Examination of Witnesses (Questions 160
- 179)
MONDAY 19 MAY 2008
MR MALCOLM
WICKS MP, MR
JOHN DODDRELL
AND MS
JAYNE CARPENTER
Q160 Chairman: Is it possible that,
in future, somebody who is put in prison for breach of arms export
control rules will automatically have licences taken away? Why
does this not happen automatically? You are looking puzzled, Minister,
but we are puzzled.
Mr Doddrell: One of the strengths
of the register is that somebody can be struck off the register.
The principle of the open general licence is somebody can just
register by a click on the internet and so it is not something
that has generally been factored in, but we have dealt with it
now and will do so again in future.
Mr Wicks: Obviously you are right
and crooks should not have licences and we will try to remove
them as speedily as possible from crooks who have been proven
to be crooks.
Q161 Mr Borrow: Whilst someone can
be in breach of the regulations and have an open licence, there
is an argument that if there is a breach by that individual of
the regulations which leads to some suspension or some sort of
punishment, whether it is prison or not, that ought really automatically
to lead to an examination and suspension of that open licence,
because they may have a breach which is not of the open licence
but of something else that they are doing and there ought to be
a mechanism which automatically examines what their status is
in terms of open licences.
Mr Wicks: Yes. We have been looking
at this and my colleagues may want to add something. The majority
of non-compliance cases are usually minor record-keeping errors,
incorrect references on documentation. There should be full compliance.
I think these are always reported to HMRC.
Mr Doddrell: I can confirm what
the Minister has said that any compliance reports from all of
our visits to companies are referred to HMRC and if there are
any breaches then they are referred and it is up to HMRC to consider
whether to take any action or indeed to prosecute the company
involved.
Q162 Mr Oaten: Does a minor non-compliance
show up against their registration? For example, on eBay your
grade gets worse and worse the more non compliances there are,
and there comes a tipping point. I just wondered whether there
was a first warning, a second warning which shows against the
licence so we get a sense of how good or bad they are?
Ms Carpenter: There is a compliance
rating system which is updated after every compliance visit which
runs on a traffic-lights system.
Q163 Mr Oaten: Is that public for
people to see?
Ms Carpenter: No, it is an internal
system that our compliance officers use and they can copy it to
other people in licensing.
Q164 Mr Oaten: But if one wanted
to look and check the appropriateness of somebody you would not
then see that information?
Ms Carpenter: If you worked in
the ECO or in Customs, for example, you would be able to see it.
It is not a public system at the moment.
Mr Wicks: I am not complacent
about this and I think we need to improve. We have now been able
to reallocate some resources to compliance. You will recall that
when you visited ECO we told you about the introduction of SPIRE,[6]
the new system. That does free up some resources. I am advised
that in the last year the compliance team has increased by over
30% so that more companies can be visited each year.
Q165 Mr Jenkin: Minister, how do
you actually tell what has been exported under an open licence?
Ms Carpenter: We cannot tell what
has been exported under an open licence. Compliance auditors check
during their compliance visit what licences have been used for;
that is open general licences or open individual licences. What
we do not do is collect together statistical information which
shows everything that has been exported on open licences.
Q166 Mr Jenkin: The complaint the
Committee received from Amnesty International is that there is
an incompatibility between the Customs database and the Customs
CHIEF[7]
system in the way ECO registers exports and that the very cumbersome
problem of reconciling these records is not something you even
attempt to do because it is not the purpose of the licence.
Ms Carpenter: There is a link
between our new IT system and CHIEF, the Customs operating system.
Q167 Mr Jenkin: Is this used for
spot-checking and audits rather than checking generally what people
are exporting?
Ms Carpenter: My understanding
is that it is used for spot-checking.
Q168 Mr Jenkin: The UK Working Group
has given us evidence that, in 2004, 5% of open licences were
seen to have been misused and in 2005 8% and in 2006 11%. Is this
because you are doing more checking or is the situation getting
worse and how are you addressing this?
Mr Doddrell: Two points, if I
may, Mr Jenkin. The first point is that the interface between
SPIRE and the CHIEF system was not operating fully to begin with.
It is now operating fully and this provides a connection between
what is being exported from the Customs Officer and a link into
whether the exporter has the appropriate open licence that he
is registered for under the SPIRE system. To an extent the links
between Customs and ECO are now tied up on that. The second point
is that we are concerned about levels of non-compliance in relation
to use of open general licences. Partly this has come about because
more people are using the open general licences and we now have
the mechanism in place to remove entitlement to use open general
licences if there are persistent breaches, so there would be a
real incentive on exporters to get it right, make sure that they
are following the rules, otherwise their entitlement to use an
open general licence will be withdrawn.
Q169 Mr Jenkin: Perhaps you could
explain to me as a novice what is the open general licence actually
intended to achieve? Are we actually achieving it? The rising
misuse of open general licences would suggest that that is not
the case.
Mr Doddrell: I can certainly try
to explain what it is intended to achieve. It is intended to apply
to those areas where we are talking about low-risk goods going
to low-risk countries where, if an individual licence application
was made to the ECO, the licence would invariably be granted.
It is an attempt to take that burden out of the system by providing
a general licence so that all the exporter needs to do is to register
to use it on the internet. This has a great advantage to industry
because it means that they do not need to go through the process
of applying for each licence on a case-by-case basis. It also
has advantage for the Export Control Organisation because it means
that we do not need to worry as much about this low-risk stuff
going to low-risk destinations and we can concentrate our efforts
and our resources on goods that are of real concern going to destinations
that are problematic from our point of view.
Q170 Mr Jenkin: If an open licensing
system operates effectively it would be good for the defence industries
because it is low cost of compliance and good for government because
again a low cost of enforcement. What representations have you
received from industry about this, because I should imagine the
rising incidence of non-compliance is causing them a concern that
these rather easier arrangements are going to be taken away from
them if they continue to be abused. What do they say about it?
Mr Wicks: It is fair to say, as
you have indicated, Mr Jenkin, that the industry sees this system
of open licences as a major advantage. After all, we are trying
to get the balance right between real risks and what is sensible
regulation for legitimate exporters for the sensible function
of the UK economy. I think it is fair to say that the industry
is concerned that this licence arrangement can be maintained.
You are right in that non-compliance puts it into disrepute.
Q171 Mr Jenkin: Have they been making
any suggestions of how it should be better managed?
Mr Doddrell: They very much supported
our proposal that we should be able to withdraw the rights of
individuals to use open general licences if over a period of time
they are shown to be persistently non-compliant.
Q172 Mr Jenkin: What about monitoring
of non-compliance and catching non-compliance because at the moment
you are working basically on a spot-check basis?
Mr Doddrell: We have strengthened
our team of compliance officers. As we have already said, we have
substantially increased the number of compliance visits that we
undertake every year and every company that is registered for
an open general licence will be covered by the compliance programme,
so sooner or later their breaches will come to our attention and
we will take action then.
Q173 Mr Jenkin: The industry supports
that?
Mr Doddrell: The industry supports
that.
Q174 Mr Jenkin: Do you have a kind
of anonymous hotline—a Crime Stoppers feeding of information,
no names, no pack drill? Do you have any arrangements like that?
The gossip in the industry—it is a fairly tight knit industry
and I should imagine there is a fair amount of chat?
Mr Doddrell: We do occasionally
have representations made to us along those lines and we would
follow up and sometimes they can be vexatious complaints so we
do have to be careful not to react immediately in an over the
top manner, but we would look into it and certainly follow up.
Mr Jenkin: Maybe we should take representations
from industry on this question.
Q175 Chairman: Industry had an interesting
comment to make on penalties for non-compliance when they gave
evidence to us in March. Mr Hayes from EGAD[8]
told the Committee on 20 March: "If I was to contrast the
situation in the United States with the situation in the United
Kingdom, working as I do with both systems frequently, the main
difference, from a company's perspective, is that non-compliance
with the UK system can make economic sense, but non-compliance
with the US system never makes economic sense".[9]
Is that not a sad comment on the effectiveness of our export control
system?
Mr Wicks: Maximum penalties available
to courts, as you know, Mr Berry, in terms of non-compliance go
up to a 10-year prison sentence or an unlimited fine. I think
I was receiving advice that those levels of fine and prison sentence
are in line with Home Office guidelines, as you would expect.
I guess the actual sentence will be a matter for the court.
Q176 Chairman: The Government has
increased the sentence. The Government deserves credit in my book
as it used to be seven years and it is now 10 years. You have
increased the maximum penalty and yet we have one of the key people
in the defence manufacturing community in this country who works
both in the UK and in the States who says that in the States there
is never any financial incentive whatsoever to break the rules;
in the UK he comes across countless examples where breaking the
rules can make economic sense. Can somebody look at it? The risk
of prosecution and the penalty that you are likely to incur if
you are successfully prosecuted are the two things that presumably
determine whether or not you have an economic incentive to comply.
Can the Government please look at these two issues? There have
been recent examples of successful prosecutions that we are very
pleased to see. There has been real achievement, no question about
it, but it is deeply worrying when a spokesperson for the defence
manufacturers tells us of that contrast. Whether it is the judges
you need to have words with, I do not know and it is not for me
to say, but are you as shocked as we are to be told that by somebody
who knows?
Mr Wicks: I am not shocked because
I am always being told in my job that there is another country
that does things better—that is part of the nature of politics—so,
while not shocked in that sense, I am interested, Mr Berry, and
we will investigate. As you say, there have been a number of successful
prosecutions in recent times here in the UK but we will look at
the point you have raised with us.
Q177 Chairman: I have just been reminded
by our clerk, and I should recall this myself, the Committee has
recommended in the past that the Commission on Sentencing Guidelines
looks at this and they have said no, or the Government's response
to our recommendation was that they have decided not to look at
this. Would it be possible to revisit the issue via the Commission
on Sentencing Guidelines, Mr Doddrell, and to look at it again?
The United States is not just a country plucked out of thin air;
it is a country with which many manufacturers have dealings and
knowledge of.
Mr Doddrell: I believe that we
may have turned the corner on this, Dr Berry, in that the last
few cases have resulted in significant prosecutions and sentences,
particularly to mention that Mr Knight actually appealed his conviction
and the judge, in considering and overturning Mr Knight's appeal,
set out some quite useful guidance on how sentences should be
applied in cases of conviction under the arms control legislation.
That is something that we would want to consider as well.
Q178 Chairman: Obviously the Committee
has yet to consider this report and we may raise this again. Some
have suggested that, rather than relying exclusively on a criminal
law prosecution, the Government amend primary legislation to allow
it to proceed through civil courts, as for example happens in
the case of Germany and Israel, where the evidential basis is
not quite as high as for a successful criminal conviction. Has
the use of civil penalties been considered by the Government?
Mr Doddrell: We have been looking
at this very carefully with Customs and will be planning to make
an announcement if ministers agree in the coming months. Part
of this is suspending people's right to use OGELs—that is
part of it—but[10]
also whether financial penalties can be imposed perhaps with a
slightly less onerous burden of proof than if one had to go through
a formal process in the courts. There may well be a place for
that in the regime and we have done a lot of work on it and an
announcement will be coming forward in the not too distant future.
Mr Wicks: Figures that will be
published in our next report show that the number of seizures
has increased. We were moving in the wrong direction at one stage
but I am advised that that has now been reversed. In 2006/7 there
were 44 seizures by HMRC and in 2007/8 the figure is likely to
be significantly higher and we will be reporting on those figures
in our next annual report.
Q179 Mr Oaten: We have spoken earlier
on about some of these minor mistakes and minor errors that take
place. There is no fine attached to any of those at the moment?
Mr Doddrell: There would be if
Revenue and Customs decide to prosecute.
6 Shared Primary Information Resource Environment
(the ECO's fully electronic system for processing licence applications) Back
7
Customs Handling of Import Export Freight (HM Revenue and Custom's
declaration processing system) Back
8
The Export Group on Aerospace and Defence Back
9
Q 86 [Mr Hayes] Back
10
Open General Export Licence Back
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