Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



Mr Berry

  80. I think four or five years ago the DMA advocated controls on brokering. I think it was in evidence to the Trade and Industry Select Committee, following the Mil-Tech Rwanda scandal, which was about that time. Given that you have argued for controls on brokering and trafficking and there are now proposals in the consultation document, can you advise the Committee how you feel about the Government's specific proposals?  (Major General Sharman) The initial reaction is that we simply do not know enough about what they propose. Our great concern, and I do not think the evidence from the NGOs clarified this for you particularly, is how practical effect could be given to this without criminalising or making impossible the perfectly legitimate business of companies. My worst scenario, on a purely personal basis, is that someone rings me from overseas and asks if I can recommend a UK contractor to supply a particular piece of equipment, and I know there is not one and so I recommend one in, say, Germany. Am I a broker? So, in the end, it will depend hugely on how it is defined. It is also very common practice—in fact, essential in some countries—to employ agents. If the definition is not carefully defined then agents could then be brokers, and the consequence of this could be enormous. The great challenge is to catch the baddies. We all think we know who they are, and we have no difference of opinion with the NGOs at all on what it is we believe they are trying to achieve. But how can that be done in an enforceable and effective way, which will not simply make UK industry uncompetitive and put individuals into impossible positions, is not clear.

  81. Presumably the defence industry and legitimate brokers would have nothing to fear from such an arrangement. Indeed, your association argued for this. I can understand the concerns that led you to argue this. Is your problem with the proposal there essentially one of definition of "broker"?  (Major General Sharman) Yes.  (Mr Salzmann) Definition of brokering and goods covered.  (Major General Sharman) And the goods to be covered. I think, none of us would have the slightest difficulty with it being quite clear that brokering to embargoed destinations—particularly subject to EU and UN embargoes—would fall into that category. If it is extended to non-embargoed destinations, and depending on the scope of the goods that are covered and the definition of "broker", it could be very difficult.

  82. If agreement could be reached there then problems such as administrative burdens, etc, etc would be secondary to the problems you have just identified?  (Mr Salzmann) If clear definitions are provided, yes.  (Mr Saeed) Just endorsing what Alan has said, definition is of the utmost importance because in a company like ours which is a multinational company, where we have offices in the UK and in France and there are marketing people, UK nationals, French nationals, what we are seeking is that we legitimately be allowed to conduct our business. Therefore, the definition is of the utmost importance.


  83. Do you use agents?  (Mr Saeed) Yes, we do use agents.

  84. Do you see them as brokers? Can you create a definition that excludes agents but includes brokers?  (Mr Saeed) We use legitimate agents and they, in turn, deal with people in country. I do not know if that answers your question.

  Chairman: I am trying to think of how the clause can be drafted to incorporate that.

  Dr Starkey: What does a broker do?


  85. What does a broker do that an agent does not, or vice-versa?  (Major General Sharman) Of course, where the export is from this country there is no issue; it will have a licence and as long as the definition does not include the work that goes on before the application or even the granting of licence in order to try to secure the deal (after all, you do not apply for a licence before the deal is secured) then that would suffice. We all know that what we are trying to stop is the unscrupulous trader who will buy Kalashnikovs or even old British equipment from a foreign country and send it to an embargoed country. That is quite clear and that would be, perhaps, a trafficker. So I think an awful lot will depend on the definition. What we also know from our research is that in countries that have attempted legislation—and Germany is a good example here—it has not made any difference.  (Mr Salzmann) It catches the good guys and the bad guys have moved to Cyprus.  (Mr Saeed) If I can give a specific example. For example, the Brazilians do their buying from the Brazilian Naval Commission in Europe and, of course, from our point of view they are the agent. We declare this information to the DTI when applying for the export licence. So perhaps that is where the agent definition comes in.

  86. In fact, what we need to do is to ask the question whether they would be called brokers?  (Mr Saeed) They act for the Brazilian Armed Forces, so they could be buying ships or equipment for the Air Force.  (Major General Sharman) Another issue, I think, is that again because of the very multinational nature of the business, companies will often have imbedded foreign equipment. For example, in relation to Challenger II 40 per cent of it is procured offshore. Clearly, if Vickers have sold Challenger II to Oman and, if there is a country next door to Oman that happens to make a component that is on Challenger II, which is probably imbedded in the ones the British Army have as well, it would be nonsense for Vickers to have to ship a spare component all the way to the UK in order to get a licence to send it back. Yet, will they be guilty of brokering if, rather, on a common-sense basis they arrange to ship simply from the state next door? Again, I doubt if the intention of those who are pushing hard for these controls for human rights purposes would be wishing to catch that, but it complicates the definition even further.

Mr Berry

  87. Given that the Government has been listening to people's views on this issue for a number of years now, was the association consulted in advance of the preparation of this?  (Major General Sharman) Yes, we have had, on this particular issue, yes, substantial opportunity.


  88. How does draft Clause 5 grab you, then, having had this consultation?  (Major General Sharman) I think the point about the whole Bill as it stands is it gives the Secretary of State the most sweeping powers in theory, and until we see the orders and the—

  89. So we need a further consultation period on the whole secondary legislation?  (Major General Sharman) Yes.  (Mr McLaughlin) Undoubtedly, because that is where, as always, the devil will be in the detail. The other point, particularly on brokering, that I would highlight, if I may, is that of the scope of the issue; whether it is just the categories proposed in the draft legislation or whether it will be, as is implied as an option, the whole of the Military List. The scale of company effort required to administer and police that would be quite different at those two extremes.  (Major General Sharman) Scott said that he considered the Government had, for years, under the old laws, been enacting powers way beyond its legal remit. It seems the Bill is quite clever in enacting something which will, basically, allow it to do whatever it likes. We wait to see.

Mr Worthington

  90. The consultation document makes proposals for controls on licensed production overseas but is really quite fluid in what it suggests. It says either through additional end-use conditions on licences granted or through an obligatory contract clause on re-export of goods produced. What are the views of your members on this?  (Major General Sharman) Licensed production is particularly difficult, and interestingly it is one of those things that has, perhaps, changed by nature of the way the industry has changed significantly in the last five years. If I could mention "offset"? It is almost impossible nowadays to sell any equipment, not just defence equipment, to foreign countries without them demanding—as indeed we do ourselves—substantial offset. Invariably that involves licensed production. You simply will not win the business unless you offer a licensed production arrangement, so licensed production is here to stay if the Government wishes the industry to be able to continue to export in any meaningful way. The trick will be to find how to manage this. Licensed production already requires export licenses for the technology transfer and the supply of equipment to carry out the licensed operations. So we found the statement as it is here not really clear enough for us to form a judgment. Quite clearly, again, things to do with the selling on to embargoed countries we have no difficulty with, and controlling dual-use goods, particularly for the creation of weapons of mass destruction—they are all straightforward. It will be the impact of the definition and the additional bureaucracy and delay that it might add to what has become a very routine part of business. It is not a matter of a company licensing someone else abroad to have them make stuff that is undesirable to send somewhere else. That is not the issue. The fact is if Vickers sell Challenger II to Greece the tank will be made in Greece, just as we are making the Apache helicopter here in the UK.


  91. That is not going to be re-exported.  (Major General Sharman) No, but, of course, part of the licensed production will not simply be the assembly of the tanks. There would be Greek companies being invited, perhaps, to make, for argument's sake, starter motors. They might then go into a whole range of Vickers future equipment, including equipment they make in, say, the South African company they now own. It will be quite hard to envisage a practical way and even a respectable way in which you could start to control that activity. Again, it would depend on the definition and scope of what is included.

Mr Worthington

  92. You will have heard the assertion earlier, sitting listening, by the NGOs that as the UK tightens up its regime and the EU does and other people tighten their regime, that unscrupulous exporters are locating production on arms outside the UK and the EU. Do you have evidence of that?  (Major General Sharman) No. Interestingly, the example that they give always on these occasions is the case of Heckler and Koch in Turkey. Heckler and Koch, of course, have to have export licences from Germany, and anyway Heckler and Koch were exporting and had entered into a licence arrangement with Turkey long before they were bought by Royal Ordnance. So I think these things are not at all straightforward. So, no, we have no evidence. We do have evidence of companies that, in frustration at the UK licensing laws, have gone elsewhere, but not in order to break rules. I can give an example: one of our companies, Aardvark, make a mine clearing piece of equipment and they even had difficulty getting licences in order to sell Aardvarks to the Canadians to clear mines in Kosovo, and were told they had to be shipped via Canada before they could have a licence. The company seriously considered moving its production line to Finland where the Finns make a comparable piece of equipment which is classified as agricultural machinery. The end of that situation was that the British Government saw sense and derated the equipment so that it no longer needed a licence. I have no examples of companies that have gone offshore in order to make weapons to sell to countries we would not not want them to be sold to.

  93. If we are talking about not using napalm on our cattle, the definition of "agricultural equipment" is getting broader and broader.  (Major General Sharman) Yes, and most casualties in Rwanda were caused by machetes, which could have been brought under the 1939 Act.

  Mr Worthington: So you are broadly satisfied with what is proposed but you need more detail. What representations will you be making about licensed production overseas?


  94. If I can just supplement Mr Worthington, paragraph 77 on page 20 offers two options. What is your view on that paragraph?  (Mr Salzmann) Based on the initial responses from industry they are totally opposed to Option A. Option B is only marginally more acceptable, but certainly the options which the industry have come up with are that it should be down to the Government to negotiate, government-to-government, a memorandum of understanding with overseas administrations to allow British companies to retain control of certain key items of technology for licensed production arrangements which might be entered into. By that means, if that was done, then the Government would retain control of exports from those licensed production facilities because the British company which retains the control of these key technologies would still have to apply for export licences and then use undertakings to supply those goods to the licensed production facilities.  (Mr McLaughlin) Option A also has a competitive implication if it is introduced unilaterally by the UK—ie, not in conjunction with other EU members—because, other things being equal, if at the front end of any commercial negotiation we are being asked to tie up the person we are trying to do business with with downstream restrictions then my judgment would be that he would go somewhere where he will not have those downstream restrictions to contend with. So I think there is a competitiveness issue in any unilateral introduction of this particular point.

  95. In the case of Rolls-Royce, for example, your major competitor in this field is the United States, who have very much stronger controls—  (Mr McLaughlin) Or the French. They are another competitor.

  96. They have stronger controls. This is not unchartered territory. The United States, for example, have very powerful controls over licensed production and re-export. Have they not?  (Mr McLaughlin) Yes, they have.

  97. What is being suggested is something comparable. Why could you not live with that?  (Mr McLaughlin) Because if it was not EU-wide at the time of its introduction—and I stress my point is only valid if it is a unilateral UK imposition of this particular legislation—then, say, our French competitor, should he so decide would have a competitive advantage, because he is not trying to tie up the licensee with whom he is trying to do business with downstream restrictions, which Option A would require us in the UK to do, he would hold an advantage.  (Major General Sharman) The footnote to that is that our greatest competitor now, besides the Americans, who are in a different league altogether, is not the French but the Russians.

  98. In licensed production?  (Mr Salzmann) And in exports in general.

  99. Mr Saeed, has your company any experience of licensed production?  (Mr Saeed) I cannot recall one, but in the previous company before the acquisition we licensed some goods to be built in India, and the specification offered was of a much lower quality than you would otherwise have sold.  (Mr McLaughlin) May I stress that I am not arguing against licensed production per se, what I am saying is that if it is not part of an international agreement I think there are competitive issues that are wrapped up within the proposed legislation.

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