THURSDAY 3 APRIL 2003

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Members present:

Mr Roger Berry, in the Chair
Tony Baldry
Ann Clwyd
Mr Tony Colman
Mr Bruce George
Mr Gerald Howarth
Mr Bill Olner
Mr Martin O'Neill
Rachel Squire
Sir John Stanley

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Memorandum submitted by the British Defence Manufacturers' Export Licensing Group

Examination of Witnesses

MR MIKE McLAUGHLIN, Head of Government Relations, Rolls Royce Plc, MR DAVID HAYES, Export Control Manager, Goodrich Corporation, MR TIM OTTER, Vice-President, Business Development Smiths Detection, and MR BRINLEY SALZMANN, Exports Director, Defence Manufacturers' Association, British Defence Manufacturers' Export Licensing Group, examined.

Chairman: Good morning and welcome to the Committee. Does any member wish to declare any interests?

Rachel Squire: Yes, Chairman. On the one hand, I can say that I am a member of Amnesty International; on the other hand, largely because of strong constituency interests, I have had a lot of contact with members of the Defence Manufacturers' Association. I have accepted their hospitality from time to time, and some years ago I did do the Industry and Parliament Trust Scheme with British Aerospace.

Chairman

  1. Thank you for your written submission. You make the point in the memorandum that the British defence industry strongly supports the need for export controls. You refer to the need to strike a sensible balance in legislation between control and facilitation of legitimate business. It is pretty obvious from the first page of your submission that you have some grave concerns about this proposal. You use the phrases, "great concerns, disastrous, unworkable, impractical". Would you care to elaborate on these rather immoderate terms and explain how you think the Government can more effectively target illegitimate proliferation without doing damage to our defence industry?
  2. (Mr Salzmann) Certainly when the preliminary legislation came out, and we gave evidence to the Committee in April 2001, we said at the time the devil would be in the detail. Now we have seen the detail, we are concerned about the workability of what is being proposed. We certainly welcome the publication by the DTI of its thoughts and, since that has been published, we have had a number of fruitful discussions with the DTI's officials about the problems which we have identified within the proposal. We would be keen to work with the DTI in trying to address all these to come out, at the end of the day, with a piece of legislation which actually is effective in curbing the irresponsible proliferation activities of people out there. Our concerns are entirely practical on the basis of the workability of what is being proposed. We are concerned that it will have a minimal impact on the activities of those people whom we all want to try and control, and we would agree need to be controlled, whilst having a major impact on legitimate industry.

  3. Could you give me an example? What is the main concern you have from the point of view of business? What is it in these proposals that causes you the most grief?
  4. (Mr Salzmann) It is a lack of definition to a major extent. For instance, to take just one instance, the proposal on trafficking and brokering; if you look at the annex on page G3, sections 4 (1), 4 (2) and 4 (3), you will see that the Government is proposing controls on travelling and working arrangements being entered into. As you go through this from 1 to 3, you are getting further and further away from the actual deal being done. The problem is that if you take the business continuum between normal, general marketing and promotion at one end, which is not export licensable, and the actual contract signature at the other hand, which is, there is no clear delineation and definition in that document as to where along that continuum the trigger point is at which a licence would be required.

    Mr Olner

  5. I wondered whether you can give the Committee any examples as to where it is difficult to distinguish between the market and the promotional activities and what is licensable on the other hand?
  6. (Mr Hayes) I think the difficulty lies in the fact that the orders are quite clear to the extent that normal marketing activity is not subject to control under the new proposals and that entering into a commitment is. If you look at 4.1, 4.2 and 4.3 in succession, it appears that the point at which those provisions take effect is progressively further in advance of the point at which you enter into a commitment, whatever a commitment might be. The definition of "commitment" is itself unclear, and the point at which each of those respective provisions takes effect in advance of whatever a commitment might be is also unclear. To give a specific example would be impossible because we do not know what we are attempting and what is involved.

    (Mr McLaughlin) If I may, I might attempt to give an example that the company that I work for, Rolls Royce, meets not infrequently. For example, as one is having the discussions with potential customers, the subject of offsets may well come up. If you agree in principle to a percentage, or even a fixed number, in terms of values of an offset agreement, what I do not believe is clear from the consultation document is whether that has moved us from marketing to trading and whether therefore a licence is required.

  7. Chairman, at this stage I ought to declare that in a previous existence I was a Rolls Royce employee. I am a Rolls Royce pensioner at this point in time.
  8. (Mr McLaughlin) I was aware of that. You will understand offsets particularly well. That was an illustration of the sort of commitment that the company or companies generally - and it does not just apply to a single company - may wish to make to a potential customer. What is not clear to me is whether that is far enough along the continuum to which my colleague referred to constitute a licensable activity.

  9. Are there any particular areas where technology gets caught in this trap of perhaps requiring a licence? I think we all fully understand that if you are an exporter of a fighter plane, a helicopter or a tanker, you need a licence. Are there any areas that you think are particularly grave or difficult to deal with, particularly on the technology side?
  10. (Mr Salzmann) Possibly in the ethical issue of nuclear and biological chemical warfare.

    (Mr Otter) The basic technologies that we use and are involved in for detecting chemical warfare agents, and indeed detecting biological warfare agents, are standard and available across-the-aboard technologies that you can acquire off the shelf from a medical supplier, for instance, and the same equipment is used for environmental monitoring. You get into all sorts of difficulties about technology that is actually being used for a very sensible application in the defence field but which cannot be exported to cover those other fields.

  11. Could I perhaps probe a little. The Committee will determine its own views on this consultation paper. Obviously you have submitted evidence not only to us but I would imagine to the Secretary of State as well. Could I ask how these proposals configure with similar proposals that other EU countries or other countries globally use?
  12. (Mr Hayes) Certainly, the one which we are most involved in would be the United States controls under the International Traffic in Arms Regulations (ITAR). Conceptually the two are completely different in the sense that the American concept of export control is based on the nationality of the recipient as distinct from the geographical location of the person at the time. These controls are based on the geographical location. Therefore, theoretically, if I were to send an e-mail to a French national in Britain, that would not be an export. If I were to send the same e-mail to an Englishman in France, it would be. Conceptually the two are to that extent incompatible.

  13. What I was trying to establish was whether the British defence manufacturing industry would be under greater shackles with this legislation than other EU competitors or other global competitors. I was trying to get a balance of what is happening in other countries compared to what is contained in here.
  14. (Mr McLaughlin) May I pick up on one point which I think is the underpinning issue? Your question, if I have interpreted it correctly, is about competitiveness. The consultation document provisions regarding intangible transfers certainly I think we collectively would judge may, depending on their interpretation, which itself is a question, well impose an unfair balance in terms of cost, bureaucracy and resource in meeting those recording requirements, in particular the tangible transfers, compared with other regimes, obviously the EU regime and the US regime. There are other dimensions to it but I think the implication of costs on competitiveness is a major one.

    Chairman

  15. Let me come back to this distinction between promotional activity and the commitment to make a deal. Could we leave the issue of offsets to one side. We will return to that in a few moments. It seems to me, looking at it from the outside, that there is a clear distinction between promotional activity on the one hand and the decision to make a deal. Under present arrangements, there is no requirement to have a licence for the former but there is for the latter. In do not quite see how that distinction cannot continue to be maintained relatively straightforwardly.
  16. (Mr Hayes) I think the problem lies in the fact that the controls to which Mr Salzmann referred in 4.1, 4.2 and 4.3 of the Trade Order actually apparently take effect at the various points prior to the commitment being made. It is unclear at precisely what point they would actually take effect and at what point the activity would therefore become licensable.

  17. I have got them in front of me. Basically, certainly the provisions of the order are saying that no person shall do anything to promote, arrange or negotiate a contract, et cetera. It seems to me that it is activity designed to negotiate a contract that this is seeking to constrain. Is that not clear?
  18. (Mr McLaughlin) I do not think it is clear, Mr Berry. I think your question absolutely highlights the issue for industry. We all want to comply with whatever the regulations will say. I think our problem, in part anyway, is that they are not clear. If you were to come along and start a discussion about buying, in my case aero engines - we use the word offset and I know you said we would return to it - if there is an agreement in principle, long before any contract signing were reached, that we will be prepared to have this discussion involving potential business underpinned by agreement in principle regarding offsets, I do not know from the consultation document whether I should have gone for a licence to have that or not.

    Mr O'Neill

  19. You are suggesting that the number of licences which are going to be applied for under the new arrangements is going to stretch your resources somewhat and that there is a danger that the civil servants will be swamped. Could you expand on that because I am a bit unclear as to the scope or the scale of the problem that you have alluded to, in rather florid language, I have to say.
  20. (Mr Salzmann) Defence companies are also looking at the Order and trying to get a grasp of what the potential implications are. In the modern commercial business world, exchange of information by e-mail and so on between companies involved in multinational collaborative projects is a regular occurrence. Engineers love to talk to one another and share information. There is a vast amount of exchange of information which is taking place out there, just in terms of the transfer of technology. Similarly, on the trafficking and brokering side, what is being controlled is involvement in other people's exports. One of our member companies gave us a wonderful example of a schematic representation of a business deal which they had just entered into about three weeks ago. It is not just supplier and customer; it is suppler, customer and all these other suppliers in the supply chain that they have got to do business with who are based all round the world. The UK company is therefore, as it is at the top of this supply chain, going to have to try to apply for trade licences for this activity which is taking place below the surface. We are just very concerned that what could happen is that the export control authorities in this country would be so snowed under with applications from British companies, legitimate and responsible companies, trying to deal with these new proposals that, in terms of trying to spot the illicit arms dealers, it is going to be like trying to spot a snowflake in a blizzard, except that it is even worse because the snowflake will not be there as they will not be applying for the licence in the first place; they will still remain outside the system.

  21. How many applications do your members make in a year?
  22. (Mr Otter) What I tried to do, just for myself, in a two-week travel period was to apply the new regulations and look at the number of applications I would have to make. In one four-day period that I was at an exhibition where we were actually discussing on an exhibition stand trying to enter into particular deals, and they happened to be to support UK forces in the Gulf, I think I had 100 telephone calls, 150 e-mails, 35 faxes and 100 conversations. Because our equipment has to be individually licensed, each one of those would have required a licence. That was down into our supply chain; that was sideways into other suppliers whom we were trying to put equipment into so that it could be delivered to the Gulf; and also back to the UK Government. As I was overseas, in theory the conversation between me and the UK Government would have to be licensable.

  23. What I am trying to get at here is that we are talking about the Government intending to use open licensing for a fair number of -
  24. (Mr Otter) Not for weapons of mass destruction equipment, which requires individual licensing.

  25. With respect, weapons of mass destruction do not constitute the bulk of the arms trade which we are talking about. Let us get a sense of proportion here. The Government has said that there will be between 100 and 150 new individual licences for applications for electronic transfer of military technology and no more than 100 to 250 new individual licence applications under the new trade controls. What do they not know that you seem to know?
  26. (Mr Otter) I think it is the fact that, the way things are drafted at the moment, people will be saying - and we have had this happen and the DTI have said to us - "Well, we are only really trying to scope it and we are not actually trying to define what is going to happen". What the lawyers would say is: "As it is written at the moment, you must apply for that, otherwise somebody could get ten years in jail".

  27. They have afforded themselves a range of figures between 100 and 150 for one category and 100 to 250 for a second category. One would have thought that these sorts of margins were not unreasonable and that if the scoping exercise has not been completed, then we are talking at most at the outer limits of their estimates of about somewhere of the order of 500 additional applications per annum. I am led to believe that it is something in the area of several thousand export applications every year. If we were to take it that it was no more than 4,000, and that is a conservatively low estimate perhaps but even if it were that, and the addition is 400, which is the maximum the Government is talking about, then frankly we are only talking about an increase of 10 per cent. Even then, we do not know what the distribution is between your members because there may be some of your members who will be largely unaffected by this and there will be others who quite correctly may well have a data requirement to openness and to make these applications. Are you not crying "wolf" here?
  28. (Mr Hayes) I think one of the issues, particularly in relation to trade, and look at page G1, is that it refers to "equipment" as a defined term and "equipment" means "both used and unused goods and does not include software or technology". Then if we look at "controlled goods", also on page G1, that means "any equipment specified in Part 1 of Schedule 1" to the Order defined. Effectively that is anything on the military list, which also includes technology. In the definition of controlled goods, the word equipment is not in inverted commas and so you can infer from that that under the Trade in Controlled Goods Order intangible transfer of technology is also controlled because that technology would be covered by Part 1 to Schedule 1 of the Export of Goods Order. The word equipment in that definition is not contained in inverted commas. That may be an error; it may be as simple as that.

  29. The point I am still making is that the advice that you are receiving from the Ministry is that there will be a maximum of 400 more applications. Your document suggests that there is going to be an inundation of Victoria Street, people queuing up with lorry loads of applications being brought in every day, and the whole system being gummed up. Frankly, I think you are running away from reality here. It is not going to be like that at all. You may have a case that any requirement for a greater degree of applications is going to create work, but are you not over-egging the pudding?
  30. (Mr Hayes) We all hope that it is not going to be like that but at the moment we are in an area of considerable uncertainty.

  31. You are uncertain, therefore you exaggerate beyond reasonable belief?
  32. (Mr Hayes) I disagree with that.

    (Mr Otter) I think what people are saying is that because the definition is uncertain, what happens is that the legal advisers are saying, "You have got to, otherwise you will not be in compliance with the law". It is better to be safe rather than sorry; otherwise, if there is any debate and it goes to court, someone ends up being sent to prison. It is not worth taking a risk. You have got to play safe rather than sorry.

    Chairman: There may be some bad drafting here but that can be sorted out. To some extent, I think we are going round the same points. Can we move on?

    Sir John Stanley

  33. As we all know, the timescales imposed in war are totally and utterly different from those in peacetime. The lives of our own servicemen depend on getting equipment and spares et cetera to them in the timescale that they require. You refer to this in a paragraph in your paper, "Support for the UK's Own Armed Forces". You say in your paper, and I will just quote one sentence: "The complete lack of any mention throughout the draft Secondary Legislation of the complicated issue of 'Crown Exemption' could, if not addressed by the Government, result in an inability of UK Industry to provide the essential expeditious support needed by our own Armed Forces in overseas deployments in the future." The question I want to put to you is: do you consider that the critical requirement for British arms exports to be able to meet the procurement requirements of the Ministry of Defence in the circumstances where our own forces are in combat situations can be met simply by the clarification you are seeking as to the ambit of Crown exemption or do you believe the Government needs to go further and have additional primary legislation under which it is clear beyond any doubt at all that the normal inevitably delayed arms export control processes have been put into a period of suspense in circumstances where there is an imperative need in a war situation to supply our armed forces with the equipment they require?
  34. (Mr McLaughlin) There are several questions there. I think there has to be introduced into the orders some arrangement for Crown exemption allowing the support of the armed forces. If this consultation document were already in being, we would not be able to take phone calls from Basra, which one of us did this morning, on technology questions and answer with a technical response.

  35. Can you explain that. Why would you not be able to take a call from Basra?
  36. (Mr McLaughlin) Because that is an embargoed destination, because of where it is.

  37. You are back on the Crown exemption point basically?
  38. (Mr McLaughlin) Yes. There has to be some sort of exemption, and I do not know what the precise details of that are, for that sort of support in the field. I think at the front end of your question the answer is that it is much more complex in terms of Crown exemption and at that stage of deal-making I was referring specifically a moment ago to support in the field. I think it is rather more complex when you start to bring it backwards towards a deal-making and detailed involvement, a Government involvement, and so on, as to how Crown exemption might or might not apply. There are lots of detailed issues underpinning that, not least the issue of ownership, particularly in a modern complex business environment where the issue of ownership, and therefore does Crown exemption if it exists apply or not apply, is anything but clear, frankly.

    Mr O'Neill

  39. Do you actually think the authorities will necessarily prosecute for phoning Basra and giving technical advice in the middle of a war?
  40. (Mr McLaughlin) It is self-evident that the answer is that I would not expect it to happen and the answer is "no". What I was highlighting was the fact that there is, if you like, a technical or legal breach and, whilst we might have every confidence that you, the Government, will not do such a thing, I cannot account for civil litigation.

    Sir John Stanley

  41. I do not know if any of your colleagues want to respond to my original question.
  42. (Mr Hayes) The issue Sir John raises is probably of a slightly different relevance in the context of coalition warfare in that, whilst an export may be in support of forces operating in the theatre and indeed in forces directly supporting and working with British forces, it may not actually be for the British forces themselves. Potentially, yes, I would agree with your comment that there is a need to address this in the legislation in the round rather than in the specific context of Crown exemption.

    (Mr Otter) It does not just stretch to the armed forces. It may well stretch to protecting and defending the civil infrastructure, which is the equipment, and that may well have defence connotations about going in to protect the civil population. Many countries have civil defences; we do not in this country. We got rid of that some long time ago. Civil defence and police have equipment requirements to protect people that are very similar to those of the armed forces. I stress the point about allies as well.

  43. Can I return to your original comments on trafficking and brokering. I just want to be clear on this. As far as your Association is concerned, am I right in saying that your concerns on the really quite limited trafficking and brokering provisions in the secondary legislation are limited to what you say in the section in your paper headed "Clarification"? We have already referred to the lack of clarity you see in Annex G. Can I be quite clear that there is nothing further in that area that is causing you concern in these draft secondary legislation provisions, is that correct?
  44. (Mr McLaughlin) The short answer is: no, I do not believe it is. There are other issues that cause some concern. I can think of an example. In a partnership programme or partnership project, if the control, if that is the right word, is exercised from, let us say, the UK but there are suppliers and partners in other countries, then I ask myself the question: how will the extra-territoriality provisions apply if you happen to have, for example, a Spanish partner? If the expectation is that someone in the UK can control his shipment of goods as part of this joint programme, assuming he had a Spanish or an Italian, whatever nationality you like, licence in place, then I am not quite sure in my own mind how any enforcement process would happen if the programme is controlled in the round from the UK. The commercial dealer can say, "The programme director is in the UK and these various partners will make these various components and ship them to wherever", but the actual control of that activity going direct from a supplier, even within the EU to somewhere, is outside, I would judge, the practical control of the UK-based programme director. There, for example, is another concern.

    Mr Colman

  45. Mr Salzmann, on page 2 of the memorandum you gave us, in the paragraph on the burden of training, you claim that all 310,000 staff in the UK defence industry require the suggested training on their responsibility under the new legislation. It is rather like Mr O'Neill was suggesting: it is exaggeration in terms of the new number of licence applications. Are you suggesting there that the catering staff or the cleaners are going to require training in this? Is this not, surely, rather like the situation in the financial services industry where you have a compliance officer and an adviser in each company to whom individuals could go to ask for advice - and I see you shaking your head - and to get information on what can and cannot be done before in fact you send the information abroad, and that this can in fact be done in this way? Why are you suggesting this should be such a complicated or time-consuming undertaking that is being proposed within this new secondary legislation?
  46. (Mr Hayes) It is actually quite the opposite to that, Mr Colman. At the moment, the situation you describe is quite true in the sense that in the world of tangible exports there is effectively a choke point within most organisations with a person well versed in the export control legislation. All exports can be routed through that person and controlled to a very high degree. Move to the world of intangible exports and that situation changes dramatically. I am not suggesting for a moment that we do not believe the controls on intangibles should be put in place. Industry does indeed fully support that. The question is one of implementation. But you move away from the choke point situation whereby all of your controls can be applied at that choke point to a situation where anyone within the company with access to a fax machine, telephone, computer, shared data environment or telephone conferencing facilities, can be an exporter. Therefore, they have to have at least an awareness of what constitutes an export and what does not; what is control and what is not. The training commitment therefore does extend to anyone with access to technical information and those facilities. It does not only extend to UK employees; it extends to all employees of the company worldwide who might visit the UK and whilst here make contact with their offices back in their home country because their intangible transfers from the UK will be subject to UK law whilst they are here.

  47. In my parallel example of a compliance officer within any financial services company, which is in a sense similarly dealing with intangibles but is able, if you like, to cope with the regulatory framework as to what can and cannot be done, is that not a situation that has been working in Britain over many years? Therefore, you again are grossly exaggerating the impact of this legislation?
  48. (Mr Hayes) Not being an expert in financial services, I would not like to comment on that.

    (Mr McLaughlin) I think the issue is, in part, one of scale. I accept your point about the way the financial services industry is regulated. As my colleagues have said, at the moment most of the industry is regulated through a number of choke points where we have experts who monitor and do the right thing. To give you an example from the company that employs me, we have 16,000 desktops, all connected to the company network Any one of those 16,000 owners/users of those desktops could make an intangible transfer.

  49. In the same way as the financial services industry?
  50. (Mr McLaughlin) Yes. To ensure compliance, we are already working on a programme of training for those 16,000 people and/or a combination of IT control by key word recognition, by all sorts of things being examined in some detail. Either way, I would like to link the response that I am making to the earlier response I gave to Mr O'Neill about the cost of compliance, if we can put that in inverted commas. In an industry or a major client with a large number of employees, the scale of the cost of compliance is beginning to run away . We will have to have very expensive, clever IT provision and/or we will have to have training programmes, otherwise we could not as a company - and I think this applies generally - put our hand on our heart and say we are doing our best and making our best efforts to comply with this new legislation.

  51. At the moment, the movement of stocks and shares and of financial advice has been controlled and has been policed and has been done. That has been coped with and it has not required massive training, if you like. An individual visits the client's offices in each company; he is set the rules and everyone knows where to go in terms of getting the advice. You do not think there is in fact a basis on which this legislation would work in the same way and be coped with?
  52. (Mr McLaughlin) The short answer to that question is: yes, but not with the present scale of resources.

  53. Do you believe the idea that every single person working in the defence industry would need that training? Do you think that is a gross exaggeration?
  54. (Mr McLaughlin) The answer to that depends on the DTI interpretation and application of what I would call the compliance regime. I think the underpinning answer, the conceptual answer, is: yes, if you have the ability to make an export from your company's IT network where there is licensable control of data, then you are going to have to know from the first day that you have access to that when you sit at your desktop and who you can send it to, who you cannot send it to and what you can and cannot do. That is what I would judge to be a self-evident level of commitment to a level of training there, and quite how large is something we are all working to get our heads around.

    (Mr Otter) And critically where those individuals are at any one time because when I am seated at my desk, it is not an export; when I go overseas, it becomes an export. Unless every one of our 33,000 people knows where I am all the time, they could be unwittingly committing a breach.

    Rachel Squire

  55. I would like to continue with the theme of training employees all over the world and return to offset, which you defined as where the customer demands manufacturing or design work in their own country in return for buying the product. That is an integral aspect of the modern global defence industry and it is increasingly spreading into the non-defence commercial sector, too. We accept that it is often a crucial part of any commercial or defence export work at the moment because a country to which you are exporting will look to share the skills and technology and have some local employment and training provided. We referred to it earlier but I would like to hear a little more about what your concerns are about the effects the new controls and training will have on offset agreements. Would you like to give some specific examples of how you think that has a very negative effect?
  56. (Mr McLaughlin) I understand the question but there is a very complex answer, even if I were able to give it all. I think already some aspects of offsets are controlled and we live with that and do it as a matter of the daily conduct of business. The issue I was attempting to highlight earlier, and I use offset as an example, is one of what I would call the negotiating points that will underpin any commercial deal when it is eventually signed at the contract signing stage. At the risk of repeating myself, my concern and the industry concern is whether, if you agree in principle to a 10 million offset for example in any given commercial deal, at that stage we already should have a trading licence. At the moment, we will have that sort of discussion not requiring a licence. The question I now cannot answer is whether I would need a licence even to have the discussion about the value of the offset. That is the first point. The second point is that I think we are into generally less of an issue because, in the way offsets happen, the current legislative and regulatory regime already requires us to learn to cope with it. I can give you a good example. We, as a particular company that does quite a lot of business in India, the Indians would, as a matter of routine, wish to have a discussion about offset. The offset, I should stress, is not necessarily linked to the products that you are trying to market. The offset can be unrelated and simply defined as a value. If they, the country, whichever country, India in the example I was using, already has the competence, the capability, to do whatever the work is that we want to put there, then it is a non-issue. We already have to cope with the licensing regime as part of this deal under an offset agreement if we want to send a capability to India, for example, that they do not currently have. That happens now. The offset comment I made earlier was related to the new trading licence requirements.

  57. Can I pick up on armed forces support? Coming back to the comments and discussion on support for the UK armed forces, you mentioned the importance of coalition forces, allied forces, and also interoperability. I am interested in how that works at the moment where you have forces that do have common equipment and are very much interoperable and the need for urgent supplies or repairs. Is it very much a manufacturer's agreement that cuts across international boundaries? Is it very much an inter-governmental agreement? How do you think it would change under the proposed secondary legislation?
  58. (Mr Otter) There are two aspects to the answer. One is that in theory it should be government-to-government activity. To give you a simple example, we supply chemical warfare detectors to both America and the UK. At the moment, the UK cannot get any batteries for their detectors because they do not have the stock, so they are drawing off American stock on a formal basis. Another example is that both the Americans and the British are short of another particular item of equipment. Neither of them have got any stock because their defence stocks have been pared and pared. What we have got to do is to come to the manufacturer. In theory, according to the new regulations, we would not have been able to supply the United States in the way that we have done, but we could supply the UK.

    Mr Olner

  59. Are you really telling us that there are no batteries for our forces in the Gulf who are in danger from chemical warfare? It beggars belief.
  60. (Mr Otter) That was the situation, yes, largely because the United States had bought all the batteries. They had taken up the industry's capability to supply the batteries.

    Chairman: I regret to say that this has nothing to do with the consultation document we are discussing but it illustrates a problem arising from other things than arms export controls, does it not?

    Tony Baldry

  61. Can we move on to record keeping? Clearly record keeping is crucial to the administration of the orders. The industry, not surprisingly, has asked for there to be a pragmatic approach to record keeping. Could you explain to me what you mean by a pragmatic approach?
  62. (Mr McLaughlin) The first problem industry has with the consultation document is one of definition where record keeping is concerned. The document refers to functional record keeping. We are in a round of meetings with the DTI to try and better understand what is meant by functional record keeping, and so industry's answer to your question I think will vary along a continuum that at the moment we are unable to define. If functional record keeping gets what I would christen a harsh interpretation and requires specific records to be kept of every intangible transfer, major companies, whose scale will obviously vary according to the size of the company, are going to be talking hundreds of thousands, if not millions, of pounds of data storage space and then retrieval systems to get those records out every time we have to demonstrate compliance. If functional record keeping means something less than that, clearly it will be a less onerous burden, if that is the right word, for industry, but the first issue for industry is to understand what functional record keeping means. That is inextricably linked to the regime of compliance that the DTI will seek when they come to check that very fact, the fact of compliance.

  63. As I understand it, the DTI put forward two alternatives; one is what they describe as a prescriptive approach, the other is a functional approach. The functional approach would allow firms to use their internal records to demonstrate compliance with the new legislation. It would specify what information would need to be kept but not the format in which it was kept. Are you clear, from the consultation you had, as to what information and records you need to keep?
  64. (Mr McLaughlin) The short answer to that is "no". I will ask Mr Hayes to pick up that particular point.

    (Mr Hayes) If you look at page F11, that actually lists the information to be kept. It is fairly obvious that what has happened is that the record keeping requirements from the world of tangible exports have been read across into the intangible world where they have a lot less relevance. A good example would be at 13.2(c), the quantity of goods. In the tangible world, fine; in the intangible world, that has little or no meaning. But the requirements themselves are fairly prescriptive and, if these were to be the requirements, then I think the cost burden on industry would be considerable. The sheer volume of records being kept would be overwhelming, both for industry and from the Government compliance and audit point of view. That is another example of where a transaction of concern would be lost in a deluge of data relating to transfers which were of little or no significance. The other issue is one of practicality. If we turn to the trade controls, the record keeping requirements are broadly similar in relation to the movement of goods. However, those movements are between two countries, neither of which is the UK. We have no power to require companies in our supply chain, or indeed our customers, to provide those records to us. That begs the obvious question that industry is being required to keep these records, subject to sanctions presumably for not keeping the records, and yet we have no means by which we can obtain that which we are required to keep.

  65. When you have raised these concerns with the officials, what has their response been? How far have these negotiations or consultations got with officials?
  66. (Mr Hayes) There have been many meetings with officials. They have listened carefully to the viewpoints that we put forward. As you would probably expect in a consultation period, there has been little feedback coming the other way.

    (Mr McLaughlin) These various points of individual companies and various trade associations involved will be covered or addressed in the formal responses to the consultation document and of course the closing date for those is 30 April. I endorse what David Hayes has said; I do not really believe that any of us expect any substantial response from officials in advance of the closure of the consultation document or the consultation period.

    Mr Howarth

  67. May I go back because I was late arriving, for which I am sorry. Mr Otter, you were suggesting that under the current arrangements your ability to export to the United States, to our coalition partners, batteries for CW detectors requires a lengthy licensing arrangement. Is that correct?
  68. (Mr Otter) Yes.

  69. That is under the existing arrangements?
  70. (Mr Otter) Yes.

  71. Are you suggesting that under the new arrangements that position would be made worse?
  72. (Mr Otter) It would be made worse.

  73. That is a rather severe accusation to make.
  74. (Mr Otter) It is just the way the legislation is drafted.

  75. How would you like to see it improved?
  76. (Mr Otter) I take Mr O'Neill's point of view on weapons of mass destruction, that it might be a small element of it, but what we are talking about here is defence against weapons of mass destruction, and let us make that perfectly clear. Some of the catch-all provisions that are in the document are so severe that they actually make it very difficult even to trade and discuss things with people like the US Government and the Danish Government, which has special forces deployed in support of the coalition at the moment, or would do. The definition needs to be loosened considerably.

  77. Are you suggesting that our forces are at risk, as Mr Olner was putting to you, as a result of what can only be termed ludicrous bureaucracy and that you can supply and the Americans cannot supply the batteries, that you are the only supplier?
  78. (Mr Otter) I think in this new system there is going to be far too much bureaucracy.

  79. Even worse than at the present?
  80. (Mr Otter) Even worse than at present.

  81. May I then raise with you the transitional arrangements? I understand that you are rather concerned about the transition period. Can you tell us why you regard the three-month implementation period for controls on intangible items of technology as inadequate?
  82. (Mr McLaughlin) It is in part linked to my earlier answer about the effort we judge that companies will need to put into two things in particular, a training regime and an IT capability in whatever final form of technical detail that manifest itself, and to get those in within three months. I repeat that I think underpinning it is an issue of scale. For a company of 50 people, it is going to be, one presumes, rather more straightforward than for a company of 30,000 people, I think you might admit, Mr Howarth. My own company has 16,000 desktops and to have any hope of meeting the provisions of the documents in a compliance sense, there will have to be at the very least - I do not know quite how detailed and that is a separate debate - an awareness and briefing programme for those 16,000 people with desktops, any one of whom could make an intangible transfer. The final point is that to do all that in three months I think is asking rather a lot.

  83. How long do you think it would take, realistically?
  84. (Mr McLaughlin) On the intangibles specifically?

  85. Yes?
  86. (Mr McLaughlin) I think there ought to be some sort of gradual programme worked out, of course in consultation with officials, spanning perhaps a year.

  87. A company the size of Rolls Royce with 16,000 desktops is a very large company but a small company could perhaps cope with a small supplier with, say, 50 employees?
  88. (Mr McLaughlin) I do not think I am suggesting that. There are representatives here of SMEs, which clearly I am not. Of course, the resource of the larger companies is counter-balanced by the lack of resource in the SMEs, so I think the problem is the same irrespective of the size. Scale will make a difference to some things.

  89. Just so that we understand exactly what is at stake here, can you give us some idea of the practical training issues that could not be done in three months but you reckon could be done in 12 months? Is it scale with 16,000 desktops and however many thousand people or is it procedure?
  90. (Mr McLaughlin) In an organisation it is setting up your training programme, getting people to the right place at the right time. You have to have the trainers fully understanding the rules. The theme running through the discussion this morning has been: we collectively judge there is a lack of clarity in some of the detail in the consultation document. Until the trainers have that sort of clarity, you clearly cannot communicate the information to 16,000 desktop users. Just to pull out of the sky a comparator, Rolls Royce North America, where we operate of course under the US export control regime, ITAR regulations primarily, twice a year hires a local cinema in Indianapolis, to give one example, where we have a few thousand people. We bus everybody down there for a day's training on export control. I do not judge we will get to that in terms of scale of effort here in the UK, but it will begin to approach it.

  91. Have you made a strong protest to officials about this and have you had any feedback? We gathered earlier that perhaps there has not been a lot of feedback so far.
  92. (Mr McLaughlin) I am not sure we have made a strong protest, either individually or more generally as part of UK Plc. The Government makes the rules; we try and comply with them. What I am here to try to do is to help the understanding of some of the difficulties of compliance in the way this consultation document is currently drafted and highlight in some cases also the cost of that compliance. The competitive dimension to it is self-evident to everyone.

    Mr O'Neill

  93. Is not the truth that you do not want these changes and you are exaggerating at every turn the administrative difficulties. You keep going on about 16,000 computers. For God's sake, the whole point of computers is their ability to communicate quickly. One would have thought that these desktops would have been receiving instruments for a lot of the communications that you would have to do. Now, with respect, Mr McLaughlin, you are exaggerating at every turn and you are creating problems where they do not necessarily exist. You choose selectively to ignore the opportunities that the technology you keep going on about can afford in terms of communicating quickly with all your workforce.
  94. (Mr McLaughlin) I think I have been pretty clear, Mr O'Neill.

    Mr O'Neill: You have been consistently clear.

    Chairman

  95. Let us hear what the reply is.
  96. (Mr McLaughlin) I do not believe I am exaggerating. I have tried to explain that I believe the question of scale and just how difficult it will be to comply, if it is at the lower end of that or whether it is at the higher end, will be largely determined by compliance regime that you find is expected by officials.

    Mr O'Neill

  97. The truth is that you do not even accept the point that at most there would be a ten per cent increase in licence applications. You have never agreed on that. Would you accept it?
  98. (Mr McLaughlin) I think I would disagree with that. I was about to say, no, I do not think I would, but I do not know where the number came from.

  99. If there are several thousand applications for licences every year at the present moment, and the officials suggest that there will be a maximum of 150 of one kind and 250 of another kind in addition to what we already have, but if we were to take the number of applications as being 4,000 and the maximum number of increase as being 400, then a ten per cent increase is what we are talking about and I am saying that is a very conservative figure. Taking a low figure of the present number of applications and the highest possible one that the Civil Service thinks is going to be the increase, then you get to a figure of perhaps ten per cent. You keep going on about the difficulties of communicating and, by your own admission, you say that you have got excellent means of communicating with 16,000 desktops to start with.
  100. (Mr Hayes) The issue in relation to intangible transfer for most of industry is probably not one of licensing because I think it is fair to say that for most of the defence industry a lot of our intangible transfers of technology will take place under open licences. The issue is primarily one of the knowledge of the people who are making the exports because the choke point solution has been removed. The export is not routed through an expert resource any more and, if it were, on intangible transfers you would take away the very means of rapid communication to which you refer, Mr O'Neill. The bigger issue is one of record keeping, particularly when you are talking about shared data environments, in which each entry by the party into a shared data environment may be regarded as an export and, if it is, then you are certainly talking in the tens of millions per annum in relation to some companies.

    Chairman: Thank you. We have taken the main points that you have made this morning, which we have heard very clearly from you. We are very grateful for the written evidence you have supplied and for you taking the time to come to see us this morning. Thank you very much indeed.

    Memorandum submitted by UK Working Group on Arms

    Examination of Witnesses

    MR ANDY McLEAN, Head of Communications, Saferworld and MS JULIA SAUNDERS, Policy Adviser on Conflict and Arms, Oxfam, UK Working Group on Arms, examined.

    Chairman

  101. Welcome to the UK Working Group. Would you like to introduce yourselves to us for the record?
  102. (Ms Saunders) I am Julia Saunders. I am the policy adviser on Conflict and Arms for Oxfam.

    (Mr McLean) I am Andy McLean, the head of communications at Saferworld. Perhaps just at this point I could apologise for the absence of our colleague, Robert Parker from Amnesty International, who is unwell.

  103. We had news of that. I hope he is all right.
  104. (Mr McLean) Thank you very much.

  105. Okay. Could we start then with perhaps one of the areas of the consultation that has caused most interest from yourselves, namely the extra-territorial application of trade controls. Could you just summarise why you believe that all trade in military equipment by UK citizens, wherever they are located, should be subject to UK licensing controls?
  106. (Ms Saunders) I think we are starting off with a sort of consensus that brokering needs to be under regulation and that is presumably the intention of the controls that are being introduced. It is our firm belief that those controls need to map the way the industry really works and to be effective rather than just exporting the problem. You need extra-territorial controls because brokers, by the very nature of the business, do move between jurisdictions very fluidly and that is the way you need to track them rather than regard it as a territorial issue.

  107. Would this, for example, impose an unfair burden on a UK citizen, say, working for an aerospace company in India? Would that not place them in a rather difficult position in relation to the requirements of the legislation if you incorporate the full international coverage that you envisage?
  108. (Ms Saunders) If we start legislating for exceptional cases we are going to miss the vast bulk of what we want to control. Your choice of a person working in India would raise difficulties, I agree, because it is not a destination which you might consider for an open licence to free-up an individual working in a foreign company, but I would not want to throw out the baby with the bath water on this one. I think that you should define your terms of what you wish to capture under the Act more precisely in order not to disadvantage legitimate people dealing abroad.

  109. I know that the UK Working Group is part of an international association of NGOs with concerns in relation to these matters. Are you therefore able to tell us a little about the practice of other countries? In your written submission, which is a very detailed one, you make reference to the United States and you make reference to some of the European Union countries. Would you be able to comment on how they deal or are proposing to deal with the trafficking and brokering?
  110. (Ms Saunders) There are a couple of countries who already have had existing legislation for a number of years, which perhaps can give us some interesting examples to hone our own legislation. I believe the defence representatives mentioned the US controls in their evidence. This system looks at brokering and defines brokering around the receipt of a fee really. So it is looking at it differently from how this proposal is looking at it and, also, it is fully extra-territorial. It has a register which is mandatory plus you can access those who have been struck off, so it is quite a complete system. Looking within Europe, the Swedish system works on the basis of those who are habitually resident in Sweden, so it controls extra-territorially those that have a real relationship, paying taxes, for example, to Sweden. Germany has a system which is only territorial and they have had the problem with export. It is fairly easy to cross the border from Germany to countries without controls so they have the problem of brokers hopping over the border literally to do their deals. There is a new round of legislation being introduced as countries have identified this is a problem area and these countries have taken the view that fully extra-territorial controls are required. We have seen controls introduced recently in Finland and in Poland - fully extra-territorial - and also they are under consideration in Belgium and France, although quite whether or not they will emerge the other end of the legislative process is obviously still a news question.

    (Mr McLean) On that particular aspect, if I just reiterate that there is a move internationally towards extra-territorial controls. So the mention that by doing this the UK would be out of step with other countries is not actually correct.

  111. Do you have any view about which of those various systems that have been introduced, which are the most effective, cause or impose the least burdens on legitimate defence industries? The American system is different from the European system, is it not?
  112. (Ms Saunders) Yes.

  113. In terms of your objectives, do you have any preference and, if so, why?
  114. (Ms Saunders) Would it be possible to answer that by saying there are aspects of the different systems which I admire.

  115. I suspected you would say that.
  116. (Ms Saunders) We are in the position of wanting to learn from these experiences. I would say that the register in America, for example, is something which we should be looking hard at, particularly the ability to proscribe brokers. You can access this list. So, for example, if you were a DTI official in this country and you had an application from an American citizen to broker here, you could check this list to see if he had fallen foul of the American law at any stage. Obviously, that aids transparency and the effectiveness of making sure those who are the dodgy dealers of this world are hounded out of being able to practice here. That would be one place I would suggest as an example.

  117. Just a final question before I turn to my colleagues. What you said about trafficking and brokering, as I understand it, seemed to focus mainly on the small arms trade. Would that be true? If it is, would some of your concerns be met if the Government were to introduce targeted controls in that particular area?
  118. (Ms Saunders) Some of our concerns would be met and I would certainly welcome any proposal along those lines but, of course, you can also be killed from a tank or something dropped from an aircraft so there are other areas which are not controlled which would also be of concern. I would be foolish, I think, to say that I would not support any advance in this area, particularly if it was seen as a pilot to see if this was an effective way of going about controlling conventional weapons.

    Chairman: Thank you.

    Mr Howarth

  119. Can I just ask to what extent do you think this a problem? Can you give us some examples of where you think the law is being flouted, flagrantly or otherwise? I seem to recall I took this Bill through Committee and it was quite difficult to nail down any precise examples.
  120. (Mr McLean) Perhaps I could give you an example of one which has come to light in recent weeks, which is the case of a British arms broker who has entered into negotiations to supply weapons from an Eastern European country to a country neighbouring Iraq. It is fairly clear from the negotiations that it is apparent that some of these weapons might end up in Iraq. Yet the way in which the correspondence is very carefully worded and, obviously, the way in which arms brokers make their position very clear is they are aware of the international regulatory framework and they are at pains to ensure that they do not step outside the law. We all know that at the moment one of the main ways in which brokers and other arms dealers ship weapons to embargoed destinations is by sending them via neighbouring countries to avoid detection. We strongly believe that by only enforcing extra-territorial controls on British brokers who are sending weapons to embargoed destinations, we would actually not be meeting the Government's objectives because it would run the risk of brokers being able to ship weapons via neighbouring countries. If we had an extra-territorial licencing system, if the governments saw that there was an application to broker an arms deal to a neighbouring country, to Iraq, to the Yemen, to anywhere, presumably, in the current environment, they would look at it very carefully and at least one would think would reject the licence. However, if you do not have a licence system, the broker can simply do it without any sanction from the Government whatsoever.

  121. If there were a register like, as some of us have suggested, in the United States, have you any idea how many people might appear on that register? What sort of numbers are we talking about?
  122. (Ms Saunders) The American system defines brokers differently from what is proposed here, so it is possible that the numbers may not correlate. Since making our submission we have had an update from the American official who looks after this list, and it is currently standing at about 250 individuals, but I must stress they do not use the same definition.

    (Mr McLean) Of course, presumably for the UK, being a much smaller country and a smaller defence industry, one would expect that number to be lower.

    Chairman: Thank you.

    Rachel Squire

  123. Can I pick you up on the Open General Trade Licence and the fact that the Government proposes to make an Open General Trade Licence which would permit all transfers to and from a list of approved countries with exceptions such as torture equipment, landmines and so on, and the approved countries would include the EU, USA, Canada and others. I understand that your Working Group is opposed to the scope of the proposed Open General Trade Licence, and you would like to see the list of excluded destinations expanded and to exclude some including the US and only include EU countries, for instance. Can you explain to us that where a country has strong export controls, as the US does, and it is an ally of ours, why you believe that an open licence is an inappropriate form of control on British involvement in trade between that country and a third country?
  124. (Mr McLean) Yes, certainly. Obviously, it is important we all recognise the extraordinarily comprehensive range of the Open General Trade Licences that are being proposed here. In a meeting the other day somebody referred to these open licences as "the gold card in arms dealing" and I think that is a very accurate description. I think in our analysis this gold card under the new proposals would be too widely given. The reason for that is that basically under the proposals it would allow trade in military equipment from the countries you mentioned to any destination other than those which are explicitly proscribed. Now, this is a far wider commitment than any country has for direct arms exports. I think the principle that we would subscribe to is that the controls on brokered arms deals should be of an equivalent nature to those for direct exports from the UK. Of course, the direct exports from the UK have the graded system of standard individual licences, open individual licences and open general licences. This relation with the scheme is not being proposed for these brokered arms deals. We are concerned that the list of countries where weapons could be sent is far too wide and would include destinations such as Algeria, Columbia, Indonesia, Israel, the Philippines and Turkey. There would, therefore, be no controls on exports to those destinations from the countries you mention, and also some of the countries do not have exactly parallel export control systems to the UK. You mention the US, which does not have a criterion requiring them to judge the impact of arms exports on sustainable development, therefore, could we be sure that they would be imposing in all cases the same controls as we would ourselves?

  125. So just going on from that point, your concern about the US is its export control policy rather than the actual standards of US export controls?
  126. (Mr McLean) We agree that the export control system as a whole is very rigorous and we are often drawing examples from it to present to you. I think in terms of some specific licensing deals, we might have a question about them, and also with respect to the developments which give sustainable development concerns and those licence figures. So that we just basically believe in this case that the Open General Trade Licence will be too broad. It could be that you could create some other form of more broader licensing system just on a simple case by case basis, but the Open General Trade Licence is too broad.

  127. Do you think it would be appropriate to make any effort to influence the US policy in respect of sustainable development?
  128. (Mr McLean) Yes, I think that is vital. One of the things which the Working Group has consistently proposed is increasing co-ordination and harmonisation of EU and US export control policy. I think that has been a common statement of principle and we would like to see that moving further to include a consideration such as sustainable development.

  129. Good. Do you think that would be more appropriate than trying to ask British traders to fulfill the criteria of two different licensing systems?
  130. (Mr McLean) I do not think that the two are exclusive. Obviously, we should be working with the US and other allies to ensure that they have similar export controls to ourselves, but in the absence of effectively similar controls we should not be providing arms brokers with Open General Trade Licences.

    Rachel Squire: Thank you.

    Sir John Stanley

  131. In your paper, on page 3, under the heading Extra-territoriality, you say this: "Under the draft secondary legislation the Government does not intend to introduce controls on all UK brokers wherever they are located, despite this being promised in its election manifesto in 2001. Instead the Government has opted to pursue only torture equipment, embargo breaking and long-range missiles." Now, first of all, can you clarify for me how you have arrived at that policy conclusion as far as the Government is concerned? Am I right in thinking that your basis for saying that rests on the draft statutory instrument in Annex G in the schedule to that Annex? I am afraid it is unnumbered in the text, but it comes immediately after G7. When you say the Government is covering torture equipment, am I right in thinking you are referring therefore to the draft paragraph 1 under the heading Certain Security and Para-Military Police Equipment? Is that correct?
  132. (Ms Saunders) Yes.

  133. Thank you. Obviously, the next paragraph, Certain Missiles, is the basis you are saying long-range missiles, and the Government is there saying: "Missiles capable of a range of 300 kilometres or more." Then, secondly, in terms of embargo breaking, I assume you are referring there to the next draft statutory instrument at Annex H?
  134. (Ms Saunders) Yes.

  135. Thank you. Then in your paper you go on to say, and I quote, continuing: "This comes at a time when other European countries introducing controls are doing so with full extra-territorial powers. Finland and Poland have introduced controls". I am just going to stop the quotation there. Are you saying to the Committee that as far as you are aware both Finland and Poland have introduced full brokering controls on an extra-territorial basis applying to all forms of military equipment? Is that what you are telling the Committee?
  136. (Ms Saunders) Yes. The details of what they define under their military list may differ from ours.

  137. Basically, you are saying that they are applying their extra-territorial controls, those two countries, to all forms of military equipment, in broad terms anyway?
  138. (Ms Saunders) Yes.

  139. Right. Thank you. Then going on to the remainder of that sentence you say, I quote: "...and they are under consideration in Belgium and France."
  140. (Ms Saunders) Yes.

  141. As far as those two countries are concerned, when you are saying they are under consideration, are you saying to us that there is a clear Government commitment to extra-territoriality in relation to all military equipment in both Belgium and France?
  142. (Ms Saunders) I think the situation differs. To get the details, I will have to go back and send you fuller information if you want exact details, but I understand in Belgium it is a Senate amendment, so it has come from their Senate. In France, do you know?

    (Mr McLean) I think it is also a parliamentary proposal. If it would help, we could provide the Committee with a note summarising the practice in each country.

    Chairman: I think on each of the items that Sir John has identified it would be very helpful if we could have precisely what it is they are doing. That would be helpful to the Committee.

    Sir John Stanley

  143. Thank you very much. One country you do not mention which we have taken a close interest in, not least in the intensive work that this Committee did in the last Parliament and has continued in this Parliament on the issue of parliamentary scrutiny, is in the practices and procedures in the United States. Indeed, some of us in the last Parliament went specifically to the United States to look at their whole arms export control system. As we all know, the United States is far and away the biggest arms exporter worldwide. Have you got any information for us as to whether the United States Government has any provisions in the area of extending statutory controls on an extraterritorial basis in relation to brokering so that its own rigorous arms export control policy is not subverted by extraterritoriality?
  144. (Mr McLean) They probably have the most comprehensive system. The US system controls US arms brokers and US citizens wherever they are located in the world.

  145. Why did you not refer to that in your paper? Was there some reason?
  146. (Mr McLean) I think that would have been an oversight. It is something that we have referred to in previous correspondence with the Committee. That is a prior existing legislative commitment and the ones we referred to in the brief are new ones, we have just referred to the most contemporaneous ones.

    Sir John Stanley: Perhaps in the further paper we could also have the particular views on the latest position in the United States so far as legislation on extraterritoriality is concerned.

    Chairman

  147. That would be helpful.
  148. (Ms Saunders) There is mention of the US system briefly on page six.

    Sir John Stanley: Thank you. If you have got anything further you want to add on the US, if you could put that in your further paper.

    Chairman

  149. If I might say now, before I forget to say it, as quickly as possible please because we want to respond to the Government's consultation document within a reasonable period of time.
  150. (Mr McLean) Of course.

    Chairman: Thank you for that.

    Mr Olner

  151. Perhaps UKWG can tell the Committee why should British transportation agents involved in the transport of military equipment be subject to regulation?
  152. (Ms Saunders) When you look at the cases that have come to light through investigations, such as the UN investigations into those breaking embargoes or into the exploitation of natural resources in the DRC, the Democratic Republic of the Congo, you find that it is very often transportation companies that are taking arms - UK transportation companies - into conflict zones or by diversion breaking embargoes rather than British brokers. If you want to control the problem of arms going into conflict zones in an unregulated fashion then transporters are an obvious place to apply government pressure.

  153. How big is the problem?
  154. (Ms Saunders) Andy, would you like to talk about that?

    (Mr McLean) We recently had a meeting with a British air freight operator who estimated that in terms of air transportation from British agents the numbers we are talking about are fairly small. He estimated that there are probably about 20 British air transportation agents operating around the world and between 14 and 16 of those would be operating in Africa, so we are not talking large numbers.

  155. How many of those would be doing it "legitimately", not clandestine, quite straightforward, they offer their services and they are accepted?
  156. (Mr McLean) I think one of the problems at the moment is that it is an unregulated area. If you take a look at the legal definition of what is legitimate then unless they are supplying weapons to a country under a UN arms embargo then everything is legitimate.

  157. Just to give the Committee a feel of it, have you any idea how many companies we are talking about?
  158. (Mr McLean) In terms of British air transportation agents, the figures we were given by this individual were there are about 20 in operation internationally and about 14 to 16 of those would be operating in Africa.

  159. And they would all be UK based?
  160. (Mr McLean) They are certainly UK companies and individuals, whether they are all based in the UK I am not quite sure.

    (Ms Saunders) What can happen is you can have a UK head office with your planes based elsewhere, for example Ostend.

  161. So you think regulation will catch those sort of people?
  162. (Ms Saunders) The regulations do not catch those people unless they are breaking UN embargoes.

  163. You heard the industry earlier giving evidence and one of their concerns was perhaps the unacceptable financial burden of these added regulations. Have you any assessment as to what the cost will be to British defence manufacturers?
  164. (Mr McLean) With regards to transportation?

  165. Transportation specifically but the whole subject of regulation in general.
  166. (Mr McLean) I think with regard to transportation what is generally coming to be recognised internationally is that post-September 11 it is no longer an excuse for air transporters and other freight companies to not know what they are carrying or what the regulatory framework for those goods are. We would strongly argue for the importance of regulating transportation agents.

  167. I cannot understand you connecting that with what happened on September 11. On September 11 they were ordinary civilian domestic air flights.
  168. (Mr McLean) Yes, but it has recently come to light that the International Transport Workers' Federation has raised the problem of ships and airlines operating under flags of convenience potentially being under the control of al-Qaeda operatives and supplying military equipment into the Horn of Africa.

  169. I accept that but if al-Qaeda were using them they would not be regulated. We are talking about two different things here.
  170. (Mr McLean) What I am talking about is the world within which we live where being recognised increasingly is the importance of ensuring that weapons do not fall into the hands of rogue states or terrorist organisations. We should be taking all the steps we can to increase the transparency and control of those who are organising arms shipments and those who are moving weapons.

  171. What you are really saying is that you have done no assessment at all about the financial burdens that might be placed on legitimate defence industries.
  172. (Ms Saunders) The answer to that is no. I was wondering which part of the controls you were wondering about because the defence industry presumably are submitting their estimates for the proposed controls. Did you mean the further controls that we would like to see happening?

  173. Yes.
  174. (Ms Saunders) I think it would depend which level you went in at. In our section on transporters, for example, we have suggested a number of options, the first option being the most onerous which would be the requirement to apply for a licence if a brokering or export licence was not already in existence for that particular shipment. We have also suggested other levels which would be easier entry points, for example starting off with a register of transporters who would submit records of what arms shipments they have made in a year. I would suggest that would be a less onerous entry point if you wish to analyse where controls can most effectively be placed. I cannot give you a pounds, shillings and pence answer.

  175. That is an old-fashioned answer.
  176. (Ms Saunders) I cannot give you that because I think that would be more appropriate for the industry itself to present.

    (Mr McLean) If I could add to that. I think this conversation illustrates one of the problems at the moment is that there is a lack of transparency over who is involved in the trade, so establishing a register would be a very formidable first step to shed some light on what at the moment is a very grey area.

    Mr George

  177. I am not an expert on air transportation but I have read lots of novels. Perhaps the people you are talking about are pretty evil, often pilots running their own little aircraft who can zip in and out, who are flying aircraft that would probably breach any - any - minimum standards. Whilst the aim is noble to catch British companies who might be indulging in this often heinous act, is it not really an act of incredible utopianism to assume that this is going to have even a marginal effect upon transportation of illicit weapons, drugs or anything to areas of the world which are exceedingly dangerous? There would be dozens of countries where aircraft would be registered, there would be so many pilots and companies who would not have the slightest interest in complying with any decent principles whatsoever, so is it not making this proposal a little utopian, a little, I would not say silly? In no way is anybody endorsing what people are doing, passing arms around and exacerbating already tense areas, creating mayhem, but this is noble although truly, truly unworkable. Please give me a chance of reconciling my conscience with this because I would support it but, frankly, I think the chance of it having any impact on the trade is slight.
  178. (Ms Saunders) I am totally happy to be called both noble and silly if that is what you really think. At the moment this is not illegal. The way you phrased your question you were talking about illicit transports, people doing things that are illegal, but the situation is because it is not regulated there are no controls and unless it is breaking a UN embargo it is not illegal. Therefore, we are talking about people who are entirely legitimately moving cargoes around into conflict zones which are not embargoed, of which there are many around the world. I believe that there is a purpose for legislation in defining what is legal and what is illegal and casting a light on this grey area, and that in itself has a deterrent force for those who, okay, there will always be in life a few people who are happy to act illegally but you will find those who wish to still retire to the UK, for example, who wish to remain on the right side of the law and they will wish to play by the rules, at least not be detected in breaking them. At the moment we are in a situation of having no rules.

    (Mr McLean) Cases have come to light but have not been able to be prosecuted because of the lack of regulation. I think it is unfair to say that what we are proposing will not make a difference. Indeed, when we put these proposals to the air transportation agent we have mentioned he said they would make a significant difference in terms of regulating the trade.

    Mr Howarth

  179. Chairman, as a pilot myself I am bound to defend the reputation of pilots generally, I cannot tolerate a slur on those of us who fly aeroplanes. Given the complaint that you have that there is a breach happening here and that it is basically lawful at the moment and that you wish to close that loophole, why, given the Government's strong position on this issue, has it not taken up your suggestion?
  180. (Ms Saunders) I would be very happy if you ask that question this afternoon because I am afraid I cannot answer it. We have been arguing this for a number of years.

    Chairman

  181. I will call Gerald this afternoon to ask that very question.
  182. (Mr McLean) I wonder if I could make one more point on arms brokering and trafficking, which is that two of the main reasons which the Government has put forward for not introducing more comprehensive extraterritorial controls are to do with enforcement and to do with the issue of dual criminality. These are both areas where in other pieces of very recently introduced or currently under discussion legislation the Government is proposing to go further. If I can just quote two things to you. As part of the Antiterrorism, Crime and Security Act, the Government has stated that "We have also considered whether we should go further and extend nationality jurisdiction to such an offence..." they are talking about corruption "...recognising that this could send a strong deterrent message that the UK is determined to act against corruption wherever it occurs. This is a message that will have real persuasive and dissuasive force. Whilst recognising the practical problems associated with the prosecution of extraterritorial offences, the Government believes that the balance of advantage rests with assuming jurisdiction over its nationals for offences of corruption committed abroad". That is one piece of legislation. There is also currently before the House, I believe, a Private Member's Bill on female genital mutilation and when responding to this the Minister, Hilary Benn, said "Hon. Members will want to recognise the fact that the Bill represents a significant extension of the present law because it will go a step beyond the current established international practice that dual criminality is normally needed, namely the practice needs to be an offence in both countries to apply extraterritorially". Those are just two pieces of legislation that the Government is currently considering, one of which has been introduced, where this principle has been overcome.

    Chairman: Thank you very much. Let us move on to your arguments on licensed production overseas.

    Mr O'Neill

  183. We took evidence in the last Parliament from Stephen Byers when he was Secretary of State for trade and industry and he said on the question of licensed production overseas: "What is required is a system which ensures that the Government knows when a licensed production facility is being set up, and which ensures that the goods produced are not exported to countries or end-users where the UK would not license them". The Government has put forward some indirect controls already and are now proposing to introduce additional ones. Why do you not think that these new controls are going to be sufficient to do what you want them to do or, alternatively, maybe I can start with Stephen Byers' statement? Do you agree with Stephen Byers' statement?
  184. (Mr McLean) Yes.

  185. So what is wrong with what is coming forward at the present moment?
  186. (Mr McLean) As we understand it, the current proposals do not actually include any specific controls on licensed production overseas. The Government put forward two options in the initial consultation paper, neither of which have made their way into the current draft. They are instead saying that by enacting controls over the export of component parts that is sufficient to control licensed production overseas. We think that is incorrect and that you need to license the deal itself because if you are only licensing the component part of the licensed production facility you are in danger of missing the big picture.

  187. On the other hand, without the components you cannot have any goods at all.
  188. (Mr McLean) Yes, but it would be quite possible for the components to be imported to the production facility from a third country, so it would be a UK company establishing the facility but drawing on technology from a third country, in which case the Government would have no control over what the UK company would be doing. Also, I think the case which the Committee has heard previously with the Foreign Secretary with the confusion over whether a licence had been granted for the export of hawk components to India, that illustrates the problem here. Under the proposed hawk deal the hawk jets were to be built under licence in India and yet it appeared that the Foreign Office missed the licence which would actually authorise the export of the component parts. I think this issue shows that without licensing the deal itself you can miss the bigger picture.

  189. I take your point but we will leave that aside for the moment. There are occasions when, of course, a licensed production can be established and then add-on parts can be purchased elsewhere which were never in the original deal, never in the original contract. How do you police that?
  190. (Mr McLean) How would you police the components coming from a third country?

  191. Yes.
  192. (Mr McLean) I think the important thing to police is the establishment of the deal.

  193. With respect, there are a number of pieces of military equipment which have the capacity to have add-ons but which need not necessarily be that specific. You cannot do anything about that. With respect, the obvious way around your recommendation is not to talk about these things that could be obtained from elsewhere which could change the character of the kit that is being produced under licence. Would you agree with that?
  194. (Mr McLean) If the deal itself was licensed and the government set a limit, as the US does, on the number of weapons manufactured under the licence, and also they always regulate the subsequent export destination, it would not be such a relevant concern as to whether there might be pieces of equipment coming in from a third country which could add to the manufacturing capability because already there would have been a government-to-government agreement on the number of weapons manufactured and an ultimate destination.

  195. I think it is still rather difficult to police the third stage when you have no control over it at all. I just make that point. The other point that has been raised is that the defence export business make the point that licensed production agreements are a little bit like offset in some respects and you can do production in the country and sometimes orders will not be obtained if there is not some kind of licensed production agreement. Would you agree with that?
  196. (Mr McLean) We are not seeking to stop licensed production agreements, we are just seeking to ensure that they are effectively regulated. The US, as we have heard previously, is the main arms exporter and the most successful in the world and yet they treat licensed production agreements as physical exports. They require prior approval from the State Department which puts limits on the production levels and any sale to third countries are also prohibited without prior US Government approval.

  197. Is that because the US has got higher standards than we have or it has got the ability to enforce whatever it wants on the people to whom it is selling armaments?
  198. (Mr McLean) I think it certainly has high standards in this respect.

  199. You would probably agree, however, that the high standards are not always achieved in every area or even pursued in every area, so why is it that they do it there? Is it not so much a matter that they are doing it out of economic self-interest rather than out of any desire, and in some respects you might say uncharacteristic desire, to inhabit the moral high ground?
  200. (Mr McLean) I am not sure that the motivation is important, it is the control in that it actually prevents downstream proliferation. We have seen with the example of Heckler & Koch machine guns being manufactured, 200,000 of them under licence in Turkey, that some of those ended up in Indonesia. It is unlikely that at that time the British Government would have directly licensed the export of those machine guns to Indonesia.

  201. You quoted the example of the Americans and I was saying that in the context of American foreign policy, "my enemy's enemy is my friend", they will sell arms to whoever happens to fall into that category at the appropriate time and make the appropriate facilities if that is necessary, but I do not think that Britain is in quite that position. Even in the days of a bipolar world we were never in that position and now that we have a unipolar world I think that the United States as an example of best practice is perhaps not the most relevant because you are not really comparing like with like. It is up to us to agree or disagree.
  202. (Ms Saunders) Can I make one suggestion just to answer your question, which is that amongst the many motivations that drive the US Government to control licensed production facilities, one of those motivations might be one which would be to control the proliferation of technology and, therefore, there is an interest in the onwards export. For example, you can imagine, I believe there have been examples of licensed production facilities in Egypt exporting technologies which we are now facing in Iraq coming at us rather than in our arsenal. Therefore, there is a real interest here in actually seeing the bigger picture, estimating the risk and putting some conditions on that production facility going ahead and also using the diplomatic clout, lesser than the States I admit but there is some clout, in being the UK Government if you see those conditions being violated.

  203. I think that is a judgment call, it is not necessarily something that we can prove one way or the other. There are a lot of people who sell licensed production facilities with the best intentions and might even do watertight deals but once the deal has been completed it is rather difficult to police. I think that may well be one of the problems that the Government has identified as one of the reasons why they do not wish to tie the hands of defence manufacturers in ways that could prevent them from entering into any kind of licensed production agreement at all. I realise that is not your intention but there could be a danger of that happening, would you agree?
  204. (Mr McLean) I think it is obviously impossible for the Government, if in our process you do set a limit on capacity, to be absolutely able to enforce and prevent the company in the second country from exceeding that production capacity, which I think is your point, so how can you police it. If you introduce the political leverage into the system you increase the chances of ensuring that the capacity is not exceeded and you insert into the system that level of political leverage, diplomatic pressure, which I think can only be a good thing when the stakes are so high as in this case when we are basically talking about establishing alternative centres of producing and proliferating sensitive technology.

    Chairman

  205. Could I just ask one final question and I am not sure how well placed you are to answer it. In your written submission you make the point that it is possible that the Government can frame a law that is sufficiently intelligent to strike that simple balance between legitimate defence industry interests and the requirement of control of less scrupulous individuals. I wonder if you have any comments on the proposed legislation in the whole, whether you feel there are areas, other than the ones you have mentioned, where the legislation could be better framed to catch these less scrupulous individuals without imposing intolerable burdens on legitimate business?
  206. (Ms Saunders) Yes, and here I think we have some common ground with defence representatives in that I think there are some issues over the definitions that we see within this draft. I would focus back down on the extraterritorial provision. We believe if you get this right this is one way of streamlining the whole system because, as we have just heard, there is a discussion about what is the trigger mechanism here to know whether or not you need a licence for a particular deal. I think part of this confusion has entered because of the territorial extent of the controls because the Government has had to define the various stages of the deal and marketing and promotion being excluded but acquisition ---- I forget the actual quote from the legislation. To acquire and dispose is part of the brokering activity. In a sense, if you put that to one side and just focus back on brokering being around a commitment, which you could then go on to define using the experience under contract law, for example, you would not then have to go through the tortuous process of looking at an entire deal, you would know when that moment comes along that is your trigger moment for having to acquire a deal. If you focus on that moment you need extraterritorial controls because otherwise your brokers would just do all of their marketing promotion, have their office in the UK and just slip abroad to do the handshake. That is why you need to have the two things together. It simplifies the system if you have full extraterritorial controls and use your trigger as the moment of commitment, it does not matter where that happens then. That would be our proposal for streamlining the whole system.

    Chairman: Thank you very much.

    Sir John Stanley

  207. As you know, incapacitants have been, and are being, much in the news and indeed may well be much in the news in the next few days or weeks. There are two points on which I would be grateful for your clarification. Do you agree with me that though the phrase "incapacitating substance" is used in Annex F under the section in relation to torture equipment, I myself have not been able to find in the definitions that appear earlier in the schedule any definition of what does constitute an incapacitating substance. Am I right on that or am I wrong?
  208. (Ms Saunders) This is where we need our Amnesty colleague because this is their special area of competence.

    Chairman

  209. We will be inquorate in a second. Could we ask Mr Parker perhaps to respond in writing if that is the case?
  210. (Ms Saunders) Yes.

    Sir John Stanley

  211. My further question in this area is do you agree with me that it is distinctly anomalous to extend extraterritoriality to devices for, in the words of the Order - a magnificent euphemism - "administering an incapacitating substance" but not extraterritoriality to the incapacitating substance itself?

(Ms Saunders) Yes.

Sir John Stanley: Thank you.

Chairman: Thank you very much indeed for your written evidence and for coming this morning. We hope Mr Parker recovers quickly. If there is anything else you want to say please communicate that in writing, we will be very pleased to hear from you. Thank you very much indeed.