Scrutiny of Arms Export Controls (2011): UK Strategic Export Controls Annual Report 2009, Quarterly Reports for 2010, licensing policy and review of export control legislation - Foreign Affairs Committee Contents

6  Enforcement

80. Our predecessor Committees recommended that information in annual reports on the number of seizures by HM Revenue and Customs and the trend and type of misuses of open licenses should be published in the annual reports on strategic controls.[131] The statistics provided in the 2009 annual report show the number of companies and sites holding open licenses increased from 1,600 in 2007 and 2008, to 1,800 in 2009. The figures also show that the number of enforcement visits undertaken also increased, rising from 675 in 2008 to 836 in 2009. A total of 290 misuses were found and 56 warning letters were issued to Company Directors informing them of the errors which had been found during visits and the steps necessary to ensure compliance at revisit.[132]

81. We recommend that in its response to this report, the Government explains what action, if any, was taken in the 290 cases of misuse that did not result in a warning letter following the 836 enforcement visits in 2009.

Civil penalty regime: compound penalties

82. Our predecessor Committees recommended that the Government implement a civil penalty regime for breaches of strategic export controls.[133] On 31 March, shortly after the 2010 report was published, the then Business Minister Mr Ian Lucas wrote to the CAEC advising that the Government had decided to implement a revised policy for issuing compound penalties instead of introducing a civil penalty regime.[134] The present Government's response to the 2010 Report said

    as a result, HMRC put in place a revised compounding policy expanding its use for minor breaches of export controls, in agreement with the Crown Prosecution Service, from 1 April 2010. We are satisfied this delivers the original objectives of a civil penalty regime with the advantages of not requiring new legislation and of being implemented immediately without significant additional resource. The ECO in coordination with HMRC now publishes notifications of recent compound penalty offences on the Department for Business website.[135]

83. The BIS website, which publishes a list of cases since 2009 where compound penalties have been made, says:

    Compounding is the means by which HMRC can offer the exporter the chance to settle a case which would justify being referred to the CPS for prosecution, therefore saving the taxpayer and company time and legal fees.  

Compounding should not be viewed as a light option as there is no maximum compound penalty limit. The largest fine currently awarded for an export control related offence was for £575,000 in 2009.[136]

84. In evidence to the Committees, EGAD called the system of compound penalties "completely opaque" and added that EGAD had "absolutely no idea" what criteria were used for imposing the penalty or how the penalties were arrived at."[137] EGAD went on to complain of a lack of "give-and-take or feedback" so exporters were left unaware of their non-compliance until a penalty was issued.[138] When asked how the system was working, the BIS Minister, Mr Mark Prisk, said: "it is early days...but we have seen a number of cases brought with a range of fines, one, as I understand it, in the region of £500,000. So, so far so good."[139] As regards the uncertainty for determining the size of civil penalties, the Minister said:

    we hear a variety of opinions on that, ... but if that is their concern, it's certainly my assurance to make sure that the people who should be aware are, and I will certainly be establishing whether in fact that is followed across Government.[140]

85. We also asked the BIS Minister, Mr Mark Prisk, whether he thought it appropriate to make the names of individuals and companies who had breached arms export controls public, along with the information regarding the size of their compound penalty. The Minister said he did not think names should be released.[141]

86. We conclude that it is too early to assess fully the effectiveness of the compound penalty regime since it has been in operation for barely one year. However, we further conclude that even at this early stage the penalty system seems to lack clarity and therefore fairness. We recommend that the Government considers the industry's concerns and make public the criteria used for imposing compound penalties and how the amounts of such penalties are calculated.

87. We also recommend that as compound penalties are applied to cases which would justify being referred to the Crown Prosecution Service for consideration for prosecution, the Government holds open the possibility of making public the names of companies and individuals who have breached arms exports controls sufficiently seriously to attract compound penalties.

131   Scrutiny of Arms Export Controls (2008), Session 2007-08, HC 254, paras 50 and 57; Scrutiny of Arms Export ontrols (2010), Session 2009-10, HC 202, para 92. Back

132   Strategic Export Controls, 2009 Annual Report, HC 182. para 1.6 Back

133   Scrutiny of Arms Export Controls (2010), Session 2009-10, HC 202, para 96. Back

134   According to the BIS website: "Compounding is the means by which HMRC can offer the exporter the chance to settle a case which would justify being referred to the Crown Prosecution Service for prosecution, therefore saving the taxpayer and company time and legal fees." Back

135   Scrutiny of Arms Export Controls (2010), Session 2009-10, HC 202, para 16 Back

136  Back

137   Q 60 Back

138   Q 61 Back

139   Q 92 Back

140   Q 98 Back

141   Q 95-97 Back

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Prepared 5 April 2011