Ordered by the House of Commons to be published on 10 November 2014
Oral evidence, 4 November 2014.
Witnesses
Paul Everitt, Chief Executive, ADS Group, David Wilson, Export Compliance, Hewlett-Packard Enterprise Services and Chairman of EGAD, Sue Tooze, Deputy Head of Trade Controls, Compliance and Assurance, BAE Systems, and Bernadette Peers, Compliance Manager, Strategic Shipping Company Ltd, gave evidence.
Chair
Good afternoon, representatives from EGAD. Welcome to Mr Everitt, Mr Wilson, Miss Tooze and Miss Peers. I am going to start with the same question I put to the UK working group. As you will have seen in successive reports that these Committees have produced, we are particularly concerned about the Government’s export policy on arms that could be used for internal repression. Is your view that, under the present Government, that policy has become more relaxed or tighter, or that it is broadly the same as under the previous Government?
Paul Everitt
I guess we would take the view that the policy is clear. We are not aware of any change. For clarity, nor have we sought any change.
David Wilson
I think, generally, we have found that the emphasis changes depending on the political situation in the various destination places over time and whether there is seen to be a risk—that is always the difficult bit that, it is accepted, Government has to follow. How much of a risk is there in sending stuff that we supply to our own police forces to a similar police force in Hong Kong? Was there seen to be a risk at the time? I would suggest that, probably, there wasn’t. It is probably not seen as a great deal more of a risk than providing the same material to the Metropolitan police. So the emphasis hasn’t changed, as far as I am aware.
Chair
Thank you. There is a further question I want to ask you. When the present Government issued its own consolidated criteria for arms exports in March this year, it dropped the policy statement made by the previous Government in that Government’s consolidated criteria issued in October 2000. The wording read: “An export licence will not be issued if the arguments for doing so are outweighed…by concern that the goods might be used for internal repression”. Do you consider that the dropping of those words is a matter of significance or not?
Paul Everitt
I am not aware that there has been any substantive change, nor would we infer from a change in wording that there had been a change in approach.
David Wilson
What I think disappeared was a certain amount of Government freedom of action to say that the risk is outweighed by something else, but of course we have no knowledge of what those other things that outweighed it might have been. I think I speak for all my industry colleagues when I say that if we think there is a risk—a clear risk, an outweighed risk; that is semantics—if we think there is a risk, nobody will be surprised if an export licence is refused.
Chair
Thank you. Now we come to the Arms Trade Treaty.
Mike Gapes
The Arms Trade Treaty comes into effect from December. What impact do you think it will have on your members?
David Wilson
Very little, I think, because we have worked closely with Government and the negotiators over a number of years to try and ensure that the Arms Trade Treaty brings other countries into line with the very clear processes that the UK already has, which are internationally accepted as robust. So to find that the Arms Trade Treaty outline processes are broadly similar to the ones that the UK has already implemented inevitably means that we as potential exporters are not going to be faced with a huge variety of great extra difficulty or bureaucracy. Little change is the simple answer to your question.
Mike Gapes
Does that apply to small companies as well as larger ones?
David Wilson
I would say so.
Bernadette Peers
I think it would do. The key problem for small and medium-sized enterprises is a lack of awareness. There has been much discussion about the Arms Trade Treaty so many SMEs are aware of it. It is more a Government concern than an industry concern because industry is following export control procedures anyway. Nothing will greatly change as a result of the treaty, so firms should not see a huge impact, but Government needs to make them aware that the treaty is now in force and, although the ECO’s limited resources may struggle with this, do some awareness work with SMEs on the fact that the treaty is in place, that there is a reporting requirement and what that reporting requirement is.
Sue Tooze
Industry is very supportive of the treaty and very keen to work with Government on the implementation arrangements. We are keen to continue to be involved with that initiative and to keep that dialogue open in the future.
Chair
We now come to the Export Control Organisation within the Business Department, and its computer system.
Mike Crockart
June this year saw the ECO issue a notice to exporters stating that it had recently migrated to a new system and had experienced a “significant short term impact on the performance and availability of the ECO SPIRE system”. What has been the impact on you and your members?
David Wilson
Quite a lot. As we understand it, it was largely Microsoft’s fault—it is always Microsoft’s fault—for withdrawing support to the operating system on which SPIRE was built, so it had to be substantially rebuilt. Short-term glitches were expected. What we were not expecting was the withdrawal of the control classification service at the same time. The classification service enables exporters to say, “I have a piece of kit here that is rated as ML10 or whatever and therefore needs an export licence to so-and-so. Do you agree that it is ML10?” The corollary of that is to go on and ask, “Do you think I would get an export licence for it or should I not bother to have a sales push?” The lack of that ability is hurting.
Mike Crockart
And that functionality was there previously?
David Wilson
It was. You were able to ask in SPIRE whether or not something was subject to an export licence. What has increasingly happened—I think there has been a spate of it recently—is that you try and find out the answer, and they say, “Apply for an export licence, and we will tell you whether it needs one.” That is a waste of the Export Control Organisation’s resources, and it is a huge waste of industry’s resources, because you have to go to the potential customer, you have to get an end user undertaking and you have to fill in all the bits and pieces. Then you apply for an export licence, and they say, “Actually, you didn’t need one” or “You did need one, but you can’t have one because—”. So there is an element of where industry used to work collaboratively, if perhaps informally, with the Export Control Organisation that has changed recently. There are two reasons for those changes. One is that the system has changed a bit. The other is the lack of resources as the Export Control Organisation has been hollowed out. I understand you want to address that situation further later.
Paul Everitt
I was going to say that we obviously understand why there were some hitches with the upgrade of the system; those are normal things that happen, and that, of itself, did not create major problems for industry. But the withdrawal of what was regarded as a very valuable and useful service alongside that has created further issues.
Mike Crockart
In the movement from the previous system to the new SPIRE system, how involved were your members in looking at the functionality that was there previously and in defining what functionality the new system should have?
Bernadette Peers
We had no impact at all on any discussions or consultations in terms of what we would like to see from SPIRE. We have always been very pleased with SPIRE—it has been a fabulous system, and what it provides is very useful to industry—but the removal of that control list classification service has had quite large ramifications for SMEs, because they don’t always have the technical expertise in-house, so they got quite a benefit from the CLCS. With its removal, being told to apply for licences now is not a good solution for industry or for ECO.
Mike Crockart
You say that there were two types of impacts. One was the removal of a piece of functionality, and one was the movement from one operating system to another. Has the second lot of issues gone?
David Wilson
Pretty much.
Bernadette Peers
Yes.
David Wilson
It was a change of operating system. Our understanding was that the functionality would just move from Windows XP or whatever it was to the new operating system, and various bits of it would change a little bit around the edges. That is, substantially, what has now happened, except for CLCS.
Mike Crockart
We visited the department dealing with these things, and we were shown the wonderful new system and how wonderfully it is working now, and I am glad that you are backing up that that is the case. But at the time, I asked what processes they had for feedback from users of the system to define what functionality was missing or needed upgrading or working on, and there did not seem to be anything there.
David Wilson
There isn’t a formal system, but we have a really good working relationship, in that if we think something has gone badly wrong, there is a bunch of people we can ring up. We can say, “Oy! This doesn’t work. What are you going to do about this?” and it will be fixed as quickly as possible. Our collective view, I think, is that SPIRE has been a success story on the part of the Government.
Mike Crockart
Okay, but in June this year, a piece of functionality was removed, and you have presumably been shouting about it since June.
David Wilson
Yes.
Mike Crockart
When is that functionality going to be put back?
David Wilson
The answer is when the Export Control Organisation is given more resources by the Government. There appears to be a lack of the technical skills inside the Government to make the technical decisions on whether something is licensable or not, and that is proving to be a big issue across a number of areas—in my case, in the dual-use area, where the UK Government has decided to take a uniquely strong line on what bits of computer equipment should be subject to export control and which bits should not be. We have found since the end of last year that, with pieces of computer equipment, other Governments have said, “No, you don’t need a licence for that.” Particularly the US—that is where most computer equipment comes from—has said, “No, you don’t need a licence for that.” We have checked with the French, and the French have said “No, you don’t need a licence for that.” So the company puts out advice to all its clients to say, “This piece of kit is rated as ‘no licence required’. You don’t need a licence for it.” Then it gets stopped at customs because the Export Control Organisation has said, “Oh! We think this does need an export licence.” Then you apply for a rating, and they come back and say, “Some of it is, some of it isn’t.” “OK—how do we know which?” “Ah! Well, you have to apply for a licence.” It is Catch-22, and it goes very slowly. Worse still, when you then appeal, there is no response to the appeal. We have had an appeal in since April: no response. That has resulted in huge damage—by our standards—to the UK balance of payments, because instead of stuff being sold from the UK, multinational companies now sell it from somewhere else. Simple. There is a pipeline from a manufacturer, and instead of that pipeline ending in the UK and then being sold from the UK, it now stops somewhere else, and the goods are sold from somewhere else.
Chair
Thank you. We will come back to the dual use list issue later. As you know, we very specifically and very clearly highlighted the issue of appeal delays in our last report. We come now to EGAD’s website guidance. Adrian Bailey?
Mr Bailey
If I were a small business, I would really expect to go to a Government website, i.e. the Export Control Organisation website, to get this information. Why are you doing it, and not the Export Control Organisation?
Bernadette Peers
The Export Control Organisation are doing it, but there is a great deal of information there. ADS and EGAD, in particular, just supplement what the UK Government are doing. We work closely with them, we assist on events, but in certain areas of UK industry, it is not ECO’s role to give advice on US export controls, in particular. So EGAD, ADS, will fill in that gap, because UK industry needs to understand not just UK export controls but global export controls. EGAD sees any outreach as a supplement rather than a replacement for ECO’s guidance. We have outreach sub-committees with the head of the outreach unit of ECO as the chair. So we are in discussion with them about what kind of outreach they can provide, and how we can assist them. It is a mutually beneficial arrangement, we feel.
Mr Bailey
So you are effectively supplementing what I think you said was already—I am sorry if I am putting words into your mouth—a considerable raft of information. How can that make it easier?
Paul Everitt
We would like to think it is complementary. Fortunately, in our team in the individual businesses are people who have that understanding and expertise. The very nature of our kind of organisation is that by sharing that expertise, we can promote good practice, and sometimes make it easier for people to get the point of understanding than it is when they approach a governmental website. For those who are comfortable and use the system often, the Government site is absolutely fine. For those who are perhaps new, or for whom it is a relatively new experience, the kind of help and information we provide helps them through the process.
Mr Bailey
If I were a small business applying to the Government website and I needed, say, supplementary or complementary information, would that website signpost your particular—
David Wilson
No, it does not.
Mr Bailey
That would seem a little odd, if you are providing specialist information.
David Wilson
It works the other way round, in that we point them to the darker recesses, if you like, of the Government’s bits of the website, which are not always the easiest thing for a novice to navigate.
Mr Bailey
But, again, if I were a small business dealing with a Government regulatory agency, I would assume—I may have got this wrong—I would go to the Government website first. A website that did not signpost the additional information that EGAD could provide would seem, on the surface, to be a bit of a deficiency and potentially to undermine the role that it is trying to play.
Paul Everitt
We would obviously welcome that sort of recognition and we would welcome the ECO pointing people towards us. Equally, our job as a membership organisation is to support our members. That is the approach that we take. If others acknowledge and support it as well, all the better for us.
Mr Bailey
Did you have any assistance from the Export Control Organisation when you created your website?
David Wilson
I don’t think so, no.
Paul Everitt
We would have said something on the website about the information we were using.
Bernadette Peers
There is a Cranfield University scheme that exporters can participate in. It was set up with the ECO, and the companies involved and EGAD were part of that. The scheme runs online courses and a day’s training. That was certainly done in conjunction with the ECO, but I don’t think the website or our guidance was, no.
Chair
We come now the Export Control Organisation’s performance.
Ann McKechin
You have already commented on how cuts are impacting on you, in terms of the staff in classification. More generally, you have spoken about the Department having a shortage of skilled and experienced staff and the number of applications that seem to be returned to companies.
Paul Everitt
There are a couple of points to make. First, we recognise that the squeeze on public sector resources is not focused solely on the ECO and that this is a general trend across the piece. I guess the issue for industry is more the hollowing out of expertise. It is not just a matter of people being there; it is necessary that those people have the requisite knowledge and experience of what can be quite a complex set of systems to operate and a complex industry to understand. It is more the expertise that is missing. We understand that there is a high rate of returns or requests for further information and we have asked the ECO about that. Clearly you would expect us to undertake some root cause analysis, so if all the people who are applying are not applying appropriately, we need to understand why that is the case and what actions we can collectively take to address that. It is in nobody’s interest to have a system that is not running smoothly or that does not process applications in a timely way.
Ann McKechin
Has any survey been carried out of your members of their reaction and their experiences over the past year?
David Wilson
We have asked the membership a number of questions, but I suppose inevitably individual companies are reluctant to put their head above the parapet.
Ann McKechin
Has the Government carried out a survey?
Bernadette Peers
I believe Ed Bell is undertaking an analysis of why there is such a high proportion. We would be very interested in finding out the details.
Ann McKechin
In previous years what was the normal rate of rejection of applications, and what is the current rate? Do you have any idea?
David Wilson
It has always been quite high, and we have worked with the Export Control Organisation for a number of years on a course called “Producing better licence applications”. Of course, not everybody has attended that course before they put in a licence application. That is probably—we do not know—a fairly major cause of the problem. Everybody accepts that it is incumbent on the applicant to fill the form in properly and answer the questions properly.
Ann McKechin
I’m not trying to put words into your mouth, but if a proper analysis were carried out and you could then work out what the reason was—perhaps training, as you suggested, is the most obvious reason—that would hopefully reduce the time spent by your members on the application process, and would also presumably keep costs down. I would have thought that all these cases being bounced back and forth and the correspondence emanating from it was not—
David Wilson
It wastes time and effort both in the companies applying and in the Export Control Organisation. If the analysis is carried out properly, it will show up any lack of training that is evident in the people doing the assessing. Do you want to give some anecdotal examples?
Bernadette Peers
In ECO’s defence, they are actually looking at putting “Making better licence applications” online. It will be on the website in the future so more of industry can see it; but the other side of that is that it isn’t always industry who are making the errors. We as a company have seen a string of completely nonsensical questions come back to us on a licence application, which resulted in us losing the business—we are a freight forwarder. We know that the goods got to where they were going, but they did not come through us legitimately—that is, with a licence application—because the application was bouncing back and forth, with questions that should not have been asked. So it is not always industry’s fault, and that is why we are so keen to see the result of the analysis.
Chair
Thank you very much. We want now to deal with particular aspects of licence revocations and suspensions.
Mike Gapes
A number of licences have been revoked and reviewed in the last two and a half years—Argentina, Egypt, Ukraine, Russia, Thailand and Israel are some, and individual licences may also have been revoked. What is the impact of this revocation or suspension of licences on arms exporters?
Paul Everitt
I think the first thing to say is that the nature of the business we operate in and of the regulatory system means that those situations are always a possibility. By and large, people accept that that is a risk of the business they are in. Certainly I can say that the most recent cases, particularly during the course of the year, have not raised specific issues or concerns. I think people recognise the shift in the international situation and what appears to be a proportionate response from Government as a consequence.
David Wilson
People can read the papers, and they expect that applications for goods that are perhaps sensitive, to destinations that have become sensitive, will be subject to scrutiny, and the licences may be withdrawn. I think everybody accepts that that process is going to happen.
Mike Gapes
Are you telling me there are no issues or difficulties?
David Wilson
It will cost companies money, but I’m not sure whether there are going to be screams and wails of anguish, because people can read the papers. In particular, companies don’t want to be the company that is sending sensitive goods to deeply sensitive locations, and they rely on the Government to give them advice on what should and should not be allowed.
Mike Gapes
So they won’t make a public protest about it, even if they are very unhappy?
David Wilson
No. The French may.
Sue Tooze
The feedback we have had is that, often, it is not the military exporters who are greatly affected, because they aren’t exporting to those destinations anyway. But there do seem to be some problems in the supply chain with importing goods, rather than exporting goods.
Mike Gapes
I see. So the components are coming from elsewhere.
Sue Tooze
Inwards, yes. And sometimes with dual-use exports, although that is not largely my field of expertise.
Mike Gapes
Thank you. What about the Wassenaar agreement? The EU dual-use control regime is supposed to have been updated, but it has been delayed. What is the impact of that?
David Wilson
That has been huge. As you are probably aware, the Wassenaar arrangement every year issues a new dual-use list, and every year the European Parliament and the Commission have had a sort of disagreement. That has resulted in EU dual-use regulation 428 of 2009 not being updated since 2011. There have been numbers of changes; some of them are increases in the capability of computers that are standard. Capability is increasing all the time, and the Wassenaar arrangement accepts that that is happening, as are increases in capability of encryption. As the security agencies gain capability in decrypting, the stuff that is controlled for export because it is difficult to crack should change. That hasn’t changed in three years. We are told that that problem has now been resolved between the Commission and the Parliament, and the new list updating the EU dual-use list to include the Wassenaar changes made up to and including December 2013 will be published by Christmas. That is the information I had yesterday evening. Which Christmas they did not say, but they did say it would be published by Christmas.
Mike Gapes
Do you think that when that happens it will be of benefit to UK exporters, or will there be advantages for some competitors?
David Wilson
Most countries follow quite quickly on the changes, so I think the big issue is that it should become a level playing field. I referred earlier to the UK’s uniquely hard line on cryptography export controls, and what should and should not be removed from those controls under what is called the mass market: stuff that you can go and buy fairly freely. The UK has taken a very, very firm line, which is causing great confusion, and that is causing a number of multinational companies to export from places other than the UK.
Mike Gapes
So the weakening of the requirements for the controls overall would make it easier for UK-based companies to export some of this quite sophisticated IT, but not necessarily stuff that would be regarded as militarily significant nowadays?
David Wilson
None of it, really, is militarily significant. Computers become cleverer and cleverer. Until fairly recently, very clever, very fast computers—for example, the computer that the Met Office has just bought, which comes from the States, needed an export licence from the States, because it is a very clever computer and it is very quick and it works very fast. So the levels change. Provided those levels stay broadly the same, which is the purpose of the Wassenaar arrangement, fine; nobody has any complaints. We are caused difficulty when the UK takes a different line. It is a matter of interpretation—I will not go into the horrible detail of it, because it would make my head hurt.
Mike Gapes
No, I don’t think we have time.
David Wilson
Differences in interpretation cause big changes in where material is exported from.
Chair
We now turn to the pre-licensing of brokers.
Ann Clwyd
As you know, for a number of years the Committees have been urging the Government to implement a register of arms brokers, and in April the Export Control Organisation issued a notice to exporters calling for evidence and seeking views. I think you were a bit opposed originally.
Sue Tooze
Yes.
Paul Everitt
Fundamentally, there were four points that we raised in the evidence that we provided. First, we all recognise that the current regime is very robust, and the question that we had was: “What improvement on the existing regime would be delivered by a pre-licensing or pre-registration system?” Secondly, we were still unclear about a specification of the problem that we were seeking to resolve in implementing that regime. Thirdly, there is no standardised definition of “arms broker” or of “arms brokering”. As a consequence, the danger we perceive is of something that will impose a very significant additional burden on companies which are already compliant within the existing regime, without delivering any specific benefit of which we are aware to the broader and wider community.
Ann Clwyd
When will the review be published?
Paul Everitt
I am afraid we don’t know. We answered the call promptly; it is for the Government to do its job and publish the responses.
Ann Clwyd
Have you asked the question?
Paul Everitt
Not specifically.
Chair
Now we come to transparency again.
Ann McKechin
You commented about the level of reporting. You may have heard our discussions with the UK working group on this issue earlier this afternoon. Are you as an industry now content with the level of reporting that is now required by the UK Government under its transparency initiative? On the additional announcement made by the Government about reporting, which was then withdrawn, if that was confined simply to those exports that have a military use only, rather than a dual use, would that be an onerous undertaking?
David Wilson
It would depend.
Sue Tooze
It would depend on what is to be reported.
David Wilson
One of the moans we had—if we could be said to be moaning—was that all of that information is already available to the Government now. That is particularly true—this is something that Oliver Sprague mentioned earlier—of the disconnect between what is licensed and what is actually exported. HM Revenue and Customs already have the information on what is exported—where to, under what licence, what the cost was and what the volume was.
Bernadette Peers
The difficulty with that, though, is that customers have always said that CHIEF—Customs Handling of Import and Export Freight, which is the data collector, if you like, at export—is old and struggling. Enabling it to draw that data off would be problematic; hence, it fell to industry to provide that data. There is a rewrite of CHIEF. We are hopeful that, when it is rewritten, it could perhaps collect that data.
Ann McKechin
It could incorporate it automatically.
Bernadette Peers
It would be useful to industry. Then, we would not have to do more reporting when the data is there in some form. The only problem with the collection of data is at export. An EU-to-EU transfer is not an export, so that data is not collected by Customs, unless it is under a standard individual export licence, not under open licences.
David Wilson
It is recorded and reported—
Ann McKechin
Perhaps I could suggest that if you want to come back to us with any more information, that would be helpful. You will appreciate that the Committees have indicated we would like to know what is being exported and the value, so that we are able better to scrutinise Government and so that, in turn, the public can know what is going on. If there is some technical problem you think could be overcome, and which would reduce the burden on industry, we would be interested to hear what that might be.
David Wilson
We can come back to you on that.
Paul Everitt
Our only concern is about transparency—it becomes increasingly burdensome. And, I suppose, there are a limited number of circumstances where there might be commercial confidentiality, when particular quantities of particular exports to particular countries might be viewed to be too identifiable and, therefore, this might pose a competitive risk. But I don’t think we have a major issue; in fact, a greater understanding of what is going on would be to everyone’s benefit.
Ann McKechin
Mr Wilson mentioned that some of this information was already available in the Government records. Could you possibly let us have a note of that in writing? That would, again, be very helpful to the Committees.
David Wilson
We certainly can.
Chair
If you could address that to the Clerk, we will make certain that it is circulated to all Members. Finally, I want to come to a particular aspect of extraterritoriality you have raised with us. This is a very wide and long-standing policy issue as far as the Committees are concerned, and we have fought a long battle of attrition with the previous Government and now with the present Government. We have got the Government position about 75% towards where we stand ourselves. You said that ECO’s guidance on extraterritoriality had been found “wanting”. Can you just spell out for us in what ways you consider it to be wanting?
David Wilson
I will take a very simple view on that. If exporters are calling the trade association and saying, “What on earth does all this lot mean?”, there is something wanting in the guidance. Now, it is not my area of expertise.
Sue Tooze
I think it’s quite difficult for companies when they have employees working abroad. It’s easier for the larger companies, who can issue guidance and guidelines. Some of the smaller exporters, who perhaps have business marketing offices abroad, might find it quite difficult to make sure they are on the right side of the legislation, without having clear guidance on when it actually affects them. That is one of the messages that will be really important. It is also difficult to monitor legislation that is enacted extraterritorially. It is going to be a problem to understand how that is going to be monitored in the future.
Chair
Right. If you feel you can elaborate a bit further and more specifically in writing to the Committees on where you find this guidance wanting, that would be very helpful. Mr Everitt, Mr Wilson, Miss Tooze and Miss Peers, thank you all very much indeed for your evidence. We appreciate it. That is the end of the session. Oral evidence: Scrutiny of Arms Exports 2015, HC 608 20