6 Organisational and operational issues
Export Control Organisation (ECO)
CHARGING FOR PROCESSING ARMS EXPORT
LICENCES
66. In the Committees' inquiry last year we asked
whether the Government had any plans to introduce charging to
companies for the processing of licences. At that time EGAD had
said that a statement from the Government confirming that they
had no intention of introducing charging for licences "would
be a great help to the industry, which is extremely worried about
the rumours that there may be charges for licences."[97]
When the BIS Minister, Mr Mark Prisk, as part of the inquiry,
was asked about the possibility of charging, he said:
It is not the intention of the Government to do anything
that would be any more than seeking to look at the possibility
of charges for the costs of the service. This is not intended
to be some sort of back-door charge over and above that, and we
would want to consult industry. We must look at the balance of
these issues to see whether, in fact, there is a different finance
model which would make more sense.[98]
However, the Government's response to the Committees'
Report said:
In the longer term, we are exploring an alternative
model whereby ECO is funded by its customers. We consider that
his might be the best way of ensuring a high quality licensing
system in future as the volume of licensing activity continues
to increase. We expect to hold a full consultation on this later
in the year.[99]
67. During the Westminster Hall debate on 20 October
it was stated that it could be attractive for the Government and
the Treasury to change the funding system for ECO.[100]
The Chairman of the Committees, Sir John Stanley, said that "the
Government was considering a proposal whereby that funding is
taken out of public expenditure [...] and is made the responsibility
of the arms exporting industry." There were possible "risks
and dangers in going down that route because a crucial feature
of the ECO is its clear independence." The Minister was questioned
whether a change in the charging mechanism "might change
public perception from seeing the ECO as an independent watchdog
to seeing it instead as a poodle of the arms exporting companies.
That would be detrimental to the perception of our UK arms export
controls."[101]
68. In responding to the debate the BIS Minister,
Mr Mark Prisk, said:
Charging is an idea that we have explored with exporters,
but only as part of the wider question of how we best reform the
service to ensure we deliver the best kind of service without
diminishing the quality of the controls that have been debated
in this Chamber. What I would say is if and when—and I emphasise
"if" and "when"—that subject becomes
a formal Government proposal with a timetable, we will launch
a full public consultation.
He accepted the point about the need to ensure that
the consultation reflected the independence of ECO.[102]
69. We asked EGAD for its views on the prospect of
ECO charging for the approval process for arms export licences.
David Hayes (EGAD) said that it recognised the problems that ECO
had, but that the proposals put forward by ECO would have been
"unworkable". He informed us that the "figures
being bandied about" were £300 for a Standard Individual
Export Licence (SIEL) and £3,000 for an Open Individual Export
Licence (OIEL). However, this pricing structure did not take into
account the value of the goods requiring the licence and that
a situation could arise where the fee for the licence for a "£10
widget could be £300." He commented that the "economics
of that just do not make sense." Mr Hayes suggested that
such circumstances would drive the manufacturing of that type
of product out of the UK as it would not be viable. He surmised
that companies in the dual-use sector could arrange for the licence
to be applied for in Italy or the Czech Republic when the goods
were physically exported from the UK. He considered that the proposal
had not been "particularly thought out in terms of the impact
or the feasibility." Mr Hayes also pointed out that applying
a charge on companies that made licence applications would only
affect companies that were compliant and would exclude "rogue"
companies that were operating "below the radar". This
would encourage non-compliant companies to stay below the radar
and "get even lower." He said that: "They would
avoid the cost of compliance altogether and enjoy an increased
competitive advantage over the companies that were complying."
[103] Bernadette
Peters (EGAD) suggested that a source of revenue for the Government
could be gained through the fining of agents or exporters who
made false or incorrect entries: this would also improve enforcement.[104]
70. When we asked the BIS Secretary of State whether
consultation on charging for processing licences would be taking
place, Vince Cable replied:
We are not proceeding with this. We have decided
not to introduce charging for the foreseeable future. The decision
has been made, so the whole consultation process is not necessary.
We may return to it, but for the foreseeable future we are not
introducing charging.[105]
71. When we asked what had informed the policy decision,
Vince Cable told us that there were "pros and cons"
regarding charging. He said that there was a high administrative
cost of processing licences and for the Department to maintain
a high-quality level the user fee would have been a "sensible
way" of doing so. However, there would have been an additional
burden by introducing charging, particularly on small and medium-sized
companies and the Government wanted to avert that.[106]
72. The Committees
conclude that the Government's decision not to introduce charging
for the processing of arms export licences is welcome as a charging
system would, at least in the public perception, have compromised
the independence of the Export Control Organisation from the arms
export industry. The Committees recommend that such policy decisions
by Ministers are made known to the CAEC wherever possible when
they are made and not in the course of Oral evidence by Ministers.
PERFORMANCE
73. The Government's Response to the Committees'
2011 Report (HC686) stated that an improvement in processing had
taken place in the first quarter of 2011 with 72% of Standard
Individual Export Licences (SIELs) processed within the Government's
target of 70% processed within 20 working days.[107]
However, the quarterly arms export licence reports produced by
ECO show that performance since the first quarter of 2011 has
fallen again.
Table1: SIELS
processing performance quarterly within 20 days
| 2010 Q1
| 2010 Q2 | 2010 Q3
| 2010 Q4 | 2011 Q1
| 2011 Q2 | 2011 Q3
| 2011
Q4
|
| % of SIELs processed within 20 days
|
59
|
61
|
64
|
61
|
72
|
62
|
62
|
60
|
Source; BIS Quarterly Reports: 2010 Q1 - 2011
Q4
74. In his contribution to the Westminster Hall debate
on the Committees 2011 Report Toby Perkins MP said:
Given the extent of the cuts to UK defence budgets
and the tremendous pressure they are putting on the UK defence
industry, it is vital that licence applications be processed in
a timely fashion when our defence industry attempts to trade with
trusted nations that present no large-scale concerns. The defence
industry reports that contracts have been lost in cases where
there were no worries about the licence application, but the process
simply took longer than it should have. Business vital to this
country's defence industry is being lost as a result of bureaucratic
failure.[108]
75. The Minister responded by saying: "The volume
of licensing activity has increased significantly, which is partly
because legitimate defence exporters have been getting their job
right. At the same time, [...] the Export Control Organisation
has made considerable improvements in its efficiency. However,
we are in a very tough public expenditure climate and efficiency
savings can, of course, only take us so far."[109]
76. The Government's performance target for the processing
of SIELs is to process 70% of applications within 20 working days
and 95% within 60 working days.[110]
Table2: SIELS Processing Performance Annually
| 2006 |
2007 | 2008
| 2009 | 2010
|
| Number processed | n.a.
| 9,647 | 12,729
| 14,187 | 16,723
|
| Processed within 20 working days
| 82% | 79%
| 73% | 73%
| 63% |
| Processed within 60 working days
| 99% | 98%
| 95% | 94%
| 94% |
Source: United Kingdom Export Controls Annual
Report 2010, United Kingdom Export Controls Annual Report 2009,
United Kingdom Export Controls Annual Report 2007.
The Government has a target of processing 60% of
appeals within 20 working days from receipt of all relevant information
from the appellant and 95% in 60 working days. These targets do
not apply to appeals concerning goods that are controlled solely
because of UN Sanctions.[111]
Table 3: SIELs Appeals Performance Annually
| 2006 |
2007 | 2008
| 2009 | 2010
|
| Appeals processed within 20 working days
| 58% | 61%
| 69% | 68%
| 51% |
| Appeals processed within 60 working days
| 83% | 100%
| 90% | 91%
| 93% |
Source: United Kingdom Strategic Export Controls
Annual Report 2010, United Kingdom Strategic Export Controls Annual
Report 2009, United Kingdom Strategic Export Controls Annual Report
2007.
77. EGAD's submission to this inquiry stated that:
Whilst it is perceived that the current export control
system, and especially the turnaround of licence applications,
has recovered to a certain extent over the past year, we are concerned
that this minor improvement has been due to efforts by the Export
Control Organisation (ECO) and its advisory departments to put
additional effort and resources into the processing of Standard
Individual Export Licence (SIEL) applications.
It believes that this limited improvement has been
achieved to the detriment of other aspects of the wider UK export
control system. EGAD said that some of the Open General Export
Licences that had been issued "have proven to be so unfathomable
to interpret as to dissuade even expert export control practitioners
from registering for them."[112]
78. When we asked EGAD about the deterioration in
the processing of arms export licence applications at ECO David
Hayes (EGAD) said that:
It would be nice to think that part of the increase
in licence applications is increased awareness, and that more
people who should be applying for licences are applying. There
is the problem that we have already spoken about, which is the
large percentage of licence applications that really should not
be licence applications at all and should be under some form of
open licensing. Companies that either can't or won't, because
of a lack of confidence in their ability to use these licences,
go down that road and use them.
He also mentioned that there had been staffing reductions
in ECO. Mr Hayes highlighted staffing reductions in the technical
assessment unit, which is the first step in the approval process
following the initial check of the licence application. He pointed
out that when new staff were taken on there was an initial deterioration
in performance, because of the training demand of the new staff.
He believed that these factors had led to the service deterioration.[113]
79. We asked the Secretary of State for Business,
Innovation and Skills, Vince Cable, what steps were being taken
to reverse the declining trend in the processing of applications
and how ECO would deal with the increasing number of licences
requiring processing. Vince Cable told us that "[...] my
understanding is that, although there are some major cases where
there has been an argument about delay, performance has been improving.
Something of the order of two thirds of all cases are cleared
within the 20 days."[114]
Tom Smith, Head of ECO, confirmed that there had been a steady
increase in the volume of export licences and that performance
had suffered. He said that ECO had "started turning this
around." This was partly because ECO had "finally managed
to stem this inexorable increase in individual licence applications."
There had been 9,600 applications in 2007; this had peaked at
16,700 in 2010 and then had reduced to 15,700 in 2011. He told
us that: "we actually managed to succeed in what we have
been trying to do for a little while, which was to allow exporters
to do more business under open licences. That is quite a positive
trend." He informed us that ECO had "various plans in
train in terms of increased efficiency and increased customer
focus." He was hopeful that performance in 2012 would be
"significantly better."[115]
80. We recommend
that the Government in its Response to this Report:
a) sets out the specific steps it
is taking to achieve its 20 and 60 working day targets for both
processing and determining appeals for Standard Individual Export
Licences (SIELs); and
b) states whether it will be setting
processing and determining appeals targets for Open Individual
Export Licences (OIELs) and Open General Export Licences (OGELs)
and, if so, what these targets will be.
The Committees further recommend
that the Government in seeking to meet its arms export licence
processing and appeal targets must comply in all cases and at
all times with its arms export control policies as stated in the
relevant legislation and in the Consolidated Criteria, and the
Committees wish to be assured by the Government in its Response
to this Report that this will be done.
REVIEW OF THE ECO
81. In its submission EGAD suggested that there was
"enormous scope" for a review of the export control
system in the UK. It believed that this would alleviate much of
its current burden. It pointed out that the number of licence
refusals continued to be "extremely small" at approximately
1% and said that there "must be a large swathe of current
SIELs which could be safely and responsibly removed from the scope
of the current SIEL system, and could be placed within the ambit
of the OGEL or OIEL systems, instead." EGAD considers that
as the workload of ECO had increased, the "need for such
a review has become increasingly pressing." In calling for
a review it said that it was "not seeking the movement of
SIEL cases where there is the remotest doubt, based on past experience,
that a licence would be issued by Government, but merely the movement
of those cases where a licence will inevitably be granted."[116]
In its 2011 Report (HC686) the Committees recommended the Government
"reviews the performance of the ECO and provide us with the
results of this Review in its response to this Report."[117]
The Government's Response to our recommendation was:
We are not conducting an overarching review of the
performance of the ECO, but have been carrying out progressive
and continuous improvements and reviews of aspects of the ECO's
performance, and will continue to do so.[118]
82. In its Response the Government also said: "Work
has also started on the review of the Open General Export Licence
(OGEL) system and we will report our findings to the Committees
on completion of the review."[119]
In a further letter from the Chairman to the Foreign Secretary
of 18 July 2011, the Committees then asked "by what date
will the Government be reporting its findings following its review
of the Open General Export Licence (OGEL) system and whether there
will be consultation with outside bodies in the course of the
review?"[120]
The Foreign Secretary in his reply of 30 September 2011 answered:
The Government has conducted a first phase of the
review of Open General Export Licences, which has concluded that
there is scope for increasing the use of existing OGELs - with
benefits both for exporters and for the ECO - through a number
of measures, including: (i) creation of a "plain English"
OGEL template; ii) standardisation of the terms and conditions
of OGELs; (iii) improvements to the OGELChecker online self-help
tool; and (iv) a study into ways of improving transparency in
relation to the use of OGELs. A draft of the "plain English"
OGEL has already been shared with industry representatives and
their reaction was favourable. We will continue to consult industry
and others on an informal basis during the course of the review.
We will provide the Committees with a further report at the end
of the year.[121]
83. In the Oral evidence session with the Secretaries
of State we asked, in the light of our recommendation in 2011
and EGAD's comments, whether there were any plans to carry out
a review of the ECO. Tom Smith, Head of ECO, informed us that
the Government was looking at the scope for increasing coverage
of open licensing; which would address the request of EGAD. He
said that it was "very technical" and adds to the "scope
of open licensing some technology which has been de-controlled
by the international regimes, but where EU law has not quite caught
up." He was hopeful that hundreds of export licence applications
could be taken out of the system annually. However, he pointed
out that there was a need to ensure that the right level of risk
assessment was applied to each application. There was a balance
between "a quick answer for business and making sure that
[ECO does] not cut corners."[122]
84. The Committees
recommend that the Government in its Response to this Report:
a) sets out what specific aspects
of the ECO's performance it is reviewing, what conclusions it
has reached in respect of each aspect being reviewed and what
specific action it is taking as a result; and
b) states when it will be providing
the Committees with a further report on its review of the OGEL
system previously promised to be available at the end of 2011.
TRANSPARENCY OF ARMS EXPORT LICENSING
85. The Government's review of its arms export policies
and procedures is considered in paragraphs 175-270 below. However,
because it relates directly to the Export Control Organisation,
a specific aspect of that review—the transparency of the
export control system—is dealt with here.
86. In his Written Ministerial Statement of 7 February
2012, the Secretary of State for Business, Innovation and Skills,
Vince Cable, said:
My right hon. Friend the Foreign Secretary announced
to the House on 13 October 2011 the conclusions of his review
of defence and security export policy in the light of events in
the middle east and north Africa.
It concluded that there were no fundamental flaws
with the UK strategic export licensing system. We share this view.
However, the review did identify areas where our system could
be further strengthened. To this end, he announced a package of
proposals that included the introduction of a mechanism to allow
the immediate suspension of pending licence applications to countries
experiencing a sharp deterioration in security or stability, and
a commitment to continue to work to improve public information
on defence and security exports, including enhanced transparency
of routine export licensing decisions and how we respond during
a crisis.
We have worked closely in developing the suspension
mechanism, and are pleased to report that this suspension mechanism
is now in place. As a result of this change the Government have
ensured that export licensing policy is now more responsive to
rapidly changing circumstances overseas.
The new suspension mechanism will allow the Government
to quickly suspend the processing of pending licence applications
to countries experiencing a sharp deterioration in security or
stability. Suspension will not be invoked automatically or lightly,
but triggered for example when conflict or crisis conditions change
the risk suddenly, or make conducting a proper risk assessment
difficult. A case-by-case assessment of a particular situation
will be necessary to determine whether a licensing suspension
is appropriate.
Any decision to suspend will be taken by the Licensing
Authority based on advice from relevant Government Departments
and reporting from our diplomatic posts. Parliament, industry
and the media will be informed of any suspension.
Suspension will be tailored to the circumstances
in play and will not necessarily apply to all export licence applications
to a country, but may instead be for applications for particular
equipment (for example crowd control goods), or for applications
for equipment going to a particular end-user.
If a decision to suspend is made, work on licence
applications in the pipeline will be stopped and no further licences
issued pending ministerial review. Once the suspension is lifted,
applications will not be required to be resubmitted.
The Ministry of Defence will apply any licensing
suspension decision to MOD Form 680 applications, for which it
is the Government authority, and to the assessment against the
consolidated criteria of gifting cases, which it co-ordinates
on behalf of the Government.
Suspension will be lifted (or partially lifted) where
the Licensing Authority considers it appropriate to do so.
Transparency is also crucial because confidence in
the workings of the export licensing system needs to be shared
by Parliament and by the public. The system should not just be
working properly; it should also be seen to do so.
I am therefore announcing today a number of proposals
to improve the transparency of the export licensing system. These
proposals build on my right hon. Friend's review [the Foreign
Secretary], and we intend to seek the views of interested parties,
including the representatives of exporters and non-governmental
organisations, on how they will work.
The first proposal is to insert into all open export
licences a provision requiring the exporter to report periodically
on transactions undertaken under these licences. The Government
will then publish this information.
The second proposal concerns information contained
in standard export licence applications. Currently all such applications
are made in confidence, which makes it difficult to make public
any more information than is already disclosed in the Government's
annual and quarterly reports. The Export Control Organisation
considers that certain additional information contained in licence
applications could be made public without causing concern to exporters.
I will explore ways of making this additional information public
while protecting any sensitive material.
The third proposal is to appoint an independent person
to scrutinise the operation of the Export Control Organisation's
licensing process. The role of this independent person would be
to confirm that the process is indeed being followed correctly
and report on their work.
In considering these proposals we intend to consult
the various interested parties to reach an outcome which achieves
the Government's objective of increased transparency while at
the same time imposing the minimum additional burden on exporters.
We will, simultaneously, be pursuing further changes
to the strategic licensing system to make it more efficient and
customer-focused, whilst maintaining the integrity of the process.
Working together, my right hon. Friend and I remain committed
to robust and effective national and global controls to help prevent
exports that could undermine our own security or core values of
human rights and democracy; to protect our security through strategic
defence relationships; and to promote our prosperity by allowing
British defence and security industries to operate effectively
in the global defence market.
I intend to make a further announcement to Parliament,
setting out the Government's conclusions and plans for implementing
any further changes, before the summer recess. [123]
87. In March 2012 the Department for Business, Innovation
and Skills published a Discussion Paper Export Control Organisation:
Transparency in Export licensing - Discussion paper.[124]
The purpose of the paper was to:
- explain the background to the three transparency
commitments made by the Secretary of State for Business, Innovation
and Skills in his Written Ministerial Statement of 7 February
2012;
- explain the key issues; and
- ask a number of questions about implementation.
The BIS Department said that responses to the Discussion
Paper would be accepted up to 20 April 2012.
88. The BIS stated in the Discussion Paper that the
ECO's published quarterly reports did not always meet the needs
of readers and it therefore launched the Strategic Export Controls:
Reports and Statistics website in April 2009. This provided a
searchable database of data from which users could create bespoke
reports which can be in a variety of formats and could be downloaded
and saved to users' computers. The UK is recognised as having
one of the most transparent export licensing systems in the world
due to the level of detail and timeliness of the reports. However,
the BIS identified a number of "significant limitations"
to the information provided:
i. The information only covers individual licences—no
information is provided for open general licences apart from the
number of registrations.
ii. There is no information on the quantity and
value of items licensed under Open Individual Export Licences
(OIELs) and under Open Individual Trade Control Licences (OITCLs),
since these licences are not limited by value or quantity and
applicants do not have to provide this information in their licence
applications.
iii. The reports only provide information on
the items licensed for export, not on quantities/values actually
exported.
iv. The reports provide no information on end-use
or end-users for the items licensed for export or trade.
BIS suggested that the simplest and most reliable
method of collecting this data was to require exporters to report
periodically on transactions under the licences they hold. It
concluded that the key requirements of the reporting on the usage
of open licences are that they must provide meaningful and timely
data for publication, impose the minimum burden on exporters,
and be operationally efficient for the ECO.
89. In considering making more routine licensing
information available to the public the BIS was aware that it
had taken measures to ensure confidentiality and commercial sensitivity.
However, following a Freedom of Information ruling and after it
became clear that not all information contained in licence applications
is "truly sensitive or confidential", the ECO considered
that in many cases exporters would not object to its release.
BIS will examine how to fulfil the Foreign Secretary's commitment
in his 13 October 2011 Statement for "enhanced transparency
on routine export licensing decisions".[125]
BIS said that the key requirements are that the published material
must improve public understanding of routine licensing decisions
and not prejudice the legitimate interests of the entities concerned.[126]
90. The BIS considered that an element of independent
oversight would help to increase public confidence in the Government's
decision-making process on strategic export licences. It proposed
that: "The 'independent reviewer' would review the operation
of the ECO by examining specific cases and certifying that the
processes and procedures had been properly followed (or not, as
the case may be)." The role would be part-time, not have
statutory powers and would report to the Secretary of State. Reports
of the independent reviewer would be published, either as part
of the Strategic Export Controls Annual Report or laid before
Parliament through a Written Ministerial Statement.[127]
91. The Committees
conclude that the Government's commitments to introduce greater
transparency into the export licensing system are welcome. The
Committees recommend that the Government keeps the CAEC fully
informed of the specific changes that will be made to achieve
greater transparency of the export licensing system following
the responses it receives to the Government's Discussion
Paper on Transparency in Export Licensing.
Priority markets for UK arms
exports
92. In response to a letter from the Committees'
Chairman,[128] the
Secretary of State for Business, Innovation and Skills, Vince
Cable, provided the Committees, in a letter dated 8 December 2011,
with a provisional list of Priority Markets for the UK Trade &
Investment Defence & Security Organisation (UKTI DSO). The
previous Priority List had been under review during 2011. He told
the Committees that a final list would not be available before
the early part of 2012, but promised to provide it to the Committees
before the Oral evidence session with the Secretaries of State
on 7 February 2012.[129]
The provisional list of Priority Markets was as follows: Algeria,
Australia, Brazil, Brunei, India, Iraq, Japan, Kuwait, Libya,
Malaysia, Mexico, Oman, Pakistan, South Korea, Saudi Arabia, Turkey,
UAE and USA. Four of these countries, Iraq, Libya, Pakistan and
Saudi Arabia, are included in the FCO's list of "Countries
of concern", in its most recent Annual Human Rights Report.[130]
93. Despite Vince Cable's assurance that the Priority
Markets final list would be provided to us before the Oral evidence
session on 7 February 2012 the Secretary of State's letter dated
6 February 2012 with this information was received only after
the evidence session had taken place. Vince Cable's letter informed
us that following a review the UKTI DSO final list of priority
markets was:
Table 4: BIS UKTI DSO Priority Markets
| Australia | Brazil
| Canada | Europe/NATO/EU (as a collective market)
| India | Indonesia
|
| Japan | Kingdom of Saudi Arabia
| Kuwait | Libya
| Malaysia | Qatar
|
| Oman | South Korea
| Thailand | Turkey
| UAE | USA
|
Source: Letter from the Secretary of State for
Business, Innovation and Skills to the Chairman of CAEC, dated
6 February 2012, Ev 156
Two of the FCO's "Countries of concern"
—Libya and Saudi Arabia—remain within the list of
UKTI DSO's Priority Markets. Algeria, Brunei, Iraq, Mexico and
Pakistan were removed from the Priority Markets list following
an assessment of the priorities of the UK industry.[131]
94. When we asked Vince Cable why countries listed
amongst the FCO's "Countries of concern" remained in
the UKTI DSO's list of Priority Markets and whether this illustrated
a lack of joined-up government he replied that there was "no
absence of joined up government." He said that the BIS worked
with the FCO in this area and that the vast majority of countries
that the Government exports to are "fully democratic; there
is no question over human rights." He said that in countries
where there are human rights issues the Government applied "controls
selectively".[132]
95. The Committees
conclude that, notwithstanding the fact that the Chairman of the
Committees wrote to the BIS Secretary of State on 21 November
2011 specifically requesting that the UKTI DSO's final list of
Priority Markets for 2011/2012 be made available to the Committees
before Ministers gave Oral evidence on 7 February 2012, the Government
was remiss in failing to ensure that the final Priority Markets
list reached the Committees before Ministerial Oral evidence was
given. The Committees recommend that in its Response to this Report
the Government sets out fully the reasons why Libya and Saudi
Arabia remain within the UK Trade and Investment Defence and Security
Organisation's Priority Markets list for 2011/2012 when both countries
are also listed by the Foreign and Commonwealth Office in its
latest Human Rights and Democracy Annual Report as being Countries
of Concern.
Trade Exhibitions
96. The Defence and Security Equipment International
(DSEi) exhibition took place in London Docklands from 13-16 September
2011. The UK Working Group in its submission[133]
informed us that three stands at the DSEi exhibition were closed
because of marketing Category A goods.[134]
One stand had promoted equipment that included leg cuffs, waist
chains, lead chains and an "enhanced transport restraint
system" that combined chains and cuffs. In 2007, the exhibition
organisers expelled two companies, one British and the other Chinese,
after they had found that the companies were promoting leg irons.[135]
UKWG had raised the issue of restraint equipment being promoted
at British exhibitions in its submission to our predecessor Committees'
Inquiry in 2007.[136]
The current Committees were informed that at last year's exhibition
Caroline Lucas MP had discovered that the Pakistan Ordnance Factories
(POF) and Pakistan's Defence Export Promotion Organisation had
both displayed promotional literature for cluster munitions.[137]
Similar concerns about both Pakistani weapons producers had been
raised at the DSEi exhibition in 2009. UKWG had raised with us
in its submission to last year's inquiry that POF had advertised
cluster munitions at DSEi in 2009 and were under investigation.[138]
UKWG said in its submission this year:
It is not acceptable that such illegal products continue
to [be] identified by NGO researchers, journalists and MPs and
not compliance or enforcement specialists working for event organisers
and the UK authorities. Yet again we are seeing evidence that
enforcement of existing UK legislation and resources and capacity
to monitor and police defence exhibitions are clearly not adequate.[139]
97. The Guardian reported that Thomas Nash, Director
of Article 36 had said that: "It was totally unacceptable
when cluster bombs were promoted at DSEi in 2009, but it's frankly
baffling that the DSEi can have made the same mistake two years
later." DSEi were reported as saying that "it was investigating
the breaches and said that its 'robust and appropriate' action
showed its commitment to domestic and international law."
Oliver Sprague (Amnesty UK) responded that: "It is wrong
that it falls to Amnesty International and other organisations
to police the fair and that we have uncovered these materials
after one quick cursory glance through the brochure, when they
were missed by alleged vigorous scrutiny from both DSEi's compliance
unit and the authorities." [140]
98. In the Oral evidence session on 23 January, Oliver
Sprague, when questioned whether the breaches were attributable
to Government policy or administrative incompetence, said:
I certainly do not think that it is Government policy
to allow companies to exhibit torture equipment or cluster bombs.
It is very clear from Government policy and cross-party support
that these things are banned, illegal and should not be there.
There is clearly a problem with the enforcement, policing and
subsequent action that they are taking against transgressors,
because they are doing it again, and it is not getting better.[141]
Roy Isbister, Saferworld, added:
I can believe that it is just an administrative bungle
if it is happening in the first place, but we have cases here
where the law has been broken and there is documentary evidence
that the law has been broken. As far as we are aware, there has
never been a prosecution on the basis of this. Maybe if the Government
policy got a little more active on prosecution for the next DSEi,
it would make exhibitors a little more cautious about what they
are willing to display.[142]
99. When, in the Oral evidence session on 7 February
2012, the Committees asked the Secretary of State for Business,
Innovation and Skills, Vince Cable, why DESi's compliance unit
had not identified brochures advertising Category A material he
said: "If offences are being committed, it is up to the authorities
to ensure that we jump on them quickly and take actions."
He continued by saying that: "Caroline Lucas and others had
identified material that was highly offensive but that was not
illegal to advertise." The Secretary of State said that:
"There is a lot of close observation of what happens at that
exhibition. It is not run by the Government and we cannot therefore
directly control what it displays."[143]
Tom Smith, Head of the Export Control Organisation, BIS, said:
"I also understand, [...]that it is not necessarily a criminal
offence to display a brochure, even if it is clearly for something
that we would never give an export licence to."[144]
Notwithstanding Mr Smith's statement, the items being advertised
were Category A goods and therefore, according to the advice provided
by the BIS in its document Guidance on the impact of UK Trade
Controls on Exhibitions and Trade Fairs the controls cover
"any act calculated to promote" the movement of Category
A goods "with no exemption for general advertising or promotion."[145]
Any act calculated to arrange the supply of Category A goods from
one third party to another does require a licence. The Guidance
continues by stating that: "Because the controls on Category
A goods do not exempt general advertising or promotion, even the
act of distributing brochures or marketing these products would
require a licence if the goods were to be sourced from outside
the UK and supplied to a third country."[146]
100. Following his oral evidence on 7 February the
Secretary of State, Vince Cable, wrote to the Chairman of the
Committees on 13 February 2012 as follows:
During my evidence session, The Committees asked
about certain events at the "Defence and Security Equipment
International" (DSEi) Exhibition in September 2011.
This exhibition is a commercial event organised by
the company Clarion Events. My department issued an Open Individual
Trade Control Licence to Clarion Events to cover any activities
which might take place at DSEi which might fall under the heading
of "acts calculated to promote the supply or delivery of
military goods from one overseas country to another" and
therefore require a licence.
The terms and conditions of this licence made clear
that no "Category A" goods - which would include cluster
munitions and torture equipment - were to be exhibited at the
exhibition. As has been the practice at past exhibitions, my Department
and officials from other Government Departments worked closely
with Clarion Events to assist them in ensuring that these conditions
were adhered to.
On 14 September 2011, it came to the attention of
Clarion that the company Beechwood Equipment were displaying on
their stand a brochure which included certain Category A items.
Clarion closed the stand with immediate effect.
On 15 September, Clarion were notified that literature
promoting cluster munitions had been found in material from both
the Defence Export Promotion Organisation (DEPO) of Pakistan and
also the Pakistan Ordnance Factories (POF). Having consulted the
relevant Government departments Clarion immediately closed the
DEPO pavilion, which included the POF stand.
Both cluster munitions and leg shackles are classified
as Category A goods and are subject to control under the Export
Control Order 2008. Under Article 21, it is prohibited for persons
carrying out activities in the United Kingdom or United Kingdom
persons anywhere in the world to "...(c) do any act calculated
to promote the supply or delivery of any category A goods, where
that person knows or has reason to believe that such action or
actions will, or may, result in the removal of those goods from
one third country to another third country".
To successfully prove an offence has been committed,
HMRC would need to show that the company's action 'will, or may,
result in the removal of those goods from one third country to
another third country'. Having an item listed in a catalogue may
not in itself be sufficient to prove an offence has occurred.
HMRC officers must make a judgement on the appropriate enforcement
action to take based on the details of each case, including what
action is proportionate and what is in the best interests of law
enforcement. In these cases officers judged that the action taken
by the organisers was proportionate and appropriate and there
were not sufficient grounds to take further action.
The Committees also asked whether allowing people
to exhibit catalogues for equipment whose export was prohibited
represented a "loophole" in the law. I have asked my
officials to look into this and I will write to the Committees
again with my conclusions.[147]
101. The Secretary of State wrote a further letter
to the Chairman on 26 March as follows:
In my letter to you of 13 February, which followed
up on points made about Defence and Security Equipment International
(DSEi) 2011 during my oral evidence to the Committees on 7 February,
I said that I would write further on the issue of whether the
fact that the display of brochures related to 'Category A' goods
was not necessarily illegal represented a 'loophole' in the law.
I have looked into the matter and would like to take this opportunity
to report back to you.
As things stand, I am not persuaded that the law
should be changed. The Government's intention is to work through
the organisers of the DSEi conference to make clear to all exhibitors,
especially those who have displayed unacceptable material in the
past, that we will not permit them to exhibit material relating
to "Category A" goods. If unacceptable material is found
on display, we will ensure that the exhibition stand in question
is closed down. I think that this, and not criminal prosecution,
is a fair and proportionate response.
As I said in my previous letter, there are two issues:
firstly, it is necessary to prove a link between the display of
the brochure, and the eventual movement of the goods between two
overseas countries; and secondly, the fact that HMRC must act
in a way that is proportionate and in the best interests of law
enforcement when deciding what, if any, action to take. In all
the cases of this type that have come to light, HMRC have concluded
that closure of the exhibitor's stand by the event organiser was
proportionate and that no further action was appropriate. We could
legislate to widen the scope of the controls on advertising and
promotion, in order to remove the link between the act of promotion
and the movement of goods between overseas countries, but the
additional test of whether a criminal prosecution was in the public
interest would still need to be met, and I am not convinced that
in practice it could be.
It is important to consider the scale of the problem.
DSEi attracts around 1300 exhibitors. Despite the best efforts
of officials from several Departments and of the organisers in
ensuring that exhibitors are aware of the relevant UK law, it
is of course a matter of regret that one or two exhibitors simply
do not get the message. But it must be emphasised that such infringements
have been relatively limited, with only one or two incidents of
this kind occurring at each event.
As an alternative to regulation, I have however asked
my officials in the Export Control Organisation to work even more
closely, alongside colleagues in other Government departments,
with the organisers of DSEi both in advance of, and during, the
next DSEi event in 2013 in order to prevent such occurrences and
to be even more diligent in our policing of the event.[148]
102. The
Committees conclude that the Government's supervision of the "Defence
and Security Equipment International" (DSEi) Exhibition in
London in September 2011 to ensure strict adherence by the organising
company Clarion Events of the terms and conditions of its Open
Individual Trade Control Licence from the BIS was inadequate,
as was the supervision by the company itself. The Committees further
conclude that it is a matter of much concern that the information
that certain Category A items were being promoted on the Beechwood
Equipment stand and that cluster munitions were being promoted
on the Defence Export Promotion Organisation of Pakistan and the
Pakistan Ordnance Factories stand was discovered by visitors to
the exhibition and not by either the exhibition's organisers or
by the Government. The Committees recommend that the Government
takes all steps necessary to ensure that no breaches of the terms
and conditions of the BIS licence to the organisers of the next
DSEi event in 2013 occur. The Committees further recommend that
in its Response to this Report the Government states:
a) whether or not it considers the
law in this area is satisfactory with particular reference to
Article 21 of the Export Control Order 2008, and;
b) whether there is any mismatch
in the Government's interpretation of the relevant law between
that set out in the BIS Guidance on the Impact of UK Trade
Controls on Exhibitions and Trade Fairs and that set
out by the Secretary of State, Vince Cable, in his letters to
the Committees of 13 February and 26 March 2012.
Enforcement
103. Our predecessor Committees recommended that
information 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 Government's Annual Reports on United Kingdom Strategic
Export Controls.[149]
In its Annual Report 2010 the Government has again provided the
information we requested. The statistics provided show that the
number of companies and sites holding Open Licences has continued
to grow, from c.1600 in 2008 to c.1900 in 2010. A total of 273
misuses of Open Individual and Open General Licences were identified
in 2010, slightly down from 290 in 2009. The number of unlicensed
shipments more than halved from 55 in 2009 to 27 in 2010. 46 warning
letters were issued informing Company Directors of the errors
which had been found during visits. On two occasions companies
had shown little or no improvement when they had been revisited
and some of the OGELs the companies were using were suspended
for a period of three months. Following improvements in their
procedures the licences for these companies were re-instated following
the suspensions. The number of HMRC seizures continued to grow,
from 50 in 2008-09, to 115 in 2009-10 and 134 in 2010-11. There
were nine successful prosecutions on export control and trafficking
and brokering offences in 2010-11, and two cases of Conditional
Discharge.[150]
104. Following the Government's publication of its
Annual Report 2010 on UK Strategic Export Controls, the Committees
put 3 questions on enforcement to the Government. The Committees
3 questions, with the Government's answers were as follows:
a) Committee question: The ratio of errors
found during compliance is relatively high. What steps are being
taken to reduce the instances of compliance misuse?
Government answer: The
majority of compliance visits are first visits. The error rate
on these visits is likely to be higher when a company is in its
first year of using open licences.
Although the number of misuses identified in each
year appears high, occurring in around one third of all audits,
it must be remembered that this includes all types of misuse including
minor administrative errors such as failing to reference the licence
on commercial documentation. The numbers of more serious errors,
such as an unlicensed shipment (i.e. a shipment of items that
was not permitted by the particular open general licence that
was used), are much lower and have actually gone down by over
50% compared to 2009.
We take all cases of misuse seriously. Persistent
misuse of Open Licences was the principal reason we introduced
the Warning Letter and suspension procedure. This appears to have
had the desired effect because, as noted above, the proportion
of serious errors has fallen. Following an audit, exporters are
always informed of the findings and of any remedial action required.
In the majority of cases when the company is re-audited the errors
have been corrected. This illustrates very well the effectiveness
of the compliance audit process and the overall robustness of
open licences.
We also encourage attendance at ECO's training and
awareness seminars, and are able to provide company-specific on-site
training. More generally we are looking at ways to improve the
usability of OGELs in order to reduce the number of errors that
occur through simple misunderstanding.
b) Committee question: In how many of
the 134 cases of seizure in 2010 of strategic goods in breach
of licensing requirements were prosecutions for strategic export
offences initiated?
Government answer: No
prosecutions have yet been initiated involving seizures of military
equipment, dual-use goods or goods subject to sanctions where
the goods were seized during the financial year 2010-2011. However,
this is not unusual, as cases require a thorough criminal investigation
before they are referred to the Crown Prosecution Service. It
then takes time to bring a case to a conclusion through the criminal
justice system.
The Government's policy is not to prosecute every
offence, and each case is considered on an individual basis. The
majority of cases where goods are seized at the border are of
a less serious nature and are dealt with by way of a written warning
and, where appropriate, a restoration penalty.
However in more serious cases, criminal investigations
leading to prosecution are initiated as a result of a seizure
at the border. For example, two recent prosecutions involved cases
where unlicensed goods had been seized at the UK border (F14 fighter
jet parts destined for Iran and telescopic sights for sniper rifles,
also destined for Iran).
c) Committee question: Why were only 5
prosecutions successful?
Government answer: A total
of five criminal prosecutions were concluded during the financial
year 2010-2011, and they all resulted in guilty verdicts. Four
of the cases resulted in custodial sentences and one resulted
in a suspended sentence. The cases involved a range of military,
paramilitary and dual-use goods. There were no unsuccessful prosecutions.
We expect that further prosecutions will be concluded during the
current financial year. This is not an area where we ordinarily
expect to see large numbers of prosecutions in any given year.
The Government's policy is not to prosecute every offence, and
the way we deal with a case needs to be proportionate to the offence.
Since April 2010, HM Revenue and Customs has made
greater use of its ability to offer compound settlements in lieu
of prosecution for breaches of export licensing controls and trade
controls. Fourteen compound penalties have been paid since April
2010, including one for unlicensed goods detected at the border.
The compound penalties issued in these cases have ranged from
£1,000 up to £239,000. An offer of a compound penalty
is only made when the circumstances of the case justify an offer.
HM Revenue and Customs, the UK Border Agency and
the Crown Prosecution Service maintain an active intelligence-led
enforcement effort targeted against the most serious proliferation
threats including deliberate non-compliant businesses and individuals.
HMRC also works with BIS to deliver a joint compliance and education
programme that aims to prevent breaches of the controls by providing
advice and guidance to exporters and improving their awareness
of their legal obligations. This reduces the risk of breaches
and helps to facilitate legitimate trade.[151]
105.
The Committees recommend that the Government in its Annual Strategic
Export Controls Report provides the same information on compliance
for holders of Standard Individual Export Licences (SIELs) as
it already provides in its Annual Report for holders of Open Individual
Export Licences (OIELs). The Committees further recommend that
the Government states in its Response to this Report:
a) in how many of the 134 cases
of the Government's seizures in 2010-11 of military equipment,
dual-use goods or goods subject to sanctions because of breaches
of licence requirements have the cases been referred to the Crown
Prosecution Service, and in how many of these cases have prosecutions
been initiated; and
b) what it considers to be the main
points of difficulty the Government has, including under present
legislation, in achieving compliance with, and enforcement of,
its arms export controls.
Compound penalties
106. The BIS website describes compounding as "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."[152]
107. Compound penalties are now a significant element
in the Government's enforcement of its arms export controls.
108. In its 2011 Report (HC686) the Committees concluded
and recommended as follow:
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 makes public the criteria
used for imposing compound penalties and how the amounts of such
penalties are calculated.[153]
The Government in its Response (Cm 8079) replied:
The Government notes the concerns raised by industry
representatives and the Committees on the clarity of the compound
penalty system. We will engage with the industry in order to further
understand their concerns and to explore how best to address these.[154]
109. The Committees in their 2011 Report (HC686)
also made a further recommendation as follows:
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.[155]
The Government in its Response (Cm 8079) replied:
The Government's policy is not to make public details
of companies and individuals subject to compound penalties as
a matter of course. The circumstances in which HM Revenue and
Customs will publish the names of persons who have agreed to pay
compound penalties was set out in Hansard on 26 April 1989 (column
560) in a written answer by the Economic Secretary to the Treasury,
Mr Peter Lilley. Where HMRC includes a publicity clause in a compounding
agreement, the relevant information will be published accordingly.[156]
110. In his letter to the Foreign Secretary of 18
July 2011 the Chairman of the Committees put the following further
question to the Foreign Secretary:
The Government's Response fails to answer the Committees'
recommendation that the Government makes public its criteria used
for imposing compound penalties and how the amounts of such penalties
are calculated. Will it now do so?[157]
The Foreign Secretary in his reply of 30 September
2011 responded as follows:
Section 152 of the Customs and Management Act 1979
allows the Commissioners to compound any proceedings under the
customs and excise Acts. In effect this allows the Commissioners
to enter into an agreement with an offender to settle the matter
out of court as an alternative to initiating legal proceedings.
An offer to compound proceedings is only made in
cases where there is sufficient evidence that would support criminal
proceedings with a reasonable prospect of success.
When considering whether to offer a compound penalty,
HMRC takes account of all factors including the seriousness of
the offence and the best interests of law enforcement. For instance
HMRC would be more likely to offer a compound settlement if the
court was likely to impose a small or nominal penalty or the offence
resulted from a genuine mistake or misunderstanding.
However, a compound settlement would not normally
be offered in case involving:
- assaults on, or obstruction
of, officers;
- persistent offenders
- an offender who is subject to a suspended prison
sentence or is on parole for a comparable offence;
- other related offences which are being considered
by Customs, Police or other government departments.
HMRC cannot impose a compound penalty and the exporter
is under no obligation to accept an offer. If an exporter does
not believe that he should pay a compound penalty, or he does
not agree that the amount of the penalty is fair or proportionate
to the offence, then he can have his case heard in a magistrate's
court.
Calculation of the offer to compound
HMRC officers consider all relevant factors in each
individual case when calculating the sum to be offered as a compound
settlement. Although not exhaustive, the following factors are
taken into account:
- the seriousness of the alleged offence;
- whether fraudulent intent can
be proven;
- the extent of the offender's efforts to perpetrate
the alleged offence;
- the type and value of any goods involved;
- the offenders previous history; and
- the level of penalties known to have been imposed
by courts for similar offences.
No compound penalty can exceed the maximum monetary
penalty laid down in law for the offence in question.[158]
111. The Chairman of the Committees put a second
question on compound penalties to the Foreign Secretary in his
letter of 18 July 2011 as follows:
In how many cases to date involving breaches of arms
export controls has a publicity clause been included in a compounding
agreement?[159]
The Foreign Secretary in his reply of 30 September
2011 responded as follows:
All compounding agreements for arms export controls
have a standard publicity clause which sets out HMRC's policy
on confidentiality and disclosure in such cases. HMRC's policy
is generally not to publicise the names of individuals or companies
accepting compound settlements. However, we reserve the right
to publicise details where there is an over-riding public interest.
This is a longstanding Government policy, the details
of which are set out in Hansard in a written statement by the
then Economic Secretary to the Treasury, Mr Peter Lilley on 26
April 1989 (Column 560). The text of this statement is reproduced
below.
Mr. Quentin Davies : To
ask the Chancellor of the Exchequer if he will make a statement
on the circumstances in which the commissioners of Customs and
Excise will disclose particulars of cases where proceedings for
offences are compounded under section 152 of the Customs and Excise
Management Act 1979.
Mr. Lilley : Section 152
of the Customs and Excise Management Act 1979 is the most recent
re-enactment of the commissioners' long-standing power to compound
proceedings, that is to offer an alleged offender the option of
paying a penalty out of court rather than be prosecuted. This
power is used to resolve the majority of customs or excise offences,
and enables them to be dealt with efficiently and effectively
without burdening the courts or tying up Customs staff in lengthy
court hearings. Hitherto, details of compounded settlements have
not usually been made public. The commissioners, having reviewed
their policy on disclosure of compounded settlements, have decided
that in respect of settlements made on or after 1 June 1989, details
will be disclosed in the following circumstances :
It will be the Commissioners' invariable practice
to disclose details
(a) to other Government Departments whose statutory
responsibilities are directly affected ; and
(b) to the courts for sentencing purposes after conviction,
in cases where there has been an earlier compounded settlement
for a similar matter within the time limits specified for offences
by the Rehabilitation of Offenders Act.
The commissioners will also disclose compounded settlements
under two other circumstances
(c) to employers when it is apparent that
(i) the nature of the employment has facilitated
the offence ; or
(ii) where drugs offences or indications of serious
alcohol abuse are involved, the nature of the employment or duties
requires a high degree of unimpaired judgement or faculties.
(d) in response to enquiries from Parliament or the
media about cases which have excited public attention, if disclosure
is considered to be in the public interest.
In all cases, persons considering an offer to compound
for an alleged offence will be warned when the offer is made that
details of the settlement may be disclosed in the circumstances
set out at (a) to (d) above.
The commissioners have considered the recommendation
of Lord Keith of Kinkel's committee on the "Enforcement Powers
of the Revenue Departments" (Cmnd. 9440), that the names
of all persons making compounded settlements and particulars of
the settlements should be published, subject to discretion to
withhold the names of persons making full spontaneous voluntary
disclosure of their offences. The policy now to be adopted reflects
the commissioners' conclusion that, other than in the particular
circumstances already described, it would not be equitable or
make the best use of their resources or those of the courts to
depart from the present general principle of non-disclosure. The
commissioners' general policy of non- disclosure of details of
their dealings in individual cases will therefore continue to
apply to cases which do not come within the circumstances described
above.
I am satisfied with this outcome of the commissioners'
review.[160]
112. The
Committees recommend that now the present compound penalty regime
in relation to arms exports has been in operation for two years,
the Government in its Response to this Report provides an assessment
of its strengths and weaknesses as shown to date, and details
the improvements it wishes to implement.
Crown Dependencies
113. The Crown Dependencies are the Bailiwick of
Jersey, the Bailiwick of Guernsey and the Isle of Man. The Bailiwick
of Guernsey includes the separate jurisdictions of Alderney and
Sark and is responsible for the administration of the islands
of Herm, Jethou and Lihou. The island of Brecqhou is part of Sark.[161]
Jersey, Guernsey and the Isle of Man are not part of the UK but
are self-governing Dependencies of the Crown. This means they
have their own directly elected legislative assemblies, administrative,
fiscal and legal systems and their own courts of law. The Crown
Dependencies are not represented in the UK Parliament and UK legislation
does not extend to them. [162]
114. In December 2011 the MS Thor Liberty,
a cargo ship registered in the Isle of Man with an Ukrainian crew,
was detained in the Finnish port of Kotka. It had sailed from
the North German port of Emden two days previously and was bound
for China. Finnish officials found 160 tonnes of explosives (picric
acid) and 69 Patriot surface-to-air missiles on board the vessel.
The explosives and missiles were seized by Finnish authorities
until it was determined that the missiles were an official shipment
from Germany to South Korea and that the explosives were a legitimate
shipment for China. However, Finnish police said the missiles
lacked proper transit documents and the explosives were not safely
stored. The Finnish military destroyed some of the explosives,
while the rest was re-packed in more secure storage. The ship
was cleared to leave Finland after a few days; however, the ship's
captain and first mate were detained by Finnish authorities.[163]
115. The Chairman of the Committees wrote to the
Secretary of State for Business, Innovation and Skills on 17 January
2012 as follows:
I am writing in respect of the attached report in
The Independent of 22 December 2011 and of all related information
held by the Government.
The Committees on Arms Export Controls (CAEC) would
be grateful for your answers to the following questions before
William Hague and you give Oral Evidence to CAEC on February 7.
1. On what date was the "Thor Liberty"
registered as a British-flagged ship, was the company that made
the registration a UK registered company, and, if so, on what
date did this company last file its Annual Report at Companies
House and in respect of which financial year?
2. Would the explosives and the surface-to-air
missiles found on board the "Thor Liberty" in Finland
when the ship was on its way to Shanghai constitute a breach of
the EU arms embargo on China if exported from the UK?
3. Do the explosives and the surface-to-air missiles
found on board the "Thor Liberty" in Finland when the
ship was on its way to Shanghai fall within or outside the ambit
of the current UK legislation on extra-territoriality relating
to arms exports?
4. Does the Government consider in relation to
this matter that any UK person(s) may have committed a breach
of UK arms export controls legislation that may be indictable
under the provisions of current UK legislation on extra-territoriality?
5. What discussions have taken place between
the UK Government , the British police and the Crown Prosecution
Service on this matter?
CAEC will of course be glad to receive any additional
information that the Government wishes to provide in its response
to this letter.
I am writing in the same terms to William Hague and
am also copying this letter to the Director of Public Prosecutions
for any comments he may wish to make to CAEC.[164]
116. The Secretary of State replied on 2 February
2012 as follows:
Thank you for your letter of 17 January regarding
a report in The Independent newspaper of 22 December 2011. The
report alleged that a British-flagged merchant vessel - the Thor
Liberty - had been impounded in Finland because it was suspected
of carrying a cargo of explosives and surface-to-air missiles
to China in breach of Finnish export control law and, as you suggest
in your letter, in breach of the EU arms embargo on China. You
also ask whether there has been a breach of UK trade controls.
I am pleased to be able to set the record straight on this story.
The Thor Liberty is registered in the Isle
of Man but it is owned and operated by a Danish company, Thorco
Shipping A/S. This company does not have an office in the UK and
is not registered at Companies House. According to other media
reports the ship's captain and crew are Ukrainian. I have seen
no reports suggesting that any UK person - as defined in the Export
Control Act 2002 - was involved in any way in the transfer or
supply of these goods. It follows that there can have been no
breach of UK trade controls.
Turning now to the vessel's cargo, the "160
tonnes of explosives" comprised a consignment of a substance
called picric acid. While this is indeed used as an explosive
it is not listed in any UK or EU strategic export control list.
A licence is therefore not required under strategic export control
legislation for the export of picric acid from the UK or the EU
to any destination, and export of this substance to China would
not be a breach of the EU arms embargo on China.
Surface-to-air missiles do of course require an export
licence. However the 69 Patriot missiles were actually being exported
from Germany to South Korea. The German government has stated
that these missiles were the final consignment under a long-standing
agreement between the two countries and while all necessary export
licences had been obtained before the goods left Germany it seems
that there was no transit licence in place to allow transit of
the goods through Finland. The Finnish Government has confirmed
that a transit licence has now been issued so that the missiles
may be delivered to South Korea.
I trust that this is sufficient to reassure you that
there has been no breach of UK trade controls and no breach of
the EU arms embargo on China. [165]
117. The
Committees conclude that the MS Thor Liberty
incident revealed how ships registered in the Crown Dependencies
could provide a means whereby shipments of arms could occur that
would be in breach of UK Strategic Export Controls if carried
out by a vessel registered in the UK. The Committees recommend
the Government in its Response to this Report states whether it
will give consideration to bringing the Crown Dependencies within
the ambit of UK Strategic Exports Control legislation.
Combating bribery and corruption
118. In their 2011 Report (HC686) the Committees
concluded and recommended as follows:
We conclude that the Government has failed to demonstrate
satisfactorily whether, and if so how, it assesses the risk that
individual arms exports may be linked to bribery and corruption
during the licence approval process. We recommend that the Government
sets out fully in its response to this Report whether such an
assessment is made for all arms export licence applications, and
if so how.[166]
The Government's Response in Cm 8079 was as follows:
The focus of the Government's scrutiny relating to
bribery and corruption in the licensing process is the risk that
goods might be diverted from their intended use. Criterion 7 requires
consideration of "The existence of a risk that the equipment
will be diverted within the buyer country or re-exported under
undesirable conditions." Corrupt contract awards and
corrupt processes further down the chain can increase the risk
of diversion and where there is credible evidence of such risks
emerging, licence applications will be refused.
Where the Government becomes aware of corruption
in arms deals, it will take the appropriate action under the provisions
of the Bribery Act 2010, which entered force on 1 July 2011.[167]
119. The Committees were concerned that the Government's
Response appeared to be unduly limited in scope with the Government
focusing its scrutiny of bribery and corruption predominately
on arms exports which might be diverted or re-exported, notwithstanding
the fact that bribery and corruption may occur in many other circumstances.
The Chairman, therefore, wrote to the Foreign Secretary on 18
July 2011 putting the following question to the Government:
Will the Government confirm that if it becomes aware
of corruption in arms deals it will, regardless of whether there
is a risk of diversion or re-export under Criteria 7, take appropriate
action under the provisions of the Bribery Act 2010?[168]
In his letter of 30 September 2011 the Foreign Secretary
replied:
Yes. The Serious Fraud Office (SFO) has lead responsibility
for investigating and prosecuting foreign bribery. They decide
whether or not to pursue an investigation, in collaboration with
the City of London Police's Overseas Anti-Corruption Unit. The
Government, civil servants and the public should report allegations
of bribery and corruption by companies or individuals directly
to the SFO (e-mail: OverseasCorruption@sfo.gsi.gov.uk). They are
also able to discuss issues informally http://www.sfo.gov.uk/bribery--corruption/the-sfo'd-response/where-should-i-report-corruption.aspx.[169]
120. The
Committees conclude that the Government's unqualified confirmation
that if it becomes aware of corruption in arms deals it will take
appropriate action under the provisions of the Bribery Act 2010,
regardless of whether there is a risk of diversion or re-export
under Criteria 7, is welcome.
121. In their 2011 Report (HC686) the Committees
also recommended as follows:
We further recommend that, given that Criterion 8
applies only to developing countries and that bribery and corruption
are not confined to such countries, the Government gives full
consideration to proposing the insertion of an additional Criterion
into the EU Common Position on arms exports obliging Member States
to assess the risk of bribery and corruption before approving
an arms export licence to any country.[170]
The Government's Response in Cm 8079 was as follows:
As the Minister for Business made clear during the
evidence session on 24 January 2011, the Government does not support
the Committees' recommendation. It would not be appropriate to
base an assessment merely on the perception of corruption in the
destination country. In order to refuse a licence under a corruption
criterion, we would need to have firm evidence that the contract
had been obtained by corruption and it is not feasible for the
Government to investigate the circumstances of every contract.
The Government therefore intends to maintain its focus on assessing
the risks presented by the end-use or potential end-use of the
goods, and the risks of diversion to undesirable end-use or end-users
The new Bribery Act modernises the law on bribery
and gives the UK some of the toughest anti-corruption laws in
the world, Where there is evidence of bribery and corruption,
the Government will address it through the provisions of the Act.
We will also continue to support wider initiatives such as the
defence industry's Common Industry Standards and Global Principle
of Ethics.[171]
122. The
Committees conclude that an examination of the EU's Common Position
on arms exports, the text of which is set out fully in Annex 4
of this Report, shows that there are numerous grounds in the Common
Position on which Member States should refuse an arms export licence
based on the perception of the destination country, for example
where the arms might be used to facilitate internal repression,
where there have been serious violations of human rights, or where
sustainable development would be seriously hampered. The Committees,
therefore, do not accept the Government's view that: "It
would not be appropriate to base an assessment [of an arms export
licence application] merely on the perception of corruption in
the destination country." The Committees continue to recommend
that the Government gives full consideration to proposing the
insertion of an additional Criterion into the EU Common Position
on arms exports obliging Member States to assess the risk of bribery
and corruption before approving an arms export licence to any
country.
International Development
123. Criterion 8 of The Consolidated Criteria, detailed
in full in Annex 3, reads:
CRITERION EIGHT
The compatibility of the arms exports with the
technical and economic capacity of the recipient country, taking
into account the desirability that states should achieve their
legitimate needs of security and defence with the least diversion
for armaments of human and economic resources.
The Government will take into account, in the light
of information from relevant sources such as United Nations Development
Programme, World Bank, IMF and Organisation for Economic Cooperation
and Development reports, whether the proposed export would seriously
undermine the economy or seriously hamper the sustainable development
of the recipient country.
The Government will consider in this context the
recipient country's relative levels of military and social expenditure,
taking into account also any EU or bilateral aid, and its public
finances, balance of payments, external debt, economic and social
development and any IMF- or World Bank-sponsored economic reform
programme.
124. In the Committees' 2011 Report (HC 686) we recommended
that the Government should provide us with a full statement of
the methodology it uses in relation to Criterion 8 in deciding
whether or not a specific arms export licence should be approved.[172]
The Government's Response was:
The methodology that the Government uses in relation
to Criterion 8 of the Consolidated Criteria was published as Annex
C (page 71) of the United Kingdom Strategic Exports Controls Annual
Report 2007 published in July 2008 and available on the FCO website.[173]
Annex C can be found on pages 71-74 of the United
Kingdom Strategic Export Controls Annual Report 2007 on the
FCO website at:
http://www.fco.gov.uk/resources/en/pdf/4103709/2007-ar-uk-strat-exp-conts
125. The
Committees recommend that the Government in its Response to this
Report states whether the methodology it uses in relation to Criterion
8 has been changed from that at Annex C of the United Kingdom
Strategic Exports Controls Annual Report 2007, and,
if so, to provide the Committees with the complete text of the
changed methodology.
126. The Committees put 3 questions to the Government
regarding the role of the Department for International Development
following its consideration of the Government's United Kingdom
Strategic Export Controls Annual Report 2010. The 3 questions
and the Government's answers to them in the letter of 7 January
2012 sent by the Foreign Secretary to the Committees' Chairman
were as follows:
Committees' question:
1) Which strategic export licence applications, and for what goods
and to which countries, were referred to DFID in 2010 for that
Department's specific expertise and advice? Of those applications,
which were granted and which were refused, and which were granted
contrary to the advice of DFID?
Government answer: DFID
received 266 applications to review in 2010. Please see Annex
1 [Annex 1 can be viewed at Annex 11 to this Report] for a breakdown
of the countries, goods and final licensing decision made for
each of these applications. DFID reviews all licences for exports
to World Bank International Development Assistance eligible countries.
Although the attached spreadsheet highlights multiple destinations
for OIELs and OITCLs, DFID comments only on those that fall within
this criterion. This is made clearer in the final column.
Of the applications seen by DFID, broken down by
country, 178 were issued, 196 issued with proviso, 25 rejected,
14 refused and 83 stopped, withdrawn or remain outstanding. There
were no instances of a licence being granted despite DFID recommending
it be declined. [174]
Committees' question:
2) Which of the arms export licence applications to countries
in North Africa and the Middle East which have now been revoked,
as detailed in Annex 1 of Cm 8079, were referred to DFID for that
Department's specific expertise and advice, and what was DFID's
advice in each case?
Government answer: None
of the revoked licences listed in Annex 1 of report Cm 8079 were
circulated to DFID.[175]
Committees' question:
3) Why is the Department for International Development only consulted
when assessing an arms export licence application against Criteria
8, and not when assessments are made against Criteria 2, 3 and
4?
Government answer: The
FCO, MOD and DFID act in a policy advisory capacity and provides
the ECO with advice and analysis on the foreign, defence and international
development policy aspects relevant to consideration of export
licence applications against the Consolidated EU and National
Arms Export Licensing Criteria.
As stated in Section 1 of the Government's Annual
Report, DFID provide specific expertise and advice in considering
applications to those developing countries eligible for concessional
loans from the World Bank's International Development Association
(IDA) eligible countries against Criterion 8 and specifically,
whether the proposed export would seriously undermine the recipient
country's economy, and whether the export would seriously hamper
the sustainable development of the recipient country. The FCO
is the advisory department on Criteria 2,3 and 4.
The Department for International Development is currently
considering its role in the UK's arms export control system, including
the most appropriate criteria on which to be consulted.[176]
127. The
Committees recommend that the Government provides in its Response
to this Report the outcome of the Department for International
Development's consideration of its role in the UK's arms export
control system, including which are the most appropriate Criteria
in the Consolidated Criteria on which it considers it should be
consulted.
97 CAEC, First Joint Report of Session 2010-12, 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, HC686, Q 63 Back
98
CAEC, First Joint Report of Session 2010-12, 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, HC686, Q 77 Back
99
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, page 7 Back
100
HC Deb, 20 October 2011, col 337WH Back
101
HC Deb, 20 October 2011, col 337WH Back
102
HC Deb, 20 October 2011, col 363WH Back
103
Q 49 [David Hayes] Back
104
Q 49 [Bernadette Peters] Back
105
Q 77 Back
106
Q 80 Back
107
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, page 7 Back
108
HC Deb, 20 October 2011, col 359WH Back
109
HC Deb, 20 October 2011, col 363WH Back
110
Department for Business, Innovation and Skills, Department for
International Development, Foreign and Commonwealth Office and
Ministry of Defence, United Kingdom Strategic Export Controls
Annual Report 2010, HC 1402, p 30 Back
111
Department for Business, Innovation and Skills, Department for
International Development, Foreign and Commonwealth Office and
Ministry of Defence, United Kingdom Strategic Export Controls
Annual Report 2010, HC 1402, page 31 Back
112
Ev 41 Back
113
Q 51 [David Hayes] Back
114
Q 81 Back
115
Q 82 [Tom Smith] Back
116
Ev 41 Back
117
CAEC, First Joint Report of Session 2010-12, 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, HC686, para 31 Back
118
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, page 7 Back
119
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, page 7 Back
120
Ev 63 - Letter to the Foreign Secretary dated 18 July 2011 Back
121
Ev 67 - Letter from the Foreign Secretary dated 30 September 2011,
Annex A Back
122
Q 83 Back
123
HC Deb, 7 February 2012, cols 7-9WS Back
124
Department for Business, Innovation and Skills, Export Control
Organisation: Transparency in Export licensing - Discussion paper,
March 2012 Back
125
HC Deb, 13 October 2011, col 42WS Back
126
Department for Business, Innovation and Skills, Transparency
in Export Licensing Discussion Paper, March 2012, p 7 Back
127
Department for Business, Innovation and Skills, Transparency
in Export Licensing Discussion Paper, March 2012 Back
128
Ev149 - Letter from Chairman to Vince Cable dated 21 November
2011 Back
129
EV 149 - Letter from Vince Cable, dated 8 December 2011 Back
130
FCO "Countries of Concern" are: Afghanistan, Belarus,
Burma, Chad, China, Colombia, Cuba, Democratic People's Republic
of Korea, Democratic Republic of Congo, Eritrea, Fiji, Iran, Iraq,
Israel and the OPTs, Libya, Pakistan, Russia, Saudi Arabia, Somalia,
Sri Lanka, Sudan, South Sudan, Syria, Turkmenistan, Uzbekistan,
Vietnam, Yemen and Zimbabwe as listed in the FCO's, Human Rights
and Democracy: The 2011 Foreign & Commonwealth Office Report,
Cm 8339, April 2012 and "Foreign Office gives update on human
rights in countries of concern", FCO Press Notice, 16 January
2012 Back
131
Ev 156 - Letter from Vince Cable, dated 6 February 2012 Back
132
Q 63 Back
133
Ev 52 Back
134
Category A goods are those classified as requiring the most stringent
controls (controls are exercised over all activities relating
to the trade in such equipment). This category covers, inter alia,
cluster munitions, equipment used in executions and 'torture equipment.'(see
Box A, page 42) Back
135
"UK arms fair under scrutiny over 'cluster munitions' stall",
The Guardian, 18 September 2011. Back
136
CAEC, First Joint Report of Session 2007-08, Scrutiny of Arms
Export Controls (2008): UK Strategic Export Controls Annual Report
2006, Quarterly reports for 2007, licensing policy and review
of export control legislation, HC254, Ev 63 Back
137
Ev 39 Back
138
CAEC, First Joint Report of Session 2010-12, 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, HC686, Ev 53 Back
139
Ev 52 Back
140
"UK arms fair under scrutiny over 'cluster munitions' stall",
The Guardian, 18 September 2011.
Back
141
Q 27 [Oliver Sprague] Back
142
Q 27 [Roy Isbister] Back
143
Q 94 Back
144
Q 95 [Tom Smith] Back
145
Department for Business, Innovation and Skills, Guidance on the
impact of UK Trade Controls on Exhibitions and Trade Fairs, April
2009, p 4.` Back
146
Department for Business, Innovation and Skills, Guidance on the
impact of UK Trade Controls on Exhibitions and Trade Fairs, April
2009, p 5 Back
147
Ev 165 - letter from Vince Cable dated 13 February 2012 Back
148
Ev 180 - letter from Vince Cable dated 26 March 2012 Back
149
CAEC, Scrutiny of Arms Export Controls (2008), Session
2007-08, HC 254, paras 50 and 57; Scrutiny of Arms Export Controls
(2010), Session 2009-10, HC 202, para 92. Back
150
Department for Business, Innovation and Skills, Department for
International Development, Foreign and Commonwealth Office and
Ministry of Defence, United Kingdom Strategic Export Controls
Annual Report 2010, HC 1402, pp 7-10 Back
151
Annex 11 - letter from the Foreign Secretary dated 7 January 2012,
Annex A Back
152
Department for Business, Innovation and Skills, Compound Penalty
Cases, http://www.bis.gov.uk/policies/export-control-organisation/eco-press-prosecutions/compound-penalties Back
153
CAEC, First Joint Report of Session 2010-12, 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, HC686, para 86 Back
154
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, p 13 Back
155
CAEC, First Joint Report of Session 2010-12, 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, HC686, para 87 Back
156
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, pp 13-14 Back
157
Ev 63 - Letter from the Chairman dated 18 July 2011 Back
158
Ev 67 - Letter from the Foreign Secretary 30 September 2011, Annex
A Back
159
Ev 63 - Letter from the Chairman dated 18 July 2011, Annex A Back
160
Ev 67 - Letter from the Foreign Secretary 30 September 2011, Annex
A Back
161
The Department for Constitutional Affairs, Background briefing
on the Crown Dependencies: Jersey, Guernsey and the Isle of Man,
June 2006, p 2 Back
162
The Department for Constitutional Affairs, Background briefing
on the Crown Dependencies: Jersey, Guernsey and the Isle of Man,
June 2006, p 2 Back
163
See: "Boat laden with surface-to-air missiles stopped in
Finland on its way to China", The Guardian, 21 December
2011; "Seized Patriot missiles are legal shipment, Germany
says", CNN Online, 22 December 2011; and"Ship
held after missiles discovery cleared to travel again", The
Guardian, 26 December 2011 Back
164
Ev 154 - Letter from the Chairman of CAEC to Vince Cable, dated
17 January 2012
Back
165
Ev 156 - Letter from Vince Cable to the Chairman of CAEC, dated
2 February 2012 Back
166
CAEC, First Joint Report of Session 2010-12, 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, HC686, para 115 Back
167
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, p 15 Back
168
Ev 63 - Letter from the Chairman to the Foreign Secretary dated
18 July 2011, Annex A Back
169
Ev 67 - Letter from Foreign Secretary dated 30 September 2011,
Annex A, p 11 Back
170
CAEC, First Joint Report of Session 2010-12, 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, HC686, para 116 Back
171
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, p 16 Back
172
CAEC, First Joint Report of Session 2010-12, 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, HC686, para 107 Back
173
Government response to CAEC, First Joint Report of Session 2010-12,
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, Cm 8079, p 15 Back
174
Annex 11 - Letter from the Foreign Secretary dated 7 January 2012,
Annex A and Annex 1 Back
175
Annex 11 - Letter from the Foreign Secretary dated 7 January 2012,
Annex A and Annex 1 Back
176
Annex 11 - Letter from the Foreign Secretary dated 7 January 2012,
Annex A Back
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