Saferworld
KEY RECOMMENDATIONS
DESO
— The Government should reconsider
the way in which the functions of DESO are being transferred into
the Defence and Security Group within the UKTI and take the opportunity
to re-examine more broadly the financial support it provides for
defence exports.
— Exports by the defence sector
should be treated on a par with exports from other sectors of
the economy.
— Clarity should be given over
what substantive changes will occur as a consequence of the transformation
of DESO into the UKTI Defence and Security Group and what impact
this will have on all DESO's current functions.
— The new Defence and Security
Group within the UKTI should ensure that it maintains operational
independence from the MoD, with a clear separation of the awarding
of licences from the promotion of exports.
— The Government should confirm
what discussions have been had with industry and other interested
stakeholders since the decision to close DESO.
— The Government should now look
to end all other direct and indirect defence subsidies, including
the massive export credit subsidies provided to the defence sector
through the ECGD.
Corruption
— SFO investigations into the
Al Yamamah deal should be re-opened as a priority in order to
demonstrate the Government's commitment to tackling bribery and
corruption.
— The Government should clarify
what steps they have made to implement the recommendations and
requirements set out by the OECD in their recent review of the
UK's implementation of the OECD anti-bribery convention in connection
with the Al Yamamah deal.
— Full cooperation should also
be provided by the Government with the US DoJ investigations into
corruption allegations.
— Government should strengthen
public commitment and extend full support to SFO investigations
into corruption within the arms industry and pursue unreservedly
prosecutions where evidence emerges of corrupt practices.
— Confirmation should be given
by the Government that the closure of DESO will not be used as
grounds for refusing to investigate DESO's role in any investigations
by the SFO.
UK-US Defence Trade Cooperation Treaty
— The UK should resist entering
into any binding bilateral agreements that limit the national
prerogative to control all transfers of strategic items, regardless
of the recipient state, for example by binding the UK into always
using open and general licences for transfers to the US.
— For transfers subject to the
provisions of the Treaty, safeguards must be put in place to ensure
that UK arms transfer control principles and objectives are not
subordinated to those of the US.
— Procedures should be put in
place to provide Parliament with the opportunity to review and
scrutinise the Implementing Arrangements of the Treaty before
final approval.
— All open and general licences
issued under this Treaty should contain specific re-export clauses
to prevent the export of UK goods transferred to the US being
re-transferred to countries of concern.
— The UK Government should reassess
the value of the Treaty in light of its potential to erode the
UK's commitment to a strict case-by-case licensing process, and
in light of its broader implications for efforts to improve arms
transfer controls globally.
DESO
1. The Defence Services Export Organisation
(DESO), part of the Ministry of Defence (MoD), was established
over 40 years ago and was originally tasked with selling surplus
UK military stock. Over the years its role has changed into one
of promoting UK arms around the world. It identifies potential
opportunities for arms sales, works with industry and other elements
of the Government to negotiate deals, and provides ongoing contract
support. DESO is funded by the taxpayer to the tune of approximately
£15 million per year, an amount that industry claims is extremely
good value for money. This is part of the controversial UK Government
subsidy in support of arms exports worth between £483—£936
million per annum.[69]
2. The value of DESO is not just monetary.
It gives, in effect, an official stamp of approval to prospective
arms sales. With a head typically seconded from the arms industry
(the previous director, Alan Garwood, came from and is reported
to be returning to, BAE Systems),[70]
it relentlessly promotes the industry's interests within the government.
It employs nearly 500 civil servants who work to identify possible
opportunities and then, in partnership with companies and other
areas of government, promote defence sales around the world. Over
200 of DESO's employees are involved in supporting government-to-government
arms sales, the largest of which is the Al Yamamah deal.[71]
DESO also supplies military personnel and equipment to UK defence
companies for sales exhibitions. In addition, through the F-680
process, it gives preliminary advice to industry as to whether
an export is likely to receive eventual official authorisation.
Although F-680 clearance does not guarantee licence approval it
can lead to the signing of contracts and enable financing to be
put in place.
3. The overall level of subsidy for arms
exports, of which the service provided by DESO is part, is out
of step with modern economic thinking which largely rejects the
concept of subsidy. Such an approach has been discredited in other
sectors of the UK economy. Saferworld therefore welcomed the July
2007 announcement by the Prime Minister, Gordon Brown, of the
decision to close DESO and to dissolve its operations into UK
Trade and Investment (UKTI),[72]
the Government agency that tasked with promoting all sectors of
UK industry overseas.[73]
Furthermore, given the apparent prominence of the Treasury in
the decision, it was hoped that this might have signalled the
beginning of a more general change in the way Government regarded
the economics of defence exports. It was seen as a positive development
both in terms of:
— the implicit acknowledgement
that the defence sector should not be given favoured status over
other sectors of the economy with regard to trade promotion; and
— signalling a clear separation
of the conflicting functions of trade promotion and arms transfer
regulation.
4. The announcement on 10 December that
DESO's functions will be transferred directly into a new Defence
and Security Group within the UKTI maintains this distinction
between promotional and regulatory functions. However, the fact
that there will in effect be no reduction in resources or staff
working in this area undermines any notion of bringing the promotion
of defence transfers into line with promotion of other exports.
This decision was taken following intense defence industry lobbying[74]
and signals that the Government still regards the defence sector
as privileged and more deserving of official support than other
sectors of the economy. Indeed in Parliament on 12 December, the
Prime Minister was at pains to point out that the improved access
provided by UKTI's extensive network of overseas offices (in approximately
100 countries as opposed to current DESO representation in 19
countries) was grounds for confidence that Government marketing
support for UK defence exports will be even more effective in
future.[75]
5. Defence exports from the UK constitute
up to 20% of total world defence exports. These sales clearly
bring a commercial benefit to the companies concerned, however
the benefit this brings to the economy as a whole should not be
overestimated. UK defence exports make up less than 2% of total
UK exports. The "patriotic" commitment of defence companies
to the UK, for example in terms of protecting UK employment, is
also far from clear: the defence industry is becoming more and
more globalised, with frequent collaboration on joint overseas
ventures, such as under the Joint Strike Fighter and Eurofighter
deals. Decisions to establish or use production facilities offshore
are frequently based on hard-headed commercial logic. BAE Systems
is a striking example of the trend—only a third of BAE's
workforce are employed in the UK compared to almost a half in
the US, while sales in the two countries are approximately equal.[76]
There is less commitment to the UK economy, and economic benefits
are passed onto international shareholders.
6. There is also the question of the damage
that could be caused to the Government's reputation by the continuation
of such active support for defence export sales to countries with
severe developmental shortcomings and/or human rights concerns
(such as China, India, Indonesia, Libya, Pakistan and Saudi Arabia).
If the UK Government wants to be seen as a "force for good"
and a world leader in promoting strict arms transfer controls,
it should, as a priority, distance itself from the promotion and
lobbying of UK defence sales to questionable countries and regimes.
7. Saferworld recommends that the Government
reconsiders the way in which the functions of DESO are being transferred
and takes the opportunity to re-examine more broadly the financial
support it provides for defence exports. With particular regard
to the reorganisation of DESO's functions, the Government should:
— Treat exports by the defence
sector on a par with exports by other sectors of the economy.
— Develop the necessary expertise
within UKTI to deal with the peculiarities of the defence sector
(this may well involve special engagement with experts from within
the MoD, but UKTI should maintain operational and decision-making
independence from the MoD).
— Wherever possible charge industry
for any special promotional support for possible arms exports,
eg for the use of MoD personnel at arms fairs (given the value-for-money
argument made by industry for this type of activity, it seems
reasonable to assume that this is a cost industry should be happy
to pay).
— Publish detailed information
regarding discussions had on this subject with industry, as well
as other interested stakeholders, since the decision to close
DESO was announced.
8. In addition, the UK Government should look
to end all other direct and indirect defence export subsidies.
This includes subsidised export credit support provided by the
Export Credit Guarantee Department (ECGD). While not the case
when the ECGD was first set up, international capital markets
are now capable of covering the risks involved in major defence
deals. Risk-management costs for arms exports should be borne
by those who would profit from them, ie the defence companies,
not the taxpayer. Therefore industry should either pay the ECGD
market rates for the services provided or go elsewhere.
Corruption
9. The announcement of the closure of DESO
came at a time when BAE Systems, the UK's biggest defence company,
was mired in allegations of bribery and corruption and DESO itself
was under investigation by the US Department of Justice (DoJ)
for claims that under the Al Yamamah deal payments from BAE Systems
to Prince Bandar—a Saudi diplomat who helped set up the
original deals—went via the US banking system.
10. This intimate relationship between Government
and the defence industry has damaged the UK's anti-corruption
credentials. The UK Government has repeatedly confirmed its commitment
to fighting corruption both at home and abroad. For example, in
2006, the Prime Minister announced new measures to tackle international
corruption. This included the appointment of the then International
Development Secretary Hilary Benn as the International Anti-Corruption
"Tzar" and the establishment of a dedicated team investigating
international corruption including bribery by UK businesses overseas.[77]
Transparency International notes that the "official arms
trade is the most corrupt of all legal international trades",
where "bribery is commonplace."[78]
The continuing allegations surrounding the UK's Al Yamamah
contracts with Saudi Arabia is a salutary lesson in what this
can mean for the reputation of a government.
11. The Al Yamamah deals, dating
back to the mid-1980s, comprise a series of agreements for transfers
of and follow-up support for, among other things, 72 Tornado aircrafts
and 30 Hawk jets from the UK to Saudi Arabia. Although UK defence
company BAE Systems is in effect the prime contractor for these
deals, Saudi preference for arranging such transfers government-to-government
has meant that the UK Government functions as principal to the
agreements and "sub-contracts" the manufacturing and
much of the support to BAE Systems. The deals have to date been
worth tens of billions of pounds, with the UK and Saudi Governments
currently in the process of agreeing another contract for the
sale of 72 Eurofighter jets, valued at a further £20 billion.[79]
12. In 2003, the UK Serious Fraud Office
(SFO) began looking into allegations that BAE Systems used a £60
million "slush fund" to buy favours from key Saudi officials
involved in the deals. However, reportedly due to pressure from
the then Attorney General and Prime Minister, Tony Blair, the
investigation was halted. This generated huge controversy in the
UK, with the Government having to defend its decision in court.
13. The SFO enquiry also piqued the interest
of the US Department of Justice (DoJ). BAE Systems has substantial
interests in the US; once the SFO closed down its enquiry, the
DoJ began an investigation into allegations that DESO approved
payments under the Al Yamamah deal from BAE Systems to
Prince Bandar—a Saudi diplomat who helped set up the original
deals—and took a commission. If such transactions did indeed
take place and if they involved the US banking system, they may
have broken US anti-corruption laws. The DoJ formally requested
information and files held by the SFO relating to the alleged
corrupt commission payments. However, six months on, the Home
Office has yet to respond to the DoJ's request.[80]
The direct involvement of the UK Government in these allegations
and their apparent lack of cooperation with the US investigation
has serious implications for the UK's image abroad and calls into
question the UK's commitment to stamping out corruption.
14. The Government has also been heavily
criticised by the Organisation for Economic Cooperation and Development
(OECD) in connection with Al Yamamah for failing to properly
tackle bribery and corruption. In a recent review of the UK's
implementation of the OECD anti-bribery convention, the OECD found
the UK had not implemented key requirements. Mark Pieth, Chair
of the OECD working group on bribery, also wrote to the Government
asking for the precise reason they halted the SFO investigation
into Al Yamamah, as Article 5 of the convention stipulates
an investigation into bribery of foreign officials can only be
halted in extreme cases. Pieth was quoted as saying: "Britain
is one of the key members of this Convention and we are concerned
because it seems as if there's been a breach of Article 5 by Britain."[81]
15. The UK Government has clearly been embarrassed
by the attention its decision to close the SFO investigation has
received, and its failure to fully cooperate with US investigations.
There is a sense that more must be done to demonstrate the UK
stands apart from and condemns corrupt practices. Saferworld recommends
that the Government clarify what steps the MoD have made to ensure
that the OECD's requirements will be implemented, as well as to
confirm that they will cooperate fully with the US DoJ investigations.
Furthermore, safeguards should be put in place to ensure that
the closure of DESO will not be used as grounds for refusing to
investigate DESO's role in any investigations by the SFO.
16. Furthermore, the Al Yamamah case
appears to be far from isolated, with several other allegations
of corruption against BAE systems being investigated by the SFO.
These include deals in Chile, Tanzania, South Africa, Romania,
Qatar and the Czech Republic.[82]
Ensuring the integrity of these investigations is vital, and Saferworld
recommends that the Government affirms their commitment to fighting
corruption by pursuing these investigations with vigour and tenacity.
THE UK-US DEFENCE
TRADE COOPERATION
TREATY
17. On 15 November 2007, Saferworld, in
conjunction with the British-American Security Information Council
(BASIC), submitted a memorandum to the Defence Committee as part
of its investigation into the proposed UK-US Defence Trade
Cooperation Treaty. The Defence Committee has subsequently
produced a report on the issue. The following section summarises
and, in light of the Defence Committee report, updates our original
submission, a copy of which has also been made available to the
Quad Committee.[83]
18. The UK-US Defence Trade Cooperation
Treaty is the latest attempt by the UK and US administrations
and defence industries to bypass some US licensing requirements.
Unfortunately, negotiations for the Treaty have been conducted
behind closed doors, without consultation with key Congressional
or Parliamentary representatives or officials, and the current
draft is effectively being presented to the UK Parliament and
the US Senate as a fait accompli. Moreover, parliamentarians
have had no sight of the Implementing Arrangements that will contain
the details of how the Treaty will be operationalised. Nevertheless,
in the UK the last date of the period allocated to Parliament
for comment (under "the Ponsonby Rule") was 12 December
2007.
19. This deadline is unnecessary in its
haste. A decision on ratification by the US Senate is most probably
some time away and certainly will not be forthcoming before the
Senate has had chance to examine the Implementing Arrangements.
It is therefore unclear why the UK Government should require Parliament
to give its verdict now and without having seen these Arrangements.
On this basis, it would seem sensible for the Treaty to be returned
to Parliament for final approval once the Implementing Arrangements
have been drafted and disseminated.
20. Saferworld is concerned that this bilateral
treaty could undermine the UK's ability to maintain an effective
and independent system of national arms transfer control. The
Treaty codifies the current status quo which sees the UK
use open or general licences for the export of many strategic
goods to the US. However, the UK Government currently has discretion
over when and how these licences are to be used and can at any
time redraft them as it sees fit. Saferworld is concerned that
this Treaty would bind the UK into always using open and general
licences for transfers to the US, thereby limiting the UK's freedom
of action. The UK should resist entering into any binding bilateral
agreements that limit the national prerogative to control all
transfers of strategic items, regardless of the recipient state.
21. This element of the Treaty is made worse
by its asymmetrical nature, ie the way it prioritises US interests
over those of the UK. Under the Treaty, the US would have discretion
over which items are covered by the Treaty and the right of veto
over which parties within the UK are to be covered by the Treaty.
The US would also be permitted to monitor the end-use of weapons
developed under the Treaty, but the UK would not. In addition,
while the UK would need US permission for third-country exports
that result as a consequence of the Treaty, the US would have
no reciprocal obligation. Codifying these differences in the Treaty
as currently drafted would institutionalise them and, for those
cases where the Treaty is relevant, make the UK's interests and
decision-making on arms transfers subordinate to those of the
US.
22. The Treaty ignores the substantive differences
that exist between US and UK arms transfer control policy, both
in terms of general principles and of policy on transfers to specific
destinations. Through the Consolidated EU and National Arms Export
Licensing Criteria (Consolidated Criteria), the UK is committed
to applying a set of universal standards to all its licensing
decisions.[84]
These include factors such as human rights, the internal situation
in the recipient country, regional peace and security and sustainable
development. While these criteria do provide for the UK Government
to "take into account the potential effect of the proposed
export on the UK's defence and security interests",[85]
it is explicitly stated that "this factor cannot affect consideration
of the criteria on respect of human rights and on regional peace,
security and stability."[86]
Furthermore, there is also explicit reference to the priority
of the criteria over considerations of national interests such
as "economic, financial and commercial interests... potential
effect[s] on any collaborative defence production or procurement
project... [or] the protection of the UK's essential strategic
industrial base."[87]
23. The US, too, has a range of criteria
which it applies in the licensing decision process. There is some
similarity between these and the criteria used by the UK, with
factors to be taken into account including counter-proliferation,
human rights and counter-terrorism. However these restrictive-type
criteria are not formally prioritised over more permissive rationale
for arms transfers such as supporting foreign policy, national
security or the US defence industrial base.
24. This stronger focus in the US on foreign
policy and national interest (as rationale for both approving
and refusing transfers) appears to be reflected in the general
US policy on exports authorised to allies in the "war on
terror". In a number of instances there appears to have been
a shift in policy post-9/11, whereby some strategic transfers
that might previously have been regarded as inappropriate are
now viewed differently. A prominent example of this is Pakistan,
which was prohibited from receiving most US security assistance
prior to the 9/11 attacks but is one of the largest recipients
of US military aid, including arms transfers.
25. In addition to this philosophical difference
between arms transfer control regimes in the two countries, it
would seem that there are occasions where a markedly different
policy operates at the level of recipient country. For example,
the US appears far more likely to award licences for transfers
to Colombia and Israel than does the UK. Conversely, the UK operates
a more liberal policy regarding strategic exports to China and
Iran than does the US. The defence Committee report suggests that
"the practical effect of the Treaty will be to bring US and
UK exporting arrangements closer together."[88]
In light of the above, this should be acknowledged as an undesirable
outcome.
26. Saferworld welcomes the recommendation
by the Defence Committee that the UK Government should restrict
any open or general licences it issues under the Treaty, to exclude
the re-export or transfer from the US of UK goods and technology
to third countries other than to US or UK forces.[89]
The Government should clarify that all open and general licences
issued under this Treaty will contain specific re-export clauses
to prevent the export of UK goods transferred to the US being
re-transferred to countries of concern. Furthermore, the Government
should reserve the right to change open and general licences as
appropriate to maintain the integrity of the overall arms transfer
control system.
27. Further analysis of the impact that
this Treaty would have on transfer controls is unfortunately made
more difficult due to the aforementioned absence of any information
to date regarding the Implementing Arrangements, which would be
critical to its operation. If this Treaty were to permit the removal
to some of the national barriers to UK-US trade in strategic items,
then the Implementing Arrangements to the Treaty must be sufficiently
robust to ensure it does not compromise the UK Government's commitment
to its existing system of transfer controls.
28. Finally, Saferworld has serious concerns
regarding the international message that this Treaty sends to
other arms exporting states. The UK is widely regarded as being
among the leaders in terms of promoting strong national arms export
controls, and is currently attempting to persuade governments
around the world of the merits of a global Treaty requiring all
arms transfers to be subject to tight case-by-case licensing control
by national authorities. It is therefore most unfortunate that,
for its defence trade with the US, the UK is seeking to remove
restrictions to bilateral trade. This sets a precedent that the
UK might not appreciate other states, for example India and Burma,
following. Furthermore, when considered alongside the UK's participation
in the Framework Agreement[90]
and the current European Commission proposals to liberalise intra-community
trade in defence items and, as part of a recast of the dual-use
regulation, intra-community trade in dual-use goods,[91]
the Treaty calls into broader question the principle of universal
national case-by-case licensing.
29. The UK Government should ensure that
all possible steps are taken to prevent the erosion of the commitment
to a strict case-by-case licensing process based on universally-applied
restrictive criteria, and to promote the merits of a global Arms
Trade Treaty requiring all arms transfers to be subject to tight
case-by-case licensing control by national authorities. While
Saferworld is sympathetic to the plight of UK armed forces and
industry not being granted timely access to routine and clearly
unproblematic strategic items from the US, we are not convinced
that this Treaty is the best way to address the issue.
December 2007
69 Escaping the Subsidy Trap: why arms exports are
bad for Britain, BASIC, Oxford Research Group and Saferworld,
September 2004, p 23. Back
70
David Leigh and Rob Evans, Alan Garwood, The Guardian,
8 June 2007,
http://www.guardian.co.uk/baefiles/story/0,,2090613,00.html Back
71
The Al Yamamah deal is the largest government-to-government
sale by the UK Government worth tens of billions of pounds. Back
72
Written Ministerial Statement on Machinery of Government: Defence
Trade Promotion, 25 July 2007,
http://www.pm.gov.uk/output/Page12683.asp Back
73
UKTI brings together the work of the Foreign & Commonwealth
Office (FCO) and the Department for Business, Enterprise and Regulatory
Reform (DBERR). Back
74
Russell Hotten, MoD victory for DESO role in arms promotion, The
Daily Telegraph, 12 December, 2007. Back
75
Prime Ministers Questions, 12 December 2007: Column 293. Back
76
Defence Committee Third Report of Session 2007-08, Memorandum
from BAE Systems UK, 14 November 2007, Evidence 25. Back
77
Prime Minister announces crackdown on international corruption,
as part of Gleneagles implementation plan, DFID, 22 June 2006,
www.dfid.gov.uk/news/files/pressreleases/anticorruption-champion.asp Back
78
Joe Roeber, Parallel Markets: Corruption in the International
Arms Trade, 2005 Campaign Against the Arms Trade lecture. Back
79
David Robertson, BAE poised to clinch £20 billion Saudi Eurofighter
deal, The Times, 7 September 2007. Back
80
House of Lords, 6 December 2007: Column 1812,
http://www.publications.parliament.uk/pa/ld200708/ldhansrd/text/71206-0002.htm07120641000011 Back
81
David Gow, Anti-bribery watchdog calls for explanation of BAE
decision, The Guardian, 5 January 2007. Back
82
BAE in several corruption probes, BBC, 9 February 2007, http://news.bbc.co.uk/1/hi/business/6339625.stm Back
83
Submission to the UK Parliamentary Defence Committee Inquiry into:
the UK-US Defence Trade Cooperation Treaty, BASIC and Saferworld,
15 November 2007. Back
84
For the full text of the Consolidated Criteria see UK Strategic
Export Controls: Annual Report 2006, pp 72-74,
http://www.fco.gov.uk/Files/kfile/ANNUAL%20REPORT%20POLICY%20TEXT.pdf Back
85
Criterion 5, the Consolidated Criteria. Back
86
Ibid. Back
87
Ibid. Other Factors. Back
88
Paragraph, Defence Committee, UK/US Defence Trade Cooperation
Treaty, Third Report of Session 2007-08, 4 December 2007. Back
89
Paragraph 49, Ibid. Back
90
The Framework Agreement concerning Measures to Facilitate the
Restructuring and Operation of the European Defense Industry was
approved in July 2000, under which the Defence Ministers of six
EU States (France, Germany, Italy, Spain, Sweden and the UK) committed
to applying simplified export procedures for the transfer of military-related
equipment among the participating states for work on collaborative
projects. Back
91
Details regarding the proposals are available at http://ec.europa.eu/enterprise/regulation/inst_sp/defense_en.htm
and http://ec.europa.eu/trade/issues/sectoral/industry/dualuse/conf260107_en.htm
respectively (Saferworld has produced submissions as part of the
consultations on both proposals; these are available at http://www.saferworld.org.uk/publications.php?id=201
and http://www.saferworld.org.uk/publications.php?id=285
respectively). It should be noted that the UK has expressed concern
over the relaxation of licensing requirements for Member States
under both of these proposals, in marked contrast to their decision
to favour the US with more relaxed licensing controls. However,
at this time it is still unsure what the outcome of these proposals
will be. Back
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