House of Commons - Scrutiny of arms Exports and Arms Control

Scrutiny of arms Exports and Arms Control - Committees on Arms Export Controls Contents

6 Organisational and operational issues

Export Control Organisation (ECO)

REMIT, RESPONSIBILITIES, STRUCTURE AND STAFFING

84. The Committees' previous scrutiny of the Export Control Organisation - remit and responsibilities can be found at paragraphs 87-90 in Volume II of the Committees' previous Report (HC 205), and the Committees' Recommendation at paragraph 47 of the Report.

85. The Committees' Recommendation on the Export Control Organisation - remit and responsibilities in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Recommendation:

The Government's Response:

86. I propose that the Committees recommend that the Government states in its Response to this Report whether it remains satisfied that the present remit, responsibilities, structure and staffing of the Export Control Organisation fully meet the Government's policy objectives, whether it has any plans to make changes, and, if so, what those changes are.

CHARGING FOR PROCESSING ARMS EXPORT LICENCES

87. The Committees' previous scrutiny of the Export Control Organisation - charging for processing arms export licences can be found at paragraphs 91-99 in Volume II of the Committees' previous Report (HC 205), and the Committees' Conclusion at paragraph 48 of the Report.

88. The Committees' Conclusion on the Export Control Organisation - charging for processing arms export licences in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Conclusion:

The Government's Response:

89. I propose that the Committees continue to conclude that it would be undesirable to make the Export Control Organisation financially dependent on fee income from arms exporters, and recommends that the Government states in its Response to this Report whether it remains the Government's policy not to introduce a charging regime for arms export licences.

PERFORMANCE

90. The Committees' previous scrutiny of the Export Control Organisation - performance can be found at paragraphs 100-112 in Volume II of the Committees' previous Report (HC 205), and the Committees' Recommendation at paragraph 49 of the Report.

91. The Committees' Recommendation on the Export Control Organisation - performance in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Recommendation:

The Committees recommend that the Government in its Response to this Report:

The Government's Response:

a) The Export Control Organisation has to ensure a careful balance between striving to offer a licensing service that meets the needs of UK companies and ensuring the UK's global security interests are maintained. Sometimes the issues are very clear, such as deciding to revoke licences for Egypt where exports might be used for internal repression. On other occasions decisions are less clear cut and countries of concern may be priority markets for export campaigns. There is no avoiding this issue: we have to strike a balance between the service we provide to UK exporters and promoting global security and human rights.

When the Arab Spring began, Ministers asked to see submissions on a significantly greater range of licence applications which might pose risks to human rights. There are robust internal processes in place, backed up by the new secondary target mentioned below, such that there are typically now only a very few cases that have been outstanding for more than sixty days.

(Responding to CAEC Report Volume II, paragraphs 103-105.)

ECO is committed to working closely with EGAD and other trade associations to improve all aspects of its service to exporters and to address issues of concern.

ECO is one of the few export control organisations to set licensing targets and publish performance data. ECO currently works to two main targets for processing licence applications. Our primary target is to turn around 70% of SIEL applications within 20 working days. Contrary to EGAD's claim that ECO is failing to meet targets, current performance is running at around 85% (year to date for 2013 is 79%).

We listened to industry concerns that, although the old secondary target of completing 95% of licence applications within 60 working days was being met, this still left a sizeable number of licence applications (around 850 applications per annum) that were taking more than 3 months to process. We therefore, increased the secondary target from 95% to 99% with effect from July 2013. The new secondary target will further improve the efficiency of the licensing system by turning around 5000 or so of the applications that currently miss the 70% target, within a backstop of 60 working days for most cases. These cases tend to be the more difficult cases which often require additional scrutiny because of their destination. Current performance is on target at around 99%.

Our current median processing time is in the order of 13 days.

ECO is striving to reduce bureaucracy and ensure that UK companies do not experience unnecessary disadvantages in relation to international competitors. The most significant step is to develop a strategy to encourage exporters to shift from individual to open licences. By making open licences more attractive and simpler to use, more exporters would use them and thus need to apply less frequently for licences. Open licensing already gives the UK an edge over many other countries but they are catching up; the US is seeking to emulate aspects of the UK's open licensing. The open licensing strategy we are developing, with the subsequent roll out of new and simpler products, is aimed at recovering this edge over other nations.

(Responding to CAEC Report Volume II, paragraphs 105, 106 and 109.)

Open General Export Licences (OGLs) are pre-published licences with prescribed terms and conditions. They have been created to recognise the reduced risk in the export of less restricted goods to less sensitive destinations. To use a particular OGL, exporters need to satisfy themselves that it meets their business needs and that they can comply with the terms and conditions. This is dependent on the individual exporter's circumstances and we may recommend that exporters consider an OGL as a simpler alternative to a SIEL or an OIEL. Advice to exporters is based on an assessment of the information given by the exporter. ECO emphasises that exporters ensure they can comply with all conditions. We signpost additional guidance and on line tools to assist them. The text of the standard letter that we use is included below.

"After initial assessment it seems that you may be able to export the items on your application (as listed below) using the following Open General Licence (OGL) ( Insert OGL Name )

( Insert goods description from SPIRE ) - rated ( Insert rating from SPIRE )

Our suggestion that this OGL may be applicable is based generally on goods rating, end-user and destination; no other conditions are taken into consideration by ECO when making this suggestion. Therefore you should look at the OGL carefully to determine for yourself whether your items are within its scope, and that you can meet any other conditions of the licence.

ECO provides the online 'OGEL Checker' tool designed to help exporters decide if they might be able to use an OGL by checking each of the licence conditions: http://www.ecochecker.bis.gov.uk.

Full details of all the OGLs that are currently available are found on our website via https://www.gov.uk/open-general-licences-an-overview

Please note that your SIEL application will not be progressed until we hear from you on this matter. If we do not hear from you through SPIRE within 10 working days, we will withdraw your application.

If you are unable to use the OGL, can you please explain why not as this may help in the development of future OGLs to try to make them more suitable to the needs of exporters."

The correct use of OGLs can save exporters the time and cost of applying for multiple SIELs, although there may be added compliance costs. In addition ECO estimate that OGLs significantly reduce the number of SIELs processed annually, thus enabling licensing resources to be targeted at the higher risk export licence applications.

ECO is not aware of the particular case cited by EGAD where an exporter questioned a 'No Licence Required' assessment. We make in excess of 18,000 licence assessments per annum and employ rigorous processes and checks to eradicate errors; we have not detected any deterioration in standards. However, we continue to review our processes and procedures to drive out errors and we will develop further guidance and training for exporters to help them to improve licence applications.

(Responding to CAEC Report Volume II, paragraphs 107-108.).

ECO's resources are primarily focused on turning around licence applications in line with published targets. While we aim to respond to Control List Classification enquiries within 20 working days, this is a non-statutory advisory service and there are other measures we are taking to enable exporters to obtain goods ratings in a timely manner. This includes using the online Goods Checker and Control List Classification Search Tool. Exporters can also enhance their understanding of export controls by attending ECO training programmes. The feedback from exporters attending these programmes is excellent. In addition, each time an exporter applies for a SIEL, we provide an attachment to the licence listing all the control entries for goods appearing on that licence, thereby further increasing the exporter's knowledge of the 'licensability' of their goods. We are also strengthening our links with trade associations to extend business outreach activities. (Responding to CAEC Report Volume II, paragraph 110.)

The Committees' Recommendation:

The Committees recommend that the Government in its Response to this Report:

The Government's Response:

b) BIS, in line with other Government Departments, has cut its budget to help the aim of reducing the deficit. The Export Control Organisation has not been affected disproportionately. Resources have not been reduced in the last year and there are no plans to do so in the year ahead. ECO is meeting its targets. Further improvements will involve reviewing processes, prioritising the workload and enhancing the functionality of the SPIRE system. In some areas, notably in the FCO, export control resources have increased and this has had a positive impact on long outstanding casework.

The Committees' Recommendation:

The Committees recommend that the Government in its Response to this Report:

The Government's Response:

c) We recognise that the focus on targets is not enough. We need to become a more customer focused organisation and will concentrate our service improvements in a few key areas alongside our focus on targets:

A. Improving our relationship with clients who experience difficulties and responding more quickly to their needs.

B. A stronger focus on raising business awareness in partnership with other parts of Government and a new partnership with business organisations.

C. Ensuring export controls are factored into export campaigns right from the start.

D. Providing greater transparency in the way the controls operate.

E. Cutting bureaucracy by creating an attractive and simple open licensing offer to UK exporters.

The Committees' Recommendation:

The Committees recommend that the Government in its Response to this Report:

The Government's Response:

92. The performance target for the processing of SIELs is to process 70% of applications within 20 working days and 95% within 60 working days. (A new target of 99% licence applications processed within 60 working days was introduced in July 2013.)[82]

Table 1: Standard Individual Export Licences (SIELs) Processing Performance

2013 2012 2011 2010 2009 2008 2007 2006

Number finalised 13,726 16,876 15,734 16,723 14,187 12,729 9,647 -

Finalised within 20 working days 77.8% 71% 66% 63% 73% 73% 79% 82%

Finalised within 60 working days 97.8% 95% 94% 94% 94% 95% 98% 99%

Source: United Kingdom Strategic Export Controls Annual Report 2012, United Kingdom Strategic Export Controls Annual Report 2011, United Kingdom Strategic Export Controls Annual Report 2010, United Kingdom Strategic Export Controls Annual Report 2009, United Kingdom Strategic Export Controls Annual Report 2007, HC Deb 11 June 2014, col 214W.

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. Of the 22 appeals decided in 2012, none fell in this category.[83]

Table 2: Appeals Performance

2013 2012 2011 2010 2009 2008 2007 2006

Appeals finalised within 20 working days 7% 23% 26% 51% 68% 69% 61% 58%

Appeals finalised within 60 working days 39% 60% 71% 93% 91% 90% 100% 83%

93. Following publication of the Government's United Kingdom Strategic Export Controls Annual Report 2012 the Committees wrote to the Government asking three questions about the Export Control Organisation - performance. The questions and answers were as follows:

The Committees' question:

Why do performance targets not apply to applications for licences to export goods that are subject to control solely because of United Nations Sanctions or to appeals in relation to such applications?

The Government's answer:

Licence applications and appeals relating to sanctions are often particularly complex and therefore difficult to assess, especially where it is necessary to determine whether the proposed export is subject to an exemption in the sanctions. In addition, in many cases it is necessary to seek prior approval from the relevant UN sanctions committee before granting the licence and this adds to the time required to process the licence application or appeal.

The Committees' question:

In Table 4.10 what are the reasons for the deterioration of appeals finalised within both 20 working days and 60 working days over the period 2010-2012?

The Government's answer:

Appeals performance in 2012 was affected by the same factors that led to the reduction in performance from 2010 to 2011 and described in the Government's response to the Committees' questions on the Government's Annual Report for 2011.

The Committees' question:

What actions are being taken to achieve the target of processing 60% of appeals within 20 working days (currently 23%) and 95% of appeals within 60 working days (currently 60%)?

The Government's answer:

We are working to improve response times to appeals against a backdrop of increasing numbers of export licence applications and finite resources. We have recently refocused resources to bring about an improvement.[84]

94. In the Westminster Hall debate on 21 November 2014, Michael Fallon, BIS Minister, stated that until recently the ECO had been working to two main targets; a primary target of 70% of SIEL applications to be processed within 20 working days and a secondary target of 95% of these applications to be processed within 60 workings days. He informed Members that the year-to-date performance up to the end of October 2013 was 80.2% on the primary target. The BIS Minister said that following industry concerns he had announced a new secondary target of completing 99% of applications within 60 working days.[85] In the Oral Evidence session held on 18 December 2013, Edward Bell, Head of ECO, BIS, stated that, at that time, ECO was at 80% on the primary target and 98.5% on the secondary target.[86]

95. In its Written Evidence the Export Group for Aerospace and Defence (EGAD) stated that it was working to inform exporters better on how to complete licence applications more thoroughly and to ensure all necessary data was provided at the initial stage, in order to reduce delays in the process and prevent, what it considered to be, the current unacceptably high level of returned application and delayed shipments.[87]

96. When EGAD was asked during the Oral Evidence session in November 2013 whether the deterioration in the time taken to process appeals (see table 2 above) was of concern, David Hayes, Chairman of EGAD, replied: "[…] yes, although the number of appeals as an absolute figure was low." He continued by stating that it was a question of resource. He believed that with a finite amount of resource if the focus was on other activities, such as meeting the targets for SIEL processing, other areas, such as appeals processing, would suffer.[88] Edward Bell, Head of ECO, told us on 18 December 2013 in the Oral Evidence session that:

When questioned further about the reason for the declining trend in the processing of appeals over the last five years, Edward Bell replied: "I think this is about the resources." He continued: "I think because the focus has been elsewhere in terms of the processing time for licences. We do need now—we will do it urgently—to focus on appeals." Mr Bell said:

These do tend to be complex cases. They will often involve the review of classified information, so we have to ensure that the people taking the appeals have the appropriate clearances. I think we just have to hold up our hands and say, "Look, it has not been working. We need to improve the performance and we will improve the performance in the coming year".

When pressed further about whether, as claimed by EGAD, it was a lack of resource, Mr Bell said: "I think it is a combination of factors. I think it is about the complexity of the cases and ensuring that we have sufficient people who have appropriate security clearance to take those cases. So it is not just about resources, but resources are certainly a feature. The question is security clearance, rather than the number of people available to do the work."[90]

97. Prior to the evidence session with the Foreign Secretary on 8 January 2014 the Foreign Secretary wrote to the Chairman of the Committees. The relevant text relating to the ECO performance was as follows:

The Government is committed to managing all transfers of strategic goods responsibly, to ensure that none fall into the wrong hands. At the same time, we support a responsible defence and security industry that helps meet the UK's legitimate needs as well as those of other states. The sector is important for the economy, employing over 600,000 and generating exports of over £11.5 billion in 2013. Export controls provide a vital service to the industry by ensuring that its legitimacy is not compromised by its products being misused.

As a further improvement to that service, in July we raised one of the already-tough targets for processing licence applications from 95% to 99% within 60 working days; we are currently achieving 98.4%. Over 17,000 applications were processed during 2013, a figure that continues to increase by some 5% each year.

98. The Chairman of the Committees submitted two Written Parliamentary Questions (WPQs) requesting details of the processing performance of both SIEL approvals and appeals by ECO for 2013. The answers to the WPQs were as follows:

Exports: Licensing

Sir John Stanley:

(a)

(b)

Michael Fallon:

Sir John Stanley:

(a)

(b)

Michael Fallon:

99. On 19 June the BIS Minister Michael Fallon wrote to the Chairman of the Committees as follow:

I am writing to let you know about a notice we sent to exporters last week. Please see a copy annexed below.

The Department for Business, Innovation and Skills has been migrating to a new desktop computer system. This will bring considerable benefits but while it is bedding in we have some temporary performance problems with the online export licensing system.

We are still handling the majority of licence applications within published target times - and there is no evidence that exporters have any lost business due to slower processing times - but we are keen to keep our customers up to date as some are experiencing short delays. Typically, applications are taking four days longer than in the period just before migration to the new desktop computer system, although more than 80 per cent of applications are being handled within twenty-five working days.

BIS are working hard to rectify the performance issues and a number of technical fixes have been implemented this week. The early signs are that these will put us back on track very soon. In the meantime we have asked exporters to contact our helpline if they are concerned that they may lose export business. We will then prioritise their applications.

Annex

Text of Notice to Exporters

Notice to Exporters 2014/16 - Impact of new computer system on SPIRE licensing service

11 June 2014

The Department for Business, Innovation and Skills has just migrated to a new desktop computer system. Although this will bring considerable performance benefits for BIS and the Export Control Organisation, the migration has had a significant short term impact on the performance and availability of the ECO SPIRE system.

While we are still meeting our licensing performance targets, we are currently experiencing a backlog in processing licence applications and delivering other advisory services. This means that regrettably, in order to prioritise licence applications, we will not be able accept new enquiries for advice about Control List Classifications until further notice. For information about how you can assess your exports please refer to see the GOV.UK guidance https://www.gov.uk/do-your-goods-need-an-export-licence.

Please accept our apology for any delays you are experiencing and bear with us while we work to clear the backlog. If you are in danger of losing export business because of these delays then please contact the ECO Helpline on 0207 215 4594 or email eco.help@bis.gsi.gov.uk and we will strive to prioritise your application. To speed up the process please avoid contacting us about non-urgent cases at this time.

On 27 June 2014 the BIS Minister Michael Fallon wrote further to the Chairman of the Committees as follow:

I am writing to update you on the performance of the online export licensing system, further to my letter on this subject last week.

The technical fixes we have introduced appear to have almost fully resolved the IT problems we faced as our new computer system is bedded in. We have also increased staff resourcing on export licensing, including through weekend working. As a result we are now reducing the numbers of licences subject to delays.

It is currently taking us around 22 days to approve 70% of licence applications, compared to our target of 20 days. But the majority of licence applications are still being handled within published target times and there remains no evidence that exporters have lost business due to slower processing times.

We will continue to do all we can to restore service levels to their target rates as soon as possible. We will also keep exporters updated and continue to advertise that exporters can contact our helpline if they are concerned that they may lose export business, so we can then prioritise their applications.

100. I propose that the Committees conclude that the substantial increase in scrutiny by FCO Ministers of arms export licence applications — up from 39 in 2010 to over 300 in 2013 — is welcome.

101. I propose that the Committees recommend that the Government states in its Response the reason for the serious deterioration of the Export Control Organisation's performance on appeals in 2013 and the specific steps the Government is taking to ensure that ECO meets its 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.

102. I propose that the Committees recommend that in its Response to this Report the Government states what specific steps it has taken to improve the Export Control Organisation's performance on appeals and what have been the actual results.

103. I propose that the Committees further recommend that the Government states in its Response whether it remains its policy "to develop a strategy to encourage exporters to shift from individual to open licences", and, if so, what assessment it has made of the risk of an increase in breaches of the Government's arms export control policies as a result.

REVIEW OF ECO

104. The Committees' previous scrutiny of the Government's review of the ECO can be found at paragraphs 113-115 in Volume II of the Committees' previous Report (HC 205), and the Committees' Recommendation at paragraph 50 of the Report.

105. The Committees' Recommendation on the Export Control Organisation review in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Recommendation:

The Government's Response:

106. Following publication of the Government's United Kingdom Strategic Export Controls Annual Report 2012 the Committees wrote to the Government asking a question about the review of the Export Control Organisation. The question and answer were as follows:

The Committees' question:

With regard to the Government's updated website, what are the specific usability improvements that have been put in place, what are the ones in the pipeline in addition to better navigation, and when will the additional facility to identify which Open General Trade Control Licences may be applicable be in place?

The Government's answer:

The Government Digital Service (GDS) within the Cabinet Office is responsible for transforming government digital services including the design and development of GOV.UK. Further information about the projects involved is available on the Cabinet Office website http://digital.cabinetoffice.gov.uk/projects/

The Export Control Organisation (ECO) is working closely with GDS to refine and condense the amount of export control policy and licence application information to further improve search results. ECO has recently launched: https://www.gov.uk/government/organisations/export-control-organisation to enable exporters to readily establish whether a licence is required and how to apply. This ECO Landing Page web address will feature on all future ECO promotional material.

107. In its Written Evidence to the Committees' inquiry in 2013 EGAD had said that it had been "deeply concerned" that the Businesslink.gov.uk website (on which the ECO web pages resided) was to be replaced by the new cross-government website GOV.UK. It stated that this would be the third "radical change" to the ECO website since 2008 and it was concerned that companies who had just familiarised themselves with the current website would be faced with a new system. EGAD considered that this would be an additional burden on both ECO staff and industry. EGAD believed that the key issue for industry would be how easy those unfamiliar with the system would find it to search for the export control-related information they might be seeking.[98]

108. When the Committees asked David Hayes, EGAD, at the Oral Evidence session on 4 November 2013, whether his earlier expressed fears of the new website had been allayed or had been justified he replied "a little of both". He continued:

His colleague, Susan Griffiths, Head of Export Control UK, MBDA UK Ltd, added:

100

109. When the Committees questioned the Business Secretary about the ECO website at the Oral Evidence session on 18 December 2013 he said: "There have been a whole lot of issues around the establishment of gov.uk. I think it is now in a much better state than it was when it was originally launched, but I think we are aware that there has been some dissatisfaction in the process."[101] Chris Chew, Head of Policy, Export Control Organisation, BIS, added:

102

110. I propose that the Committees recommend that the Government states in its Response to this Report what specific steps it has taken, and will be taking, to make the ECO website more user-friendly to exporters.

TRANSPARENCY OF ARMS EXPORT LICENSING

111. The Committees' previous scrutiny of the transparency of arms export licensing can be found at paragraphs 116-123 in Volume II of the Committees' previous Report (HC 205), and the Committees' Recommendation at paragraph 51 of the Report.

112. The Committees' Recommendation on the transparency of arms export licensing in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Recommendation:

The Committees recommend that the Government, in fulfilment of its transparency policy on arms exports, sets out in its Response to this Report:

a) whether a facility is now in operation on SPIRE to obtain additional information on arms exports and, if not, when it will be;

b) whether the Government has decided on the mechanism for making this additional information public, and, if not, by what date it intends to do so; and

103

The Government's Response:

a) and b) As set out in the Business Secretary's letter to the Chairman of the Committees of 30 July 2013 [see paragraph 114 below], users of Open General and Open Individual licences will be required to make reports on their usage of those licences on an annual basis. They will provide information on the destination country, type of end-user, and the number of times the licence has been used for that country/end-user type. The revised reporting requirements will apply from 1 January 2014 and the facility to collect this information will be available on SPIRE from that date. The first year's data will be published in 2015 via the 'Strategic Export Controls: Reports and Statistics' website. In determining the detail of how the reporting will operate, the Business Secretary has sought to strike a balance between providing greater transparency and ensuring that Government does not place an unnecessary burden on businesses seeking to grow through exports.

c) Government's position on an "Independent Reviewer" - including the reasons why we are not, at this time, taking forward this specific proposal - remains as explained in the Business Secretary's letter to the Chairman of the Committees of 21 January 2013.[104]

113. On 7 February 2012 the Business Secretary, Vince Cable announced by a Written Ministerial Statement (WMS) that all open export licences would require the exporter to report periodically on transactions undertaken under these open licences and that the Government would publish the information.[105] On 13 July 2012 the Business Secretary issued a further WMS on this subject. The WMS stated that the data on the usage of open licences would include a description of the items exported or transferred, the destination, value and/or quantity, and some information about the end-user. The data would be published in aggregated form quarterly and annually.[106] A Notice to Exporters was issued on 1 July 2013 stating that the Transparency Initiative would be slightly delayed, but made no mention of any changes in what information would be reported upon or the frequency of reporting.[107] However, on 18 July 2013 the Secretary of State for Business, Innovation and Skills, Vince Cable, stated in the House: "I have none the less established that we should dispense with some procedures relating to quarterly reporting, and we will do so."[108] This was followed by a Notice to Exporters issued by ECO on 31 July 2013 stating that: "the Secretary of State announced to Parliament on Thursday 18 July 2013 that reporting requirements on the use of Open Licences under the Transparency Initiative would be scaled back significantly".[109]

114. On 30 July 2013 the Business Secretary, Vince Cable, wrote to the Chairman of the Committees to update the Committees on a number of issues prior to the release of the Government's official response to the Committees' last report (HC 205). The section of the letter relating to the Transparency Initiative was as follows:

Transparency Initiative

This Government is committed to greater openness and transparency as this provides the means for Parliament and the public to hold us to account. At the same time it is important that we do not impose unnecessary burdens on business or put UK companies at a disadvantage over foreign competitors. In making the final preparations for the launch of the Transparency in Export Licensing Initiative it was clear to me that we had not struck the right balance between these two objectives. As I told Sir Bob Russell MP in the house on 18 July "I have ...established that we should dispense with some procedures relating to quarterly reporting and we will do so."

110

115. Following publication of the Government's United Kingdom Strategic Export Controls Annual Report 2012 the Committees wrote to the Government asking two questions about transparency of arms export licensing. The questions and answers were as follows:

The Committees' question:

The Government's Report, published on 12 July 2013, states: "It is intended that the first reports of open licence usage would be published, in line with standard practice, 3 months after the end of the Quarter to which they relate, i.e., October 2013." However, on 18 July the Secretary of State for Business, Innovation and Skills, Vince Cable, stated in the House: "I have none the less established that we should dispense with some procedures relating to quarterly reporting, and we will do so." This was followed by a Notice to Exporters issued by ECO on 31 July 2013 stating that: "the Secretary of State announced to Parliament on Thursday 18 July 2013 that reporting requirements on the use of Open Licences under the Transparency Initiative would be scaled back significantly". Why did the Government announce in the House of Commons on 18 July a less transparent policy on open licence usage than that set out in its Annual Report published 6 days previously?

The Government's answer:

Plans are reviewed regularly to ensure that we have the right balance between the benefits of greater transparency and minimising the burdens on business. In making the final preparations for the launch of the Transparency Initiative we reviewed its scope and the potential for it to impose unacceptable burdens on business. The original proposals did not strike that balance and, as soon as this was established, a statement was made in the House on 18 July. This statement superseded any previous statements made.

Although the annual report was published in July 2013 it is intended to be a report of the Government's strategic export control policy and practice during the 2012 calendar year. Occasionally it will be appropriate to make reference to events in 2013, such as the adoption by the UN of the Arms Trade Treaty; however these references will always be the exception rather than the rule. The statements in the 2012 Annual Report regarding the Transparency Initiative are a true reflection of the Government's actions and intent during 2012. In any event, the final version of the annual report was cleared by Ministers at the end of June and submitted to the publishers on 4 July 2013. This was the cut off point for making changes to the report and still ensuring we laid it in Parliament before summer recess.

The Committees' question:

Will the Government make public the same information relating to standard licence usage as it now going to do for open licence usage?

The Government's answer:

111

116. UK Working Group (UKWG) expressed "alarm and dismay" at the Government's announcement to "roll back from a number of significant commitments it had previously made in the field of transparency in export licensing". It informed the Committees in its Written Evidence that in a face-to-face meeting between Government officials and UKWG on 11 July officials had confirmed that the implementation of the Conclusions of the Transparency Initiative, announced by the BIS Secretary of State in his Statement on 13 July 2012, was proceeding as planned. UKWG continued in its submission to say:

This continuing failure to provide information on the volume or value of UK exports of controlled goods under specific open licences means that Parliament and the public will continue to be deprived of access to key information on arms transfers that the UK Government was, until recently, prepared to collect and disclose. Moreover, it is difficult to understand why the Government itself no longer wishes exporters to provide regular information relating to exports and transfers under open licences when timely access to such information could assist the Government in making informed decisions on future licence applications.

112

113

UKWG said that "serious questions must be asked as regards the process that resulted in the decision to abandon so much of the proposed changes, particularly given the published responses from the defence industry and that significant time and resources were clearly expended within Government in order to deliver greater transparency."[114]

117. When UKWG was questioned by the Committees on 4 November 2013 about the outcome of the Transparency Initiative Roy Isbister, Team Leader, Small Arms and Transfer Controls, Saferworld, said that UKWG was "disappointed by the outcome of this whole process and by the way that the process has been managed." He said that he did not understand how the change in the information that would be published had happened. He informed the Committees that a Freedom of Information request had been submitted by Action on Armed Violence asking what further contact there had been with industry on this subject and that the Government had replied that their records had been searched and that there was no record of correspondence or e-mails on this. He added: "A transparent process was producing a significant improvement in transparency, but the process disappeared behind closed doors and, all of a sudden, the transparency of the outcome has disappeared. We would like to know why." He concluded by saying that the information that would be entering the public domain is basic to standard inventory control, so it is not that industry would not have this information. It is required to make it available to the Government in the event of an audit, so it is hard to understand where things have gone wrong."[115]

118. The Export Group for Aerospace and Defence (EGAD) stated in its Written Evidence that it was initially positive about the proposed scope of the information that would be published under the Transparency Initiative. However, it expressed its unhappiness that industry was being asked to pay the cost of providing duplicate information "due to the Government's inability to modify and interrogate effectively the information that it already has on its own IT systems.[116] When questioned in the Oral Evidence session on 4 November 2013 whether EGAD had been consulted on the change in reporting requirements David Hayes, Chairman of EGAD, said that he was not aware that EGAD had been consulted on the change from quarterly to annual reporting. He said that a number of companies had been involved in testing the SPIRE system, "but at no stage was it proposed to us that these things would change."[117]

119. In the Westminster Hall debate on the Committees' 2013 Report Ann McKechin MP said she was "concerned and severely disappointed" at the decision to roll back on the requirement of exporters to report on the volume and value of open licence transactions. She added that she was astonished that the Government had taken direct steps, at short notice, to "close down debate and scrutiny based on the flimsy claim that it is too burdensome on industry, for which there is no evidence from the industry. [...] Such an excuse just will not wash, given the level of public debate and the need for greater, not less, transparency."[118] In response the BIS Minister, Michael Fallon, said that:

We remain committed to greater openness and transparency in licensing as that provides the means for Committees, the House and the public to hold us to account. At the same time, in generating more information for disclosure, we should not create unnecessary red tape for businesses.

In the most recent initiative, we have sought to increase transparency by requiring exporters to provide us with information about their export and trade activity under certain open licences. While the final preparations were being made for that, it became clear that we had not struck the right balance between the twin objectives of increasing transparency and avoiding unnecessary bureaucratic burdens.

119

120. In a follow-up letter to the Westminster Hall debate, Michael Fallon, the responding Minister, wrote the Chairman of the Committees about the Transparency Initiative as follows:

Regarding the Transparency Initiative the Hon. Member [Ann McKechin] asked:

"Where is the evidence that exporters in the United Kingdom have said at any point that they will take their business elsewhere?"

120

121. When the Business Secretary, Vince Cable, was asked at the Oral Evidence session on 18 December 2013 about the Transparency Initiative he said that; "Our starting point is that we should have as much transparency as possible in the process". In explaining the changes to the amount of information that would now be published he stated:

121

The Business Secretary added:

122

When it was put to the Business Secretary that people who would have expected to have been consulted about the changes to the timing and details of the information to be published, and who might have had some input, were not, he conceded: "That is a fair point."[123] Edward Bell, Head of the Export Control Organisation, BIS, said: "There was certainly a public consultation and companies, trade associations and NGOs responded to that. That public consultation led to the original proposals. Subsequent to that, there were certainly strong representations from trade associations and companies [...]" He added:

I think we ought to have a look at this once current arrangements, which were announced by the Secretary of State in July, have been in place and have been bedded in, partly, to ensure that the IT works properly. To make reporting and additional reporting work, it is important that the IT is robust and it is simple for companies to report.

124

122. The Business Secretary wrote to the Chairman of the Committees on 3 February 2014. The section of his letter referring to the Transparency Initiative was as follows:

125

123. I propose that the Committees conclude that the Government failed to discharge its consultation obligations satisfactorily before making a significant change of policy on the transparency of arms export licensing with the Business Secretary's decision in 2013 that the users of Open General and Open Individual Licences would be required to report on their usage of those licences only on an annual, rather than on an annual and quarterly, basis as previously stated on 13 July 2012.

124. I propose that the Committees recommend that the Business Secretary provides his promised update of his review of the reporting requirements under the Government's Transparency Initiative before his next evidence session with the Committees, which the Committees plan to have this coming Autumn.

Powers to create new categories of export licences

125. The Committees' previous scrutiny of powers to create new categories of export licence can be found at paragraphs 124-128 in Volume II of the Committees' previous Report (HC 205), and the Committees' Conclusion and Recommendation at paragraph 52 of the Report.

126. The Committees' Conclusion and Recommendation on powers to create new categories of export licence in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Conclusion and Recommendation:

126

The Government's Response:

The Government does not accept the Committees' Recommendation.

127

127. I propose that the Committees continue to conclude that Article 26 of the Export Control Order 2008 enabling the Secretary of State to create new types of arms export licences without Parliamentary approval is unsatisfactory and could be used in a way that would significantly diminish the ability of Parliament to scrutinise the Government's arms export policies. The Committees recommend that the Government should amend the Export Control Order 2008 accordingly.

128. I propose that the Committees recommend that the Government in its Response to this Report lists since the Export Control Order 2008 came into effect the individual licences and the general licences that have been created under Article 26 stating in each case:

a) the date the licence was created;

b) the reason for its creation;

c) to whom it has been granted; and

d) what goods were authorised to be exported under each licence and to whom.

Priority Markets for UK arms exports

129. The Committees' previous scrutiny of Priority Markets for UK arms exports can be found at paragraphs 129-131 in Volume II of the Committees' previous Report (HC 205), and the Committees' Conclusion at paragraph 53 of the Report.

130. The Committees' Conclusion on Priority Markets for UK arms exports in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Conclusion:

128

The Government's Response:

The Government questions the Committees' conclusion. It has confidence in the UK's thorough and robust export licensing system to distinguish between exports for legitimate defence and security purposes, and exports which pose unacceptable risks to human rights.

129

131. On 17 April 2014 the Business Secretary, Vince Cable, wrote to the Chairman of the Committees on Arms Export Controls and the Chairman of the Foreign Affairs Committee informing them of the UKTI DSO's priority markets for 2014/15. The text of the letter was as follows:

In view of the previous interest of the Committees on Arms Export Controls and Foreign Affairs Committee, I am writing to advise that the UK Trade and Investment Defence & Security Organisation (UKTI DSO) has completed a review of priority markets for 2014/15, consulting Ministers and officials from relevant Whitehall departments.

The review concluded that the list should be as shown at Annex A. This includes a brief explanation of why each country is included in the list.

I should explain that the identification of DSO priority markets is an administrative tool to allow DSO to focus its efforts better to help UK companies export in the increasingly competitive Defence and Security Sectors. The purpose of the exercise is to serve as an indication to UKTI DSO and industry of those countries where there are significant, addressable opportunities for UK exporters to win business orders. The list itself has not been adjusted to take account of export licensing and other restrictions that limit export potential.

130

131

Annex A

Recommended List of DSO Priority Markets 2014/15

Market	Summary of Reason for Inclusion
Australia	Significant market with opportunities in defence & security sectors coupled with increasing defence and security collaboration. Important route into other markets in Asian region.
Bahrain	Large single Air sector prospect, although no additional significant opportunities.
Brazil	Growth market for UK defence security exports. Opportunities for industrial defence partnership. Opportunities arising from the Olympics and Cyber Security capacity building.
France	Inward investment opportunities in all DSO sectors. Potential to be UK's key collaborative defence manufacturing partner in Europe.
India	Large and growing market for UK all defence and many security sector exports. Potential Disaster Relief market interest. UK agreed to transfer technology in 2013 (subject to our international obligations) and widened the scope of our exports market. Opportunity to collaborate with India on research to produce military equipment.
Indonesia	Important market for UK defence exports. Still has significant opportunities and high demand for DSO support from UK companies.
Japan	Large market for both defence and security. Third largest market for UK security exports. High demand from UK industry for DSO support. Relaxing of Japan's arms export policies enabling greater opportunities for international collaborative projects. Opportunities arising from the Olympics.
Kingdom of Saudi Arabia	Largest market for UK defence exports. Still has significant opportunities and high demand for DSO support from UK companies.
Kuwait	High value G2G[132] Security programme.
Malaysia	Significant G2G potential for high value opportunities in the defence Air and Sea sectors. High demand for DSO support.
Oman	Continued export opportunities in support of previous platform sales. Significant new export opportunities across Land, Sea, Air and Security sectors provide large and balanced market for UK exporters. Applications for equipment for use in internal security may require consideration by Ministers.
Qatar	Very large opportunities in defence Air sector. Increasing interest in UK defence and security products and services.
South Korea	Growth market for UK defence exports in the Air and Sea sectors. High demand for DSO support from UK exporters. In Top 10 Security exports market.
Turkey	Growth market for UK defence & security exports with opportunities for industrial defence partnership & further exports targeted by UK companies. Large defence market of regional importance bordering EU.
UAE	Significant opportunities for defence Air and Sea sectors. High demand for DSO support. Large volume of export licences approved.
USA	Largest market for defence Land, Sea and Air sectors. Largest market for Security sector. Key defence partner. Industrial partner and investor opportunities, for both export and inward investment.

The countries added to the 2014/15 were Bahrain and France, while Canada, Libya and Thailand were deleted from the previous list.

132. I propose that the Committees conclude that:

a) the decision of the Business Secretary to write on 17 April 2014 to the Committees with the outcome of the Government's review of Priority Markets for 2014/15 and with an explanation of why each country is included in the list is welcome;

b) the removal of Libya from the list is welcome; and

c) the decision to assess individual EU and NATO member countries on their arms export merits rather than as groups is welcome.

133. I propose that the Committees recommend that the Government states in its Response to this Report why Canada has been deleted from the Priority Markets List.

134. I propose that the Committees further recommend that the Government needs to explain to Parliament and the wider public more fully why Saudi Arabia is listed by the Business Department as a Priority Market for arms exports whilst simultaneously being listed by the Foreign and Commonwealth Office as being a country of major human rights concern, and also why Bahrain has now been added to the Business Department's Priority Markets List notwithstanding the continuing concerns about human rights in that country.

Trade exhibitions

135. The Committees' previous scrutiny of trade exhibitions can be found at paragraphs 132-138 in Volume II of the Committees' previous Report (HC 205), and the Committees' Recommendation at paragraph 54 of the Report.

136. Article 21 of the Export Control Order 2008 states: "no person to whom this article applies shall directly or indirectly … 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."[133]

137. The Committees' Recommendation on trade exhibitions in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Recommendation:

The Committees recommend that the Government states in its Response:

a) whether it agrees that it is of the utmost importance that all defence and security equipment exhibitions licensed or facilitated by UK Government Departments, organisations and bodies do not display, promote or market Category A goods including goods that could be used for torture; and

134

The Government's Response:

a) The Government agrees.

135

138. UK Working Group (UKWG) stated in its submission that it was disappointed to note that, despite several companies having been ejected from recent arms exhibitions in the UK, at no point to date have any of the exhibiting companies been prosecuted for prohibited activities nor, as far as it knows, has this even been seriously considered.This is despite the wording of Article 21 of the Export Control Order 2008 (see above).[136]

139. The biennial Defence & Security Equipment International exhibition (DSEi) was held at the Excel Centre in London between 10 and 13 September 2013. Over 1,300 exhibitors comprising a range of military and security companies took part in the event.[137]

140. On 10 September 2013 the Business Secretary wrote to the Chairman of the Committees with an update on the DSEi. The relevant section of his letter was as follows:

Defence and Security Equipment International (DSEi)

138

141. Human rights campaigners discovered that two companies, the French firm MagForce International and the Chinese company Tian Jin MyWay International Trading, were offering leg irons and electric shock batons in catalogues on display at the exhibition. (Leg irons and electric shock batons are both Category A items.) The UK Government's own website states: "The controls on Category A goods cover 'any act calculated to promote' the movement of such goods with no exemption for general advertising or promotion."[139] It was only after the incident was raised in Parliament by Caroline Lucas MP[140] that the organisers took action, ordering both the Chinese and French companies to dismantle their stalls before ejecting them from the exhibition. Companies at the previous four DSEi exhibitions, in 2005, 2007, 2009 and 2011, were found, by members of the public, to be promoting other Category A goods, such as cluster munitions. (See Ev w134: Annex B of UKWG's submission for a full list of companies advertising prohibited equipment at UK exhibitions from 2005-2013.)

142. UKWG considered that the repeated discovery of companies breaching the regulations around permitted promotional activity showed inadequate compliance checks both before and during the fair by the exhibition organisers and HM Revenue and Customs. It said it should not be the job of civil society or MPs to identify these breaches. UKWG also expressed concern that Rostec (See paragraph 144 below) had been exhibiting at DSEi and questioned what message had been sent by the UK Government about its commitment to the Arms Trade Treaty. UKWG stated that when deciding who could exhibit at DSEi, the UK Government should consider the international obligations and standing of the states in which potential exhibitors are based.[141]

143. The UK Government invited official delegations from 67 countries to DSEi in 2013[142]; of these, eight were from countries that abstained or were absent from the UN General Assembly vote on adopting the ATT and who had not yet signed the treaty.[143] UKWG suggested that a company from any state that had not signed the ATT should be prohibited from attending any UK arms fair. At a minimum, any OGELs issued to allow companies to automatically participate at DSEi should exclude companies originating from non-ATT signatory states.[144] UKWG also called for any state that had not signed and ratified the Cluster Munitions Convention and any company that had not signed a written guarantee that they (or any subsidiary or partner) do not produce cluster munitions or their components to be prohibited from attending future military or defence trade events in the UK.[145]

144. Campaign Against Arms Trade (CAAT), in its Written Evidence to the Committees, highlighted that nine of the UK Government invitees to DSEi 2013 were also on the FCO list of countries with the most serious wide-ranging human rights concerns. These were Afghanistan, Colombia, Iraq, Libya, Pakistan, Saudi Arabia, Turkmenistan, Uzbekistan and Vietnam. Two others on the list, Israel and Russia, had pavilions to display their wares. The invitation list also included Algeria, Bahrain, Oman and the United Arab Emirates. Afghanistan, Turkmenistan and Uzbekistan were new to the list in 2013 while Libya was back, having been omitted from the 2011 invitations. CAAT pointed out that the companies exhibiting at DSEi included Rostec (Russian Technology State Corporation); Rostec owns 100% of Rosoboronexport, the Russian state agency which supplied the equipment to Syria's President Assad.[146]

145. When the Committees asked UKWG about the promotion of banned goods at exhibitions, Oliver Sprague, Programme Director, Military Security and Police, Amnesty International UK, said that there had been "a long-standing track record of failure [of companies] to comply and of companies promoting illegal or banned goods." He said that the promotion of such goods "should have been quite easy to spot" by the authorities. He questioned whether the DSEi trade fair was able to operate within the law. He continued: "I would say, yet again, that the enforcement of the controls has not been good enough. I think that serious questions need to be asked about how the fair is run in future." Mr Sprague suggested that all product brochures should be screened in advance and that "a person whose responsibility is enforcement should be responsible for looking at all the promotional and display materials before they go live in the fair." He pointed out that at every DESi exhibition since 2005 there had been problems with display material.[147] When David Hayes, EGAD, was asked about the banned goods being promoted at DSEi he said:

148

146. When the Business Secretary, Vince Cable, was questioned about companies promoting banned goods at the DSEi exhibition he stated:

149

When asked whether product brochures should be screened before exhibitions Chris Chew, Head of Policy, ECO, commented: "With 1,300 or more exhibitors, that is potentially quite a daunting task. If each exhibitor brought 10 different brochures it would be problematic. It is clear that we need to do more in advance of the show to identify where problems might lie, but I don't think we can say anything other than we need to work harder."[150] His colleague Edward Bell, Head of Export Control Organisation, added:

151

147. When asked whether other sanctions, apart from being ejected from the exhibition, could be applied, the Business Secretary said that if companies had committed a criminal offence then action could be taken. Edward Bell added that the offending material from the DSEi exhibition had been given to HMRC. When asked whether governments should collectively highlight to exhibitors that if they break the rules then legal sanctions could be enforced against them, Chris Chew said that the Government should examine that option in relation to the next exhibition and that the Memorandum of Understanding should be revisited to see whether the Government could reinforce those messages.[152]

148. The Business Secretary wrote to the Chairman of the Committees on 3 February 2014. The section of his letter referring to the DSEi was as follows:

153

149. Caroline Lucas MP asked a Written Parliamentary Question asking "on arms trade fairs, what the specific roles and responsibilities are of (a) his Department, (b) other government departments, (c) Clarion Events and (d) other parties for ensuring compliance with and enforcing the Export Control Order 2008 in respect of (i) the Defence and Security Equipment International arms fair and (ii) an alleged breach of arms control legislation at that arms fair in 2013; and if he will place a copy of the memorandum of understanding between his Department's Export Control Organisation and Clarion Events in the Library. The Business Minster, Michael Fallon replied:

The Export Control Organisation in BIS is responsible for ensuring that Clarion Events make exhibitors aware of their responsibilities in respect of export and trade controls.

Her Majesty's Revenue and Customs (HMRC) are responsible for the enforcement of UK export controls.

The Metropolitan Police are responsible for policing and security at the exhibition.

Clarion Events is responsible for organising the exhibition and making exhibitors aware of their responsibilities in respect of export and trade controls.

154

150. The Independent newspaper, in an article on 22 March 2014, said that anti-arms campaigners had launched a private prosecution against two defence companies for allegedly marketing torture equipment at the DSEi fair held in London in September 2013. The article claimed that the private proceedings had been taken because UK state bodies had failed to act on allegations that laws banning the export and promotion of illegal weaponry had been broken by Magforce International (a French company) and Tian Jin MyWay International Trading (a Chinese company). Despite the fact that details of the alleged offences having been passed on to HMRC six months previously no charges had been brought prior to the expiry of a prosecution deadline.[155]

151. On 16 April 2014 the Chairman of the Committees wrote to the Business Secretary requesting more details about the actions taken, or not taken, by the UK Government in relation to the breaches in displaying arms materials at the DSEi. The text of the letter was as follows:

In its edition of March 22 "the Independent" newspaper carried an article headed "Torture gear' displays at weapons fair backfire". I attach a copy of this article for convenience.

Please could you tell me whether your Department, or any other Government department took specific steps to draw to the attention of the Crown Prosecution Service possible criminal offences committed by Magforce International and Tianjin Myway at the DSEi exhibition in London last year.

If so, please could you tell me what those specific steps were.

If not, please could you explain why no such steps were taken.

I should be grateful for your reply by May 8.

I am copying this letter to the Chancellor of the Exchequer, The Foreign and Commonwealth Secretary and the Secretary of State for Defence.

156

The Business Secretary replied on 6 June 2014. The section of his letter relating to trade exhibitions was as follows:

DSEi trade fair

During the 2013 DSEi exhibition the event organisers, Clarion, found literature that allegedly breached UK export controls on the stands of two companies based overseas (Tianjin Myway International Trading Company and Magforce International). The literature contained pictures of certain Category A goods, in this case paramilitary items including electric shock batons, electric-shock belts and leg irons. Clarion expelled the two companies from the exhibition and the literature in question was confiscated and passed to HM Revenue and Customs.

Simply displaying pictures of Category A goods in a brochure may not necessarily constitute an offence. In order to prove a criminal offence in such cases it may be necessary to prove a link between the display of literature and the eventual movement of the goods between two overseas countries. You will recall that this issue was addressed at some length in my letters to you of 13 February and 26 March 2012.

As you will be aware, HM Revenue and Customs is responsible for investigating potential breaches of UK strategic export controls. HMRC is also responsible for referring cases to the Crown Prosecution Service. I am assured that HMRC fully and properly considered the alleged breaches at DSEi 2013, as they would in any case where potential breaches are detected, or where there are credible allegations of an offence.

In these cases HMRC determined that further action was neither appropriate nor viable, and therefore did not take specific steps to draw this matter to the attention of the Crown Prosecution Service.

157

152. I propose that the Committees conclude that though the Government agreed without qualification the Committees' previous Recommendation "that it is of the utmost importance that all defence and security equipment exhibitions licensed or facilitated by UK Government Departments, organisations and bodies do not display, promote or market Category A goods including goods that could be used for torture", the Government failed to achieve this policy once again at the biennial Defence and Security Equipment International exhibition (DSEi) held in London in September 2013.

153. In view of the self-evident lack of clarity in the present criminal legislation as shown by the Business Secretary's reply to the Committees of 6 June 2014, I propose that the Committees recommend that the Government states in its Response whether it will amend the relevant legislation to make it clear beyond doubt that a breach of the Government's policy "that it is of the utmost importance that all defence and security equipment exhibitions licensed or facilitated by UK Government Departments, organisations or bodies do not display, promote or market Category A goods, including goods that could be used for torture" constitutes a criminal offence.

154. I propose that the Committees recommend that the Government states in its Response whether it will ensure that the Committees are informed of the outcome of the Government's review of the Memorandum of Understanding between Clarion Defence and Security Ltd and the Export Control Organisation as early as possible in January 2015.

Enforcement

155. The Committees' previous scrutiny of enforcement can be found at paragraphs 139-145 in Volume II of the Committees' previous Report (HC 205), and the Committees' Conclusion and Recommendation at paragraph 55 of the Report.

156. The Committees' Conclusion and Recommendation on enforcement in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Conclusion and Recommendation:

158

The Government's Response:

The Government considers that the work undertaken by HMRC, Border Force and the Crown Prosecution Service (CPS) to enforce strategic export controls, is satisfactory and effective. Over the past three years, HMRC and Border Force have continued to deploy resources to enforce strategic export controls, and both organisations work closely together, and with other agencies, to ensure that noncompliance is identified, that all breaches of controls are assessed and appropriate action taken.

In 2012-13 the number of seizures of controlled goods increased by 99% on the previous year, to a total of 280. Additionally, HMRC and the CPS secured three prosecutions on trafficking and brokering offences with sentences totalling twelve and a half years. This brings to seven the total number of arms brokering prosecutions achieved by HMRC and the CPS and we remain one of only two countries in the world - the other being the USA - successfully to prosecute this type of offence. The changing international security environment constantly generates new risks, as do changes in smuggling techniques. As a consequence, HMRC, Border Force and the CPS are always looking to identify what further enforcement or compliance activity may be required, such as strengthening relationships with new international partners, and providing additional educational outreach to exporters.

159

157. Following publication of the Government's United Kingdom Strategic Export Controls Annual Report 2012 the Committees wrote to the Government asking two questions about enforcement. The questions and answers were as follows:

The Committees' question:

What are the reasons why the number of warning letters where breaches of licence conditions were found during visits rose from 45 in 2011 to 101 on 2012?

The Government's answer:

There are a number of reasons why the number of warning letters will vary from year to year, not least the complex nature of compliance audits themselves. It is too early to tell whether the increase is due to a trend of increasing non-compliance. We continue to explore ways of improving our compliance procedures to support businesses that have been found to be non-compliant.

The Committees' question:

Is the increase in the number of seizures of strategic goods in breach of licensing requirements or sanctions and embargoes from 141 in 2011-12 to 280 in 2012-13 due to increased effectiveness of the authorities or to increased attempts to breach the licensing requirements or both?

The Government's answer:

The Government believes this increase is the result of a combination of factors.

- The range of goods in scope has increased steadily over the last few years as a result of the introduction of new sanctions, for example those directed against Iran and Syria, and other new strategic export regulations and restrictions. These developments increase the potential for greater non-compliance through accident (lack of awareness of the new rules) or design. This appears to be supported by the general increase in the number of voluntary disclosures, 'no further action' and warning letters we have issued in recent years, and also a general increase in the number of 'technical' offences we have encountered.

- The increase in results has also been achieved by good strategic analysis by HMRC which has considerably improved the national picture of the most sensitive commodities and ports of highest risk. Expanded training and development of Border Force front line staff has also resulted in heightened awareness of strategic export control risks and increased front-line activity.

160

158. In their Written Evidence Neil Cooper and Gerald Walther of the University of Bradford expressed concern that the Export Control Organisation (ECO) had appeared to have responded to the twin problems of limited staff resources and pressure to meet the 70% target for SIELs by encouraging companies to apply for Open Export Licences. They stated that reports from the defence industry raised concerns about the rigour with which the Open Licensing System was being policed. They provided the following tables showing the results of HMRC visits to open licence holders from 2007 to 2012.

Table 3: Results of HMRC visits to open licence holders

Number of companies and sites holding open licences Number of HMRC visits Number of misuses (% of visits)

2007 1600 (approx.) 587 220 (37%)

2008 1600 (approx.) 675 219 (32%)

2009 1800 (approx.) 836 290 (35%)

2010 1900 (approx.) 821 273 (33%)

Source: Ev w80, table 1.1

Table 4: Results of HMRC visits to open licence holders in 2011

Number of visits % Compliant % Not fully compliant

First time visits 216 70 30

Routine visits 445 73 27

Revisits 59 73 27

Source: Ev w80, table 1.2

Table 5: Results of HMRC visits to open licence holders in 2012

Number of visits % Compliant % Not fully compliant

First time visits 100 70 30

Routine visits 101 74 26

Revisits 99 77 23

Source: Ev w80, table 1.3

Neil Cooper and Gerald Walther point out that that a significant proportion of visits to open licence holders still reveal examples of non-compliance. They also expressed concern that the number of visits has fallen from over 800 in 2009 and 2010 to 300 in 2012. They questioned why, given the levels of non-compliance recorded, the number of visits had fallen and believed it raised concerns about the rigour with which the open licensing system was being policed. It was also noted that despite ECO's commitment to greater transparency recent reports had failed to distinguish between different categories of misuse, and that data on the number of unlicensed shipments discovered during compliance visits had stopped.[161]

159. I propose that the Committees conclude that the Government's confirmation that it will continue to publish details of individuals and companies convicted of arms export offences and the sentences imposed by the courts is welcome, but recommends that the Government in its Response to this Report explains why there were just 3 successful prosecutions for strategic export offences in 2012-13 and 1 in 2011-12 compared with 8 in 2010-11.

160. I propose that the Committees further recommend that the Government states in its Response why HMRC visits to Open Export Licence holders have declined from over 800 in 2009 and in 2010 to 300 in 2012.

161. I propose that the Committees also recommend that the Government should restore reporting on:

a) the number of unlicensed shipments discovered during compliance visits; and

b) the categories of misuse discovered during compliance visits to Open Individual and Open General Licence holders as was done up to and including the Government's Strategic Export Controls 2011 Report.

162. In its scrutiny of the Government's arms exports for the Quarter July to September 2013, the Committees asked the following question:

"Why was an incorporated SIEL to Brazil [via the United States] for components for military training aircraft refused?"

The Government Response was:

"We refused the SIEL under Criterion 7 because we assessed there was a risk that the goods might be diverted within the buyer country or re-exported under undesirable conditions." [The further classified information relating to this licence application given to the Committee cannot be published.]

I propose that the Committees recommend that the Government states in its Response what is the standard wording it uses in its export licence application forms in which all applicants state in writing that the information in their application is accurate, and what are the penalties in current legislation if a licence applicant knowingly includes false information in their application.

Compound penalties

163. The Committees' previous scrutiny of compound penalties can be found at paragraphs 146-148 in Volume II of the Committees' previous Report (HC 205), and the Committees' Recommendation at paragraph 56 of the Report.

164. A Compound Penalty is the term used by HM Revenue and Customs to describe the means by which HMRC can offer an exporter the chance to settle a case which would justify being referred to the CPS for prosecution by means of paying a financial penalty, therefore saving the taxpayer and company time and legal fees.[162]

165. The Committees' Recommendation on compound penalties in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Recommendation:

The Committees recommend that the Government in its Response:

a) states what improvements to the compound penalties system it has identified and when it will implement them; and

163

The Government's Response:

a) HMRC considers that the compound penalty regime could be better publicised in order to help maximise its deterrent effect. HMRC plans to achieve this as part of its ongoing contribution to wider Government outreach to industry. HMRC periodically evaluates the compound penalty system to ensure that it remains effective, proportionate and appropriately deployed. The Government believes that the compound penalty regime continues to play a useful role in the strategic export control enforcement framework.

164

166. I propose that the Committees recommend that the Government states in its Response to this Report:

a) whether there is any authority independent of the Government, such as the Crown Prosecution Service, authorising in the case of each breach of the criminal law on arms export controls the use of a compound penalty instead of a criminal prosecution and, if not, whether the Government will establish one;

b) for what specific breaches of the criminal law on arms export controls HMRC currently allows a compound penalty to be offered;

c) whether refusal of an offer of a compound penalty automatically results in a criminal prosecution, and, if not, why not; and

d) the number of compound penalties offered by HMRC and the total sum paid to HMRC in compound penalties in the latest year for which figures are available.

Crown Dependencies

167. The Committees' previous scrutiny of Crown Dependencies can be found at paragraphs 149-154 in Volume II of the Committees' previous Report (HC 205), and the Committees' Conclusion and Recommendation at paragraphs 57 and 58 of the Report.

168. The Committees' Conclusion and Recommendation on the Crown Dependencies in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Conclusion:

165

The Government's Response:

166

The Committees' Recommendation:

167

The Government's Response:

The Crown Dependencies are not part of the UK but are self-governing dependencies of the Crown with autonomy for domestic affairs. This means they have their own directly elected legislative assemblies, and their own administrative, fiscal and legal systems with their own courts of law. The Crown Dependencies are not represented in the UK Parliament.

With regard to export controls, as a matter of policy the Crown Dependencies choose to align their export controls with UK standards but it is an area within their domestic competence. That said, the Crown Dependencies have a strong working relationship with the UK authorities and as part of that relationship have kept and will continue to keep the UK Government apprised of their standards of export controls and policies in relation to arms.

168

169. I propose that the Committees conclude that they do not accept the Government's view that it would not be appropriate for it to report to a UK Parliamentary Committee any breaches of the UK Government's arms export controls and policies by a Crown Dependency on the grounds that any such breaches fall within the Crown Dependencies' domestic competences because:

a) successive UK Governments have submitted evidence to UK Parliamentary Committees, such as the Foreign Affairs Committee, on matters relating to a Crown Dependency's domestic competence; and

b) the financing of arms export transactions and arms export controls have overseas as well as domestic ramifications.

I propose that the Committees therefore repeat their previous Recommendation that the Government monitors enforcement by Crown Dependencies of the UK Government's arms export controls and policies and notifies the Committees of any breaches.

Combating bribery and corruption

170. The Committees' previous scrutiny of combating bribery and corruption can be found at paragraphs 155-159 in Volume II of the Committees' previous Report (HC 205), and the Committees' Recommendation at paragraph 59 of the Report.

171. The Committees' Recommendation on the combating of bribery and corruption in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Recommendation:

The Committees recommend that the Government in its Response:

a) states the names of the individuals and companies against whom it has taken action under the provisions of the Bribery Act 2010 in relation to their arms export dealings; and

169

The Government's Response:

a) There have been three prosecutions to date under the Bribery Act; none relate to arms exports.

170

172. I propose that the Committees recommend that the Government in its Response to this Report states, since its last Response in Cm8707, the names of any individuals and any companies against whom it has taken action under the provision of the Bribery Act 2010 in relation to their arms export dealings or financing.

International Development

173. The Committees' previous scrutiny of arms exports and international development can be found at paragraphs 160-164 in Volume II of the Committees' previous Report (HC 205), and the Committees' Recommendation at paragraph 60 of the Report.

174. The Committees' Recommendation on arms exports and international development in their 2013 Report (HC 205) and the Government's Response (Cm8707) were as follows:

The Committees' Recommendation:

171

The Government's Response:

172

175. On 24 April 2014 the Chairman of the Committees wrote to the Secretary of State for International Development following up the Committees' Recommendation in their 2013 Report. The text of the letter was as follows:

The Committees in its 2013 Report (HC205) at paragraph 164 made the following Recommendation:

Now that a global Arms Trade Treaty has been adopted, the Committees recommend that the Government states in its Response the outcome of the Department for International Development's consideration of its role in the UK arms export control system.

The Government's Response (Cm8707) was:

DFID is in the process of assessing its role in the Arms Export Control Process. Officials will be submitting advice to Ministers in the Autumn, and will update the Committees as soon as possible thereafter.

173

The DFID Minister, Alan Duncan, replied on 8 May 2014 as follows:

Thank you for your letter of 24 April, to Justine Greening, Secretary of State for International development, about DFID's role in the arms export control process. I am replying on behalf of the Secretary of State.

174

The Chairman of the Committees wrote again to Justin Greening on 20 May 2014 as follows;

I refer you to my letter to you of 24 April about DFID's role in the arms export control process to which Alan Duncan replied with his letter of 8 May.

I am sorry to say that Alan's reply is most disappointing.

Given that Criteria 8 forms part of both the EU's and the UK's Criteria for arms exports, the Committees attach considerable importance to the way in which your Department discharges its role in the UK's arms export controls process. It is therefore a matter of concern that though the Government stated in CM 8707, published last October, that officials would be submitting advice to Ministers last Autumn on DFID's role in the export control process, no such advice had in fact been submitted by the time of Alan's reply to me in May this year.

The Committees will wish to include in their Report on their current inquiry which is now being drafted their scrutiny of your Department's role in arms exports controls. I therefore need to have your promised update no later than 2 June.

175

The DFID Minister Alan Duncan replied to the Chairman of the Committees on 6 June 2014 as follows:

Thank you for your letter to Secretary of State Justine Greening on 20 May 2014. I am responding as Minister responsible for DFID's role in the UK's arms export licencing process, in particular Criterion 8 (C8).

I wish to reassure you that my Department treats the Consolidated EU and National Arms Export Licencing Criteria with the utmost seriousness, and I am therefore pleased to update you on DFID's work on Criterion 8. Officials in my department have conducted a review of C8 in consultation with other government departments. I have recently approved a revision to the methodology for its application.

DFID will strengthen its application of Criterion 8 by:

1. Improving the data and indicators used to calculate the C8 thresholds;

2. Focusing our analysis on the least developed countries and those where C8 is most relevant;

3. Ensuring the cumulative value of licenses to each country is included in our assessment;

4. Involving DFID country offices more closely in decisions on open licences.

An explanation of all these changes is attached to this letter. DFID officials will begin implementation immediately and will review the effectiveness of this revised approach after 12 months. A full report will be annexed to the 2015 UK Annual Review on Arms Export Controls.

Alongside the review of C8, my officials have also looked into whether DFID could formally contribute to the consideration of other criteria. My view is that the expertise required for assessment of these other Criteria already sits within other departments. DFID offices work closely with colleagues from other departments both in London and overseas, and their knowledge is therefore already available informally. DFID will continue to focus on the assessment of Criterion 8.

Annex

Revision to Methodology for Criterion 8 of the Consolidated EU and National Arms Export Licensing Criteria

1. This note provides details of a revision to the UK Government's methodology for assessing export licenses against Criterion 8 (C8) of the Consolidated EU and National Arms Export Licensing Criteria.

"would seriously undermine the economy or seriously hamper the sustainable development of the recipient country."

3. The 2007 UK Strategic Export Controls Annual Report outlined the current methodology and data necessary to take decisions on the application of Criterion 8 (Annex C of the report). Following a review of the application of Criterion 8, a revision to this methodology is proposed for three main reasons:

a) The cumulative impact of exports to a single country is not captured;

b) 'Open' licences are sometimes approved which allow exporters to export as much as they want to a defined country;

c) More countries are considered than necessary, including many which are unlikely ever to raise concerns under C8.

4. The revision to the methodology is detailed below, the core of which remains the same, with four changes designed to strengthen the process.

How the Methodology Currently Operates

5. The methodology laid out in 2007 addressed exports to all IDA-recipient countries. A baseline threshold of 2.5% of combined public health and education spending in the recipient country is calculated and adjusted according to a series of development indicators (see Table 1 below). DFID views any export license application above this adjusted threshold for a more detailed examination. DFID may also ask to see applications in respect of other countries ad hoc.

6. Four changes will be made to improve the robustness of the process:

I. Improving the data and indicators used to calculate the C8 thresholds.

II. Focusing analysis on the least developed countries and those where C8 is most relevant.

III. Ensuring the cumulative value of licenses to each country is included in the assessment.

IV. Involving DFID country offices more closely in C8 decisions regarding open licences.

I. Alteration to indicators

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8. The data underlying the thresholds will continue to be updated annually, where available, to maintain relevance. The full list of indicators is detailed at the end of this note in Table 1.

II. Focusing analysis on the least developed countries

9. The existing methodology for Criterion 8 involves the consideration of export licence applications for the 82 countries on the World Bank's IDA list. This includes a number of countries where the risk of Criterion 8 concerns emerging is considered very low. By excluding countries considered particularly low risk from the analysis, the revised methodology will allow DFID to focus on licences for fewer countries in greater detail.

10. In order to determine which countries to consider, DFID will undertake an assessment each year of the risk of Criterion 8 concerns emerging for each country, using the indicators in Table 1. Indicators are assigned a binary trigger value, giving each country a score of "1" or "0" for each indicator. Any country that receives a score of 4 or less is considered particularly low risk, and will be removed from the analysis of Criterion 8 for that year. The detail of this assessment is in Table 2 at the end of this note.

11. For 2014, this assessment generates the following list of 47 countries that will continue to be assessed under Criterion 8:

Afghanistan, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Comoros, Cote d'Ivoire, Democratic Republic of the Congo, Djibouti, Eritrea, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Haiti, India, Kenya, Kyrgyzstan, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Nigeria, Occupied Palestinian Territories*, Pakistan, Rwanda, Sierra Leone, Somalia, South Sudan*, Sri Lanka, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen, Zambia, Zimbabwe.

* Countries may be added to the list on an ad hoc basis where deemed necessary, or where the lack of data makes an assessment of risk difficult (as in the case of both the Occupied Palestinian Territories and South Sudan).

III. Ensuring the cumulative value of licences to each country is included in our assessment

12. The existing methodology assesses licences individually against a threshold. Under the revised methodology DFID will also consider licences cumulatively, so as to take into account the impact of all arms exports to a given country rather than of each individual export.

IV. Involving our country offices more closely in C8 decisions regarding open licences

13. Open licences have no financial value attached to them and therefore cannot be assessed against numerical thresholds. They are currently considered by DFID advisers in London, with support from country offices used on an ad hoc basis. Under the revised methodology, open licenses will be considered by both DFID advisers in London and in country (where appropriate and available) in each instance. This will strengthen the assessment of open licenses, incorporating local expertise into the consideration of factors including the nature of the goods being exported, previous licences approved, and the wider risk of Criterion 8 concerns in each country.

Table 1: Updated indicators for adjusted threshold

Indicator	Definition	Trigger	Amber Adjustment	Red Adjustment
CORE DATA FOR BASELINE THRESHOLD
Health and Education spending	2.5% of Health and Education Expenditure	2.5%	-	-
INDICATORS FOR ADJUSTED THRESHOLD
1. Military expenditure	Military Expenditure as a percentage of GDP compared to the low income country average	Red: >2.5% Amber: >2.0%	0.8	0.6
2. Military spending compared to social sector spending	Military expenditure as a percentage of GDP compared to Health and Education spending as a percentage of GDP.	Red: >60% Amber: >50%	0.8	0.6
3. EU or bilateral aid (ODA)	ODA as a percentage of Gross National Income (GNI)	Red: >4.0% Amber: >2.3%	0.8	0.6
4. Public finances (deficit)	Overall public deficit as a percentage of GDP after grants	Red: >5% Amber: >3.5%	0.8	0.6
5. Public finances (revenue)	Recurrent revenue yield as a percentage of GDP	Red: <10% Amber: <15%	0.9	0.8
6. Balance of payments (international reserves)	International foreign exchange reserves in terms of a months' imports	Red: <1.5 months' imports Amber: < 2.5 month's imports	0.8	0.6
7. Balance of payments (trend in int'l reserves)	Downward trend in reserves: if over last year, if reserves at or below 2.5 months' imports	Red: Fall Amber: Same level	0.95	0.9
9. External debt: HIPC ratios	Trends in a country's external debt relative to HIPC sustainability ratios: NPV of debt to fiscal revenue as %	Red: > 250 Amber: > 238	0.85	0.7
8. External debt: credit rating	Institutional Investor Credit Rating	Red: < 15 Amber: < 20	0.8	0.6
10. GNI	Gross National Income per capita PPP dollars	Red: <$1,000 Amber <$1,500	0.85	0.7
11. HDI	UNDP Human Development Index (HDI)	Red: < 0.400 Amber: < 0.500	0.8	0.6
12. Corruption	Whether the country is highly corrupt according to the World Bank Corruption Indicators.	Red or amber: < -1	N/A	0.5
13. DFID	Whether the country has a DFID Country Office in place	Red or amber: Country Office	N/A	0.5

Table 2: Indicators and triggers for country list

Indicator

Trigger

Result

1. Military Expenditure as a % of GDP

Greater or less than 2%

>2% = 1

<2% = 0

2. ODA as % of GNI

Greater or less than 2.3%

>2.3% = 1

<2.3% = 0

3. Military Expenditure as a % of Health and Education Spending

Greater or less than 50%

>50% = 1

<50% = 0

4. Public finances: deficit as % of GDP

Greater or less than 3.5%

>3.5% = 1

<3.5% = 0

5. Public finances: government revenue as % of GDP

Greater or less than 15%

<15% = 1

>15% = 0

6. International foreign exchange reserves in terms of a months' imports

Greater or less than 2.5 months

<2.5 = 1

>2.5 = 0

7. Balance of payments (trend in int'l reserves)

Rise or Fall

<0 = 1

>0 = 0

8. NPV of debt to fiscal revenue as %

Greater or less than 238%

>238% = 1

<238% = 0

9. Institutional Investor Credit Rating

Greater or less than 20

<20 = 1

>20 = 0

10. GNI

Greater or less than $1500

<$1500 = 1

>$1500 = 0

11. HDI

Greater or less than 0.5

<0.5 = 1

>0.5 = 0

12. World Bank Corruption Index

Greater or less than -0.6

<-0.6 = 1

>-0.6 = 0

13. DFID Country Office presence

Yes or No

Yes = 3

No = 0

Notes:

Indicator 13 - DFID country office presence - has been more heavily weighted than other indicators in order to ensure that all DFID priority countries are retained on the list.

[177]

176. I propose that the Committees conclude that it is regrettable that though the Government stated in its previous Response that the Department for International Development (DFID) was in the process of assessing its role in the Arms Export Control Process and that officials would be submitting advice to Ministers in the Autumn of 2013, and would update the Committees as soon as possible thereafter, the Committees did not receive the promised update until 6 June 2014.

177. I propose that the Committees conclude that the decision of the Department for International Development (DFID) to strengthen its application of Criterion 8 ("whether the proposed export would seriously hamper the sustainable development of the recipient country") is welcome.

178. I propose that the Committees further conclude that DFID's undertaking to make a full report in 2015 on the effectiveness of its revised methodology for assessing arms export licence applications against Criterion 8 is also welcome.

179. I propose that the Committees recommend that the Government should state in its Response whether it agrees that DFID, whilst making Criterion 8 its prime focus of involvement in the arms export controls process, should also keep under review being involved formally in the assessments under other Criteria such as Criterion 3 (Internal situation in the country of final destination) and Criterion 4 (Prevention of regional peace, security and stability) given that in a number of countries DFID has more staff present than any other British Government Department.

HC (2012-13) 205, para 47

Back

74 Cm8707, p 9 Back

75 HC (2013-14) 205, para 48 Back

76 Cm8707, p 9 Back

77 HC (2013-14) 205, para 49 Back

78 HC (2013-14) 205, para 49 Back

79 HC (2013-14) 205, para 49 Back

80 HC (2013-14) 205, para 49 Back

81 Cm8707, pp 9-13 Back

82 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 2012, HC 561, p 29 Back

83 HC (2013-14) 561, p 30 Back