Introduction

123. In their review of the secondary legislation our predecessor Committees concluded "that a […] test of the proposals will be how effectively they can be enforced against those who have no regard for the letter of the law. Only effective enforcement will dissuade such people from involvement in trade in military equipment and technology".[174] In responding the Government said:

enforceability has been an important consideration in the framing of the secondary legislation. The maximum penalty for breaking export controls has been increased from 7 years (as it stands under existing legislation) to 10 years. Offences under the new controls relating to trade, technology transfers and technical assistance will carry the same maximum penalty. Most companies will fully intend to comply with the law and the new measures will provide clear direction on unlawful activity.[175]

124. We have expressed our concerns in chapter 3 about the absence from the 2007 Consultation Document of a systematic analysis of the effectiveness of export controls since 2004. In our view crucial to such an analysis is an evaluation of the enforcement of the 2002 Act by all arms of government, not just the Export Control Organisation (ECO). The question of the enforcement of the legislation has been central to our deliberations and those of our predecessor Committees.[176] We invited views on how effectively the legislation was being enforced against those who have no regard for the letter of the law and what were the challenges to bringing forward successful prosecutions.

Section 68(2) the Customs and Excise Management Act 1979

125. Section 68(2) the Customs and Excise Management Act 1979 provides that a person knowingly concerned in the exportation of goods, with intent to evade any prohibition or restriction in force shall be guilty of an offence and may be arrested. The penalty provisions for this offence in section 68(3) provide:

on summary conviction in Magistrates' Court a penalty of £5,000 or of three times the value of the goods, whichever is greater, or imprisonment for a term not exceeding six months or to both; or

on conviction on indictment in Crown Court an unlimited fine, imprisonment for a maximum term of ten years or to both.

126. HM Revenue and Customs (HMRC) explained that it assessed all intelligence and reported breaches to determine what, if any, action was appropriate. HMRC explained that it investigated all activity suggesting a deliberate breach "involving a sensitive destination or particularly sensitive goods"[177] and would refer the matter to Revenue and Customs Prosecutions Office, to consider whether there was sufficient evidence to mount a prosecution. HMRC's evidence leaves a question over those cases where there is intent but the goods or the destination is not sensitive. We consider that the effectiveness of the export control system can only be maintained if all breaches of export controls that are discovered are thoroughly investigated and penalties imposed. We are concerned that the difficulties in launching prosecutions under section 68(2) of the 1979 Act, particularly in respect of sensitive goods going to sensitive destinations, turn the provision into a dead letter. In our view intent to breach export controls is a serious matter and it is unacceptable for the authorities to consider prosecution only where there are aggravating factors such as the sensitivity of the goods or their destination. We recommend that, in any case where intent to evade export controls is suspected, the case should be investigated and where there is evidence of intent, irrespective of the sensitivity of the goods exported or of their destination, prosecution should always be initiated under section 68(2) of the Customs and Excise Management Act 1979.

127. Where a case involving sensitive goods or a sensitive destination is reported to the Revenue and Customs Prosecutions Office, HMRC told us that outcome could be:

a)  that the reported behaviour did not constitute an offence;

b)  that prima facie an offence might have been committed but there was insufficient evidence to support a prosecution;

c)  that there was sufficient evidence to support a prosecution but that prosecution was not in the public interest; or

d)  that there was sufficient evidence to support a prosecution and that prosecution was in the public interest.[178]

128. In its memorandum the Revenue and Customs Prosecutions Office set out the reviews it made before proceeding with a prosecution. The reviewing lawyer must, for example, be satisfied that there was enough evidence for there to be a "realistic prospect of a conviction" against each defendant on each charge.[179] The Prosecutions Office explained, however, that satisfying the sufficiency of evidence test could be particularly challenging in prosecuting offences in this area because:

it was difficult to prove the destination intended for the goods in question; there might be intelligence to show that the goods were going to a country of weapons of mass destruction (WMD) concern, although the apparent destination might be innocuous;

vital evidence was often located abroad; whilst it might be possible for some or all of the evidence to be obtained by Letters of Request or bilateral Mutual Administrative Assistance arrangements, the degree of cooperation and the length of time that it took to deal with the request could vary from country to country; in addition, there might be issues as to the provenance of a particular exhibit, and its subsequent evidential admissibility in a UK trial;

evidence about the specification, functionality and proposed use of the goods could be ambiguous, which made inference of guilty knowledge difficult to draw; and

exports were sometimes accompanied by End User Certificates that were supplied by foreign governments, which were suspected to be false; in these circumstances it was difficult to prove beyond reasonable doubt that they were false instruments for the purposes of a prosecution.

when potential defendants were located outside the European Union, it could be particularly difficult to get them extradited to the UK.[180]

129. In its evidence the Revenue and Customs Prosecutions Office concluded that while in theory the legislation should not be any more difficult to apply than any comparable legislation, the challenge lay in finding sufficient evidence for a successful prosecution.[181]

130. HMRC said that "where offences are committed entirely overseas, the enforcement difficulties can be compounded" but that "where the alleged activity is internationally condemned, such as breaching UN embargoes, greater cooperation can generally be expected from foreign Governments and enforcement bodies".[182] We found no evidence, however, that breaches of embargoes were more successfully prosecuted than other breaches of export control.

131. It appears to us almost paradoxical that those cases which involve goods that are not sensitive or are not bound for sensitive destinations may not be referred for prosecution while those that do are referred but they are the cases where the prospects of securing evidence to launch a prosecution are slight. We conclude that, because of the need to secure evidence or witnesses from abroad or to reveal evidence provided by the intelligence services in court, prosecutions under section 68(2) of the Customs and Excise Management Act 1979 against those posing most threat to the UK's strategic export controls are problematic.

132. EGAD expressed concern that the seeming inability of the Government to enforce the existing laws might be used as a justification for pressures to tighten further the regulations. It argued that in many cases, what was needed was the political will to implement effectively the legislative tools that the Government already had at its disposal. EGAD was "unaware of a single legal action which has been taken by the Government against any of the real, non-compliant 'bad guys'", despite some cases having come publicly to light, and was "unaware of any cases which have been even investigated which have been of an extra-territorial dimension, since the adoption of the [Export Control Act 2002] some two and a half years' ago".[183]

133. In a memorandum in December 2006 the Government said that there had been three successful prosecutions since the beginning of 2006.

On 23 March 2006 Vestguard UK Ltd was convicted under section 68(1) of the Customs and Excise Management Act 1979 for exporting Body Armour to the value of £128,000 to Kuwait, Iraq and Saudi Arabia. The company was fined £10,000 and ordered to pay £500 costs.

On 6 September 2006 Peace Keeper International Ltd had pleaded guilty to 3 offences under section 68(1) of the 1979 Act of exporting body armour and helmets to the value of £23,000 to Kuwait and Iraq during 2004. The company was fined a total of £10,000 and ordered to pay £1,600 costs.

On 7 September 2006 Winchester Procurement Ltd pleaded guilty to 10 offences under section 68(1) of the 1979 Act of exporting military helmets and flak jackets to the value of £48,260 to Kuwait for use in Iraq during the latter half of 2004. The company was fined a total of £8,000 and ordered to pay £500 costs.

We note that none of these successful prosecutions was under section 68(2) of the 1979 Act. All were under section 68(1) which we consider further at paragraph 148 and following. In addition to these successful prosecutions the Government pointed out that:

In December 2006 a compound penalty[184] of £15,000, in lieu of prosecution, had been paid by a company which had exported carbon materials to various destinations. The company had made a voluntary disclosure to HMRC, following a DTI compliance visit, but HMRC enquiries had revealed additional unlicensed exports that had not been accounted for in the disclosure. In addition, restoration fees of £6,945 were imposed in 13 separate cases where HMRC had seized goods. HMRC suggested that the figure was likely to be higher as cases were dealt with locally and not all records were complete.[185]

134. HMRC added in its oral evidence that in 2006-07 although it had two cases concluded by a conviction in a court it also settled "two cases by compound penalty as a result of a criminal investigation".[186] HMRC told us that "the number of prosecutions will not be high and should not be used as an indicator as to whether the controls are successful".[187]

COMPOUNDING PENALTIES

135. The Revenue and Customs departments have powers under section 152 of the 1979 Act to compound offences, that is to accept a monetary amount in lieu of pursuing criminal proceedings. Compound penalties can only be issued where there is evidence to a criminal standard that an offence has been committed.[188] In its evidence to us HMRC explained that in the two cases it had concluded that compounding rather than prosecution was justified because of lower degrees of seriousness and exceptional mitigating factors.[189]

136. HMRC also assured us the compounding was compliant with the Human Rights Act. On legal advice HMRC applied compounding in a way that was compliant on the following principles:

equality of treatment; the opportunity to compound was offered to a company and there was no duress; it was available to everyone in a similar position;

it was truly voluntary; there was no improper pressure by way of threat of prosecution; and

there was sufficient evidence to prosecute; there had to be confirmation from Revenue and Customs Prosecutions Office that there was sufficient evidence to justify prosecution and that if it was to report the case for prosecution the public interest criteria would justify a prosecution.[190]

137. HMRC explained that it could not publish the names of those who paid compounding fines:

HM Customs and Excise of old did […] publish names in certain cases that were laid down by Peter Lilley when he was the Paymaster in 1989. Events have overtaken us. The Commissioners for Revenue and Customs Act prevents us from doing so. We have clear legal advice that we cannot publish the names. What we still do—and in these two cases—we are publicising details without the names, so we are publicising in general terms that there has been a case concluded involving these factors and this sort of behaviour but we are still looking to publish information on that basis. One of the two has yet to be publicised.[191]

138. We were grateful to HMRC for the explanation of the operation of the compounding process and for additional information about the above cases. We make no criticism of HMRC but we are concerned that the process could be construed, or misconstrued, as a lenient option available at the discretion of HMRC. To ensure that the process of levying compounding fines is as transparent as possible we recommend that HMRC continue to provide full disclosure of the details of all cases, but without names. In addition, we recommend that, when a suitable opportunity arises, the Government bring forward legislation to require HMRC to publish the names of those paying compounding penalties.

CO-ORDINATION AND COMPARISON WITH OTHER JURISDICTIONS

139. In our Report last year we recommended that HMRC examine how other EU countries' experience in prosecuting export control breaches could be exchanged and built upon more systematically. We are pleased to note that the representatives from the Revenue and Customs Prosecutions Office were able to attend a meeting of prosecutors and investigators hosted by Eurojust.[192] The Prosecutions Office provided us with a note explaining the lessons that it had drawn from the meeting, which included

a)  the complex investigative background to […] cases can easily cause similar difficulties to the sort of disclosure questions that we face in the UK;

b)  procedures for dealing with such issues vary considerably from country to country. Inability to disclose sensitive matters can sometimes lead to trials collapsing;

c)  the ability to implement a very strict licensing regime and impose civil penalties often results in early disposal of breaches; and

d)  that ability to have a forum to meet prosecutors and investigators involved in similar work and to share experiences is a valuable experience and well worth developing further. [193]

140. The level of successful prosecutions, although improving in 2006-07,[194] remains at a relatively low level. We considered whether this level of prosecutions was common across the EU. EGAD believed that the UK's export control legislation and enforcement were at least comparable with those of other EU Member States, and were probably amongst the most effective in the World.[195] We asked Dr Bauer and Ms Wetter to compare the approach of the UK Government to that of other European States. They reported the following.

A survey of the penalties in place that are linked to export control offences in EU Member States shows that they vary both in type and scale. The range of maximum penalties varies from 12 months of imprisonment (Ireland) to 15 years of imprisonment (Germany).

A study on administrative enforcement practices in the EU conducted on behalf of the European Commission shows that nine of the 11 Member States surveyed can impose administrative sanctions for export control violations.

Almost half of the Member States have applied their criminal sanctions against exporters violating export control law. One third of Member States regard only intentional violations as criminal offences, whereas the remaining two thirds consider violations as criminal offences in any event.[196]

141. From this survey and from the Revenue and Customs Prosecutions Office's note on the Eurojust meeting it appears that the method of operation of the authorities in the UK and the problems they face are broadly similar to those of the Member States of the EU. On the sanctions available, it is clear that most States can apply a range of administrative and criminal penalties. Administrative sanctions can include monetary sanctions and the loss of export licences, of the right to privileges (for example, simplified procedures) and of property rights through confiscation and destruction of the confiscated product. Criminal penalties can include fines, imprisonment and suspended sentences. Fines have been classified as either administrative or criminal sanctions, depending on factors such as the authority that decides and the laws on which they are based.[197]

142. We are, however, concerned that neither these contacts with Eurojust nor other contacts with export control licensing and enforcement authorities in the EU appear to have informed the 2007 Consultation Document. In our view it is useful to draw on the experience of EU States when considering issues such as the regulation of ancillary services or the treatment of subsidiary companies, which we address in this Report. Moreover, as the Consultation Document acknowledges some areas such as military end-use control are areas of EU competence.[198] In our view the absence of an international perspective in the Consultation Document is a flaw in the Government's review of the export control legislation.

143. From the evidence we received about the enforcement of export controls in other Member States of the EU we concluded the following. First, the level and pattern of prosecutions in the UK is not significantly out of line with that in other EU States, but further examination is required for a comprehensive analysis of procedures, approaches and court rulings across the EU. Second, given the similarity of work and problems faced we are disappointed that the 2007 Consultation Document fails to draw in evidence from other EU Member States. Third, we recommend that the Revenue and Customs departments continue to develop arrangements to share information and experiences with enforcement authorities across the EU.

RESOURCES FOR PROSECUTIONS

144. The UK Working Group had "serious concerns that not enough resources are being allocated to the implementation of the existing regime" and that on "a number of occasions where there has been evidence of breaches of controls, the response of Government has been inadequate".[199] HMRC explained in its memorandum that in "allocating resources to overseas investigations that can be costly, we have to take account of the likelihood of cooperation to obtain evidence and the seriousness of the offence that we can allege".[200] We conclude that in those cases where evidence is required from overseas HMRC is correct to concentrate on those cases involving sensitive goods and destinations where there is a likelihood of cooperation to obtain evidence. The Government has, however, to recognise that effective enforcement requires resources. We recommend that the Government increase resources for investigations and prosecutions under section 68(2) of the 1979 Act, particularly, to ensure the coordination and exchange of information with EU and other governments. This recommendation also fits into the commitment under the EU's Strategy against the Proliferation of WMD, which states that "The EU is committed to strengthening export control policies and practices within its borders and beyond, in co-ordination with partners".[201]

145. Before examining other methods of enforcement and penalties we have one general concern about section 68(2): whether the existence of a range of alternatives to prosecution inhibits the initiation of prosecutions. In our view the existence of other methods of enforcement and penalties should not inhibit the use of section 68(2). We recommend that as a matter of course HMRC consider all breaches of export control for prosecution under section 68(2) of the Customs and Excise Management Act 1979 and that where the evidential and other tests carried out by the Revenue and Customs Prosecutions Office are met prosecution should be initiated. The availability of a range of alternative penalties to those imposed by prosecution under section 68(2) of the 1979 Act does, however, take the pressure off the need to modify prosecution procedure by, for example, reducing the evidential tests. We received no evidence that these tests and reviews should be changed. In addition, changes to the reviews or to the tests that the Revenue and Customs Prosecutions Office has to make before launching a prosecution run the risk of the reappearance of the systematic failings which led to the Scott Inquiry—for example, the failure to disclose information to the defence. We conclude that no change should be made in the operation of the reviews and tests carried out by the Revenue and Customs Prosecutions Office before a prosecution can be launched.

Alternatives to prosecution under section 68(2) of the Customs and Excise Management Act 1979

146. Enforcement of export controls is not synonymous with prosecution under section 68(2) the 1979 Act. As the survey of enforcement of export control in Member States of the EU noted there are several methods of enforcement other than prosecution. The alternatives range from strengthening and extending the licensing controls to disruption and seizure of goods.

EXTENSION OF ADMINISTRATIVE ARRANGEMENTS

147. In its evidence EGAD questioned whether there was any point in burdening a compliant industry with the current bureaucracy if no-one checked who complied and who did not.[202] EGAD said that HMRC staff had to be resourced and trained adequately on export controls and that it was "no good seeking to rectify this merely by seeking to add yet further unnecessary bureaucratic burden on a compliant Industry, when almost no additional efforts will be taken to identify and pursue those who are not complying with the new, even tighter regulations, than have been with the previous ones".[203] We share EGAD's analysis. We conclude that it would be detrimental to industry if the Government were to increase the administrative burdens on exporters without convincing evidence that the existing measures were being fully enforced against those who with intent flout export controls.

PROSECUTION UNDER SECTION 68(1) OF THE CUSTOMS AND EXCISE MANAGEMENT ACT 1979

148. The Revenue and Customs Prosecutions Office pointed out that prosecution via section 68(2) of the 1979 Act was not the only option available. Section 68(1) of the 1979 Act provided that an offence was committed if any goods were exported contrary to any prohibition or restriction in force. The Revenue and Customs Prosecutions Office explained this was a strict liability offence, which meant that it was punishable on summary conviction to a maximum penalty of three times the value of the goods or £1,000, whichever was the greater amount. In addition, the goods in question were liable to forfeiture and this offence applied whenever a breach had been committed regardless of the knowledge or intent of the exporter.[204] Recently, recognising the need to improve deterrence, HMRC had identified strict liability cases with aggravating features and reported them to the Revenue and Customs Prosecutions Office.[205] The Prosecutions Office added that:

the increase in the numbers of strict liability offences that have been prosecuted in the past 12 months has been widely reported in the trade, which suggest that any prosecution of more serious offences would attract similar or greater notice.[206]

149. We consider that prosecution under section 68(1) of the 1979 Act should be examined in all cases where there has been a breach of export control. We recommend that in any case of breach of export control where prosecution under section 68(2) of the Customs and Excise Management Act 1979 is not possible, the Revenue and Customs Prosecutions Office as a matter of course consider, and take steps to maximise successful prosecution under section 68(1) of the 1979 Act and that the outcome of successful prosecutions be publicised by HM Revenue and Customs.

USE OF WARNING LETTERS

150. In its memorandum of December 2006 the Government provided a list of the warning letters that had been issued in 2005 and 2006.[207] HMRC explained that the purpose of the letter "is really about preventing and deterring and perhaps steering that company and its employees towards improved compliance".[208] HMRC added that all "warning letters will be referred to our local inland audit staff in one or other of our operational directorates. They will pursue any potential breaches or any issues arising from that warning letter in their follow-up audit of that company's books and records."[209] HMRC also indicated that it could "consider carrying out some further publicity, either local or national, which would focus on the type of offences that are being carried out and that generate the warning letter and therefore provide some further publicity of the types of things that exporters are doing that are clearly potentially in breach of the Export Control Act. Exporters need to take that on board and learn lessons from it".[210]

151. We support the use of warning letters and wish to ensure that they are used to the best effect to strengthen the export control system, and we welcome the use of warning letters and HMRC's commitment to examining greater publicity. We conclude that a warning letter should not be an alternative to a prosecution that meets the Revenue and Customs Prosecutions Office's tests for a viable prosecution and we recommend that, in those cases where a letter is issued, HMRC follow it up to ensure that all deficiencies have been rectified. We also recommend that HMRC examine the opportunities for greater publicity about warning letters subject to ensuring that the reputation and legitimate commercial interests of exporting companies are not unjustifiably damaged, and report its conclusions in the Government's response to this Report.

DISRUPTION OF EXPORTS OF CONCERN

152. We note that in the 2007 Consultation Document the Government said that "some effective actions have been taken to prevent or deter undesirable activities overseas".[211] No information is provided. HMRC told us that one of its contributions to preventing and deterring the illegal trade in strategic goods was disruption. HMRC explained that by, for example, visiting potential exporters in collaboration with the relevant agencies they could prevent any exports of concern. HMRC also detected non-listed goods going to end users of concern under the WMD end-use catch-all control but pointed out that these could not normally be seized unless—as already noted at paragraph 87—there was evidence that the exporter had grounds to suspect a WMD end-use. But HMRC's intervention would often result in withdrawal of the goods from export or to the goods being brought within the licensing system.[212] We assume that if the Government becomes aware, for example through intelligence, that uncontrolled goods intended for export could be used for WMD, HMRC or the ECO would inform the exporter of its concerns and at that point the "catch-all" provisions would come into operation and the goods could then be seized.

153. HMRC stated that "much valuable disruption activity has been done by HMRC investigators working with our overseas counterparts, with intelligence and security agencies, with other Government Departments and with industry".[213] HMRC stated that it had disrupted procurement attempts by preventing the supply on 34 occasions between 1 April 2005 and 31 March 2006 and 15 such attempts between 1 April 2006 and 30 September 2006.[214] HMRC's approach chimed with the view of Dr Bauer and Ms Wetter who were of the view in their memorandum that:

Arguably, the most dangerous proliferator is part of a larger network which works towards developing WMD for a state or a non-state actor. This type of proliferator tends to be indifferent to the deterrent factor of a harsh punishment (general prevention) since he or she is driven by a determination to succeed with the mission. Such a proliferator would need to be removed from the criminal arena to interrupt the proliferation risk (special prevention).[215]

154. EGAD requested that not only more enforcement effort take place (and be publicised), but also for this to be focused in trying to tackle the non-compliant "bad guys", rather than "taking the easy option of seeking to pick on inadvertent administrative minutiae errors from the compliance efforts of the legitimate and law-abiding, in order to meet targets".[216]

155. Having monitored strategic exports for nearly two years we have no doubt that HMRC should have the powers and resources to be able to disrupt exports smuggled in breach of export control and to make preventative confiscation of goods which may be exported for a WMD end-use. We were reassured that in its evidence to us HMRC was alert to the risk that the use of this crucial power could be open to criticism and was "looking into ways of providing more information with suitable safeguards".[217] We received no evidence that the power to disrupt had been abused and we accept that it is a legitimate and crucial weapon in HM Revenue and Customs' armoury. The exercise of the power by HMRC is not, however, usually subjected to review by the courts and it therefore needs careful supervision by ministers and Parliament. We recommend that HMRC as part of the review of export controls bring forward proposals to provide more information about the use of the power to disrupt exports of concern and to provide suitable safeguards, and provide information about how this is handled in partner countries.

SEIZURES

156. Table 1 below sets out the number of seizures in each of the past six financial years. Seizure occurs when HMRC detain goods subject to export control which appear to be intended for export without a valid export licence.[218]

157. The table shows that there has been a steady downward trend in the number of seizures by HMRC. We note that seizures in 2005-06 stood at less than a third of the level that they were in 2000-01. We recommend that the Government in replying to this Report provide an explanation for the reduction in the number of seizures since 2000-01.

The role of the intelligence services

158. When we invited HMRC to suggest indicators to show whether or not it enforced export controls effectively, Mr Fuchter, Head of Prohibitions and Restrictions Group, HMRC, identified, first, "preventing exports to a WMD programme […] either in response to […] tasking from the Restricted Enforcement Unit […] based on sensitive intelligence" and also "preventing similar trafficking in conventional arms". He said that "it is about prevention combined with other departments to ensure that the Government's export controls outcomes are achieved [to ensure] exporters are aware and incentivised to remain compliant [and] those considering or behaving in a non-compliant way are deterred from doing […] Finally, if proliferators and middlemen enter the field, that they are detected quickly and either dissuaded, taken out or denied the goods."[219]

159. The reply from HMRC highlighted for us the critical role of the Restricted Enforcement Unit. We assume that behind the Unit stands the intelligence services which provides material to inform decisions about applications, to inform HMRC's targeting and to alert HMRC to consignments of concern.[220] The part the intelligence services—the Security Service (MI5) and Secret Intelligence Service (MI6)—play in the system of export control is a matter on which neither we nor our predecessor Committees have commented in detail. Nor have we taken evidence directly from the intelligence services. From our own scrutiny over the past two years and from our visits to the Department of Trade and Industry (DTI) and Foreign and Commonwealth Office (FCO) it appears to us that intelligence should play a crucial role in the operation of export controls and that communication and sharing of intelligence within Whitehall is satisfactory. Indirect evidence we received from EGAD chimed with our view. While not commenting on the role of the intelligence services, EGAD believed that liaison and communication between the various Government departments was effective.[221]

160. It appears to us that the efficient enforcement of the export controls is dependent upon intelligence which could be said to provide the lubrication which allows the system to operate. We expect HMRC to be working with the intelligence services and to be using enforcement tools that include the monitoring of telecommunications, undercover operations and computer surveillance, all of which Dr Bauer and Ms Wetter identify as necessary in their memorandum.[222] There are risks in that this part of the system is neither transparent nor subject to the same degree of scrutiny as, say, the Export Control Organisation. The risks could be compounded by the availability of alternatives to prosecution such as disruption which, as we have noted, is not usually subjected to review by the courts.

Level of penalties

161. We sought information of the costs of prosecution and level of fines from the Revenue and Customs Prosecutions Office. Table 2 below[223] shows the cases prosecuted over the last two years, the goods and their value (where available) and the approximate cost of the prosecution to the Revenue and Customs Prosecutions Office. The figures do not include HMRC's investigation costs. It appears that the level of fine is well below the value of the goods seized and in two cases barely covers the costs of prosecution. In one case, Vestguard, the fine of £10,500 was 8% of the value of the goods intercepted. Such a fine could be classed as an overhead rather than a deterrent. We cannot see that fines at these levels act as a deterrent.

162. We sought views on whether the increase in the maximum penalty for intentional breaches of export control from seven to ten years had acted as a deterrent. The Revenue and Customs Prosecutions Office, which has responsibility for prosecuting cases, told us:

The impact that the increase of the sentencing powers from 7 years to 10 years imprisonment has had on the commission of these offences is difficult to measure because of the challenges of prosecuting these offences and their relative rarity. It is difficult if not impossible to measure how the increase in sentence has acted as a deterrent.[224]

163. EGAD in its evidence said that, whilst the raising of the maximum penalties for non-compliance had a "beneficial effect in assisting export control compliance staff within companies to get the attention of their colleagues on export control matters", the subsequent dearth of any headline prosecutions underscored with heavy penalties on transgressors had allowed this threat of potential prosecution to reduce as an "effective awareness raising tool". EGAD added that those cases which had arisen and been publicised, even though the penalties had been quite small in comparison to those which could be available, or which are regularly imposed in the USA, "had helped to grab the attention of colleagues within companies", and EGAD urged that more publicity be given to HMRC's activities against illegal exporters, even if this is merely disruptive in nature and not resulting in a court prosecution.[225]

164. In our Report last year we recommended that the Sentencing Guidelines Council conduct a review of the guidelines on sentences for breaches of export control as a priority.[226] In response, the Council explained that it already had a very full work programme for 2006-07 and, after careful consideration, decided that sentencing for breaches of export control could not be accommodated within this, particularly in view of the relatively small number of cases involved. The Council agreed, however, to consider the issue again when it determined its work programme for 2007-08.[227]

165. We are grateful for the consideration that the Sentencing Guidelines Council gave to our recommendation and we appreciate its pressures of work. Nothing in the evidence we have taken this year diminishes the force of the recommendation we made in last year's Report. If, as we have discussed, prosecutions under section 68(2) of the 1979 Act are very rare, we conclude that the effectiveness of the statute as a deterrent will be further weakened if those convicted receive non-custodial sentences or suspended or short imprisonment.[228] We consider that the fact that there are only a small number of prosecutions underscores the need for a review by the Council as there is a risk that the courts may form an erroneous view that a breach of export control is an exceptional and unimportant contravention of the law. We reiterate our recommendation made last year that the Sentencing Guidelines Council conduct a review of the guidelines on sentences for breaches of export control and we press the Council as a matter of urgency to include the review in its programme for 2007-08.

Intangible transfers of technology

166. The 2002 Act provided a new power to control the transfer of all controlled technology by electronic means and to control the transfer of information which could be used for weapons of mass destruction. When they examined the primary legislation our predecessor Committees concluded:

The proposed controls on the passage of technology relevant to weapons of mass destruction are profoundly significant. The Government's proposals are, we believe, ground-breaking in some respects. They deserve support for bringing them forward. It is an area of policy crying out for more effective international agreement. There would also be benefit in close analysis of the experience of other countries and of the measures they are taking, faced with similar challenges. Given the complexity and sensitivity of the issues, it is also particularly important that there be wide and detailed consultation in drawing up the secondary legislation. Non-proliferation is arguably the most important single issue in strategic export control.[229]

167. When subsequently they examined the proposed secondary legislation our predecessor Committees recommended that "the Government should take care to recognise the essential differences between physical exports on the one hand and, on the other, electronic transfers, which are not physical, and brokering activities, which are not exports".[230] They pointed out that different sorts of activity may require different sorts of control.

Effects on academic research

168. When the legislation was being framed academics were concerned that it could infringe academic freedoms and inhibit scientific research—for example, that the Government would require prior scrutiny of research papers and vet research students.[231] Our predecessor Committees recommended "incorporation in the Bill of the safeguards for bona fide academic activity set out in the commentary on the draft Bill and in evidence from the Secretary of State".[232] Section of 8 of the 2002 Act contains explicit protection of a number of freedoms.

169. In the run-up to the introduction of the new controls in 2004, the Export Control Organisation (ECO) consulted representative bodies for the academic community and following these consultations placed extensive guidance on its website. Universities UK, a body representing the interests of UK universities, is a standing member of the Export Control Advisory Committee (ECAC), a grouping co-ordinated by ECO bringing together trade associations or other bodies and which provide a forum for discussing export control issues or raising matters of concern. Representatives of academia have attended ECAC meetings on a number of occasions. ECO has also undertaken a number of compliance visits to higher education establishments and has given presentations about the new controls to academic audiences. As part of the preparations for the 2007 review of export controls, ECO has been in touch with a selection of academics and has arranged to meet them.[233] In the 2007 Consultation Document the Government said that it would continue to work closely with the academic community on awareness within this sector.[234]

170. Whilst in principle, all export controls applied to academia in the same way as they applied to any other body, the Government explained to us that, in practice, the main area of concern had been the potential transfer of technology that might be of use in WMD programmes. Controls were applied where the academic or researcher had been informed by the Government that such a transfer was intended for a relevant WMD-related use, or was aware that it was so intended, and might be used outside the EU. As such, the controls were triggered more by the recipient of the technology and the intended use, rather than by the intrinsic nature of that technology, vetting of individual research papers or publications was not part of the Government's strategy for enforcing controls in this area. Instead the Government followed a two pronged strategy:

The first line of defence against unwelcome transfers of technology is to prevent students of concern attending courses where such technology might be imparted. Historically, this has been achieved by way of the Voluntary Vetting Scheme, but this is soon to be replaced by a more comprehensive, compulsory scheme known as ATAS (Academic Technology Approval Scheme). Under this pre-Visa scheme, which will be run by the Foreign and Commonwealth Office, all non-EU students intending to undertake PhD and Masters research in specific areas (broadly Maths, Engineering, Physics, Chemistry, Biology and Computing) will need to apply for an ATAS certificate. The application will be rigorously risk assessed and a clearance certificate either granted or refused. Until the student possesses the certificate they will not be able to apply for a student visa or extension. The Government then sees export controls as a second line of defence, with the awareness effort as its key tool. A good deal of awareness raising with academics has already taken place […] but the Government is by no means complacent and will consider whether its efforts can be expanded or improved in the light of our forthcoming discussions with the academic community.[235]

171. HMRC told us that it had not concluded any investigations against academics, although it had intercepted academics at outward controls at London Airport on the basis of intelligence. HMRC advised us that it was investigating "a case not involving an academic but involving intangible transfers of technology".[236]

172. We invited the views both of academics' representative bodies and a number of academics who had written on export controls. Whilst we are grateful to those who have replied, we found it difficult to elicit views from academics whose work and students may have been affected by the operation of the 2002 Act. One who responded was Professor Ross Anderson who said that he had been unable to work out whether a number of common examples of routine scientific collaboration breached the regulations or not. He claimed that thousands of UK academics were "conducting bona fide research with colleagues overseas that could be held, should the Government ever care to go after them, to be criminal". In his view:

The Export Control Act is thus, as currently administered, one of the most objectionable pieces of legislation on the UK statute book. It criminalises thousands of people by stealth, laying them open to jail should they ever annoy the Government. The DTI has not had the courage to advertise this fact at all widely. Thus the affected parties have not […] received sufficient notice of any changes and adequate explanation of the requirements in the orders, and the system of export controls is far from being accountable and transparent.[237]

173. In their memorandum Miss Kidd and Dr Hobbs echoed some of these concerns:

It would appear that little scientific research has been affected by the UK's export controls for two reasons: firstly, few scientists are aware of 2002 Export Control Act and its implications on research and, secondly, those that are aware do not alter their research programmes to take the Act into account. This is not a satisfactory state of affairs. It is recommended that, as a matter of some urgency, the relevant Research Councils be made aware of the 2002 Act and its implications for academic research and that they are asked to disseminate this information to universities.[238]

174. The Royal Society also told us that academics did not have "a culture of dealing with export controls" and "this is something that will need to be built up over time".[239] The Royal Society stressed, however, that

it is too soon to determine whether the Export Control Act is significantly affecting academic freedoms or scientific research. We would like to suggest that the Department of Trade and Industry should monitor this issue. We will continue to maintain our watching brief over all legislation or regulation that might unduly hinder scientific progress. If we discover any such issues we will bring them to the attention of your Committee, the Department of Trade and Industry or other Government Departments as appropriate.[240]

175. While we have some sympathy with the view of the Royal Society that more time is needed, the timetable for the review of the legislation does not make this possible. The concerns expressed by academics when the legislation was before Parliament were serious and, if found to be justified, may require changes to the legislation. The absence of an identifiable reaction from academics does not of itself, in our view, justify a conclusion that the legislation is working satisfactorily. The submissions of Professor Anderson, Miss Kidd and Dr Hobbs contradict this view. On the other hand, the Government has adopted a relatively "light touch" to enforcement by concentrating on WMD and, we assume, suspicious activities or individuals identified by intelligence. It is also now putting in place what appears to be a comprehensive system for vetting non-EU postgraduate students where the responsibility for denial of admission rests clearly with the Government, not academic institutions. There are risks with this approach—for example, that academia remains ignorant of the requirements of 2002 Act and may fail to report suspicious activities. We recommend that the Government examine the effect of the Export Control Act 2002 on academic institutions and on postgraduate research and consider whether the legislation is working as intended. We also recommend that the Government formulate and adopt a publicity strategy to inform academic institutions, research councils and similar bodies of their responsibilities under the Export Control Act 2002.

Open general licences

176. The Government has indicated its intention to use open licensing to ensure that individual licence applications are kept to a minimum.[241] The existing Open General Export Licence (OGEL) for military technology has been extended to electronic transfers of technology. Our predecessor Committees saw no possible objection to this.[242] In addition, the Government introduced an Open General Trade Control Licence (OGTCL), covering trade to and from a number of countries selected on the basis that they had "robust and long developed export control systems" and that they followed the same core principles as the UK and the EU.[243]

177. During our predecessor Committees' examination of the secondary legislation the Working Group on Arms expressed concerns about the Open General Transhipment Licences (OGTLs), which allow the export of specified controlled items by any exporter without the need to apply for an individual licence, provided the shipment and destinations were eligible and certain conditions were met. The Working Group was concerned that OGTLs would provide a loophole allowing exports to countries such as Israel to which the Government would not licence exports directly from the UK.[244] Our predecessor Committees took the view in 2003 that it would be superfluous, bureaucratic and potentially anti-competitive where trade was already subject to robust and principled regulation abroad, to subject British citizens and companies to the requirements of a second regulatory system. The basis on which the Government proposed to introduce OGTLs seemed to be sound to our predecessor Committees.

178. In carrying out our current inquiry we considered whether there was any evidence that the open general licences had provided loopholes, allowed goods to be exported in contravention of the EU Code of Conduct on Arms Exports or had compromised UK interests and priorities in the long term. EGAD stated that it was unaware of any cases which had come to light where goods had fallen into irresponsible hands. Given the conditions attached to OGELs, EGAD assume that, if this were the case, then the OGEL would have most probably been illegally misused in a way which was in breach of its coverage and terms and conditions, and, thus, that the exporter concerned could be prosecuted for an illegal and unlicensed export.[245]

179. The UK Working Group argued that "the current licensing requirements regarding transit and transhipment of controlled goods are extremely confusing".[246] The Working Group contended that the standard approach of industry (apart from where the goods concerned were of a particularly sensitive nature) was to assume that "possible regulatory obligations relating to a transit or transhipment can be ignored", as in most circumstances:

a)  a licence most probably would not be required;

b)  if a licence were required, it would most probably be the Open General Transhipment Licence, for the use of which registration was not required and no records needed to be kept, so it was in effect irrelevant; and

c)  in the event that the Government decided that other authorisation should have been sought, the confusion surrounding the rules would make it virtually impossible to have any realistic expectation of a successful prosecution.[247]

180. The Working Group explained:

The Export Control Act suggests that most transit and transhipment via the UK is permitted as long as certain conditions are met, yet it fails to specify what these conditions are. The Open General Transhipment Licence (OGTL) currently available for use seems to contradict this. For most items on the military list, the OGTL lists a variety of destinations in an annexed Schedule for which individual approval is required. This implies that for sensitive destinations listed on the Schedule, a licence is required in advance to bring these goods through the UK. Since the UK is a major transportation hub and there is confusion amongst all relevant parties (including exporters themselves), amendments to the legislation and/or clear guidance on the rules and procedures for transit should be prioritised.[248]

181. In the 2007 Consultation Document the Government explained that the legislation, in the form of an exception for transit and transhipment, allowed goods on the Military and dual-use lists to pass through the UK en route to another destination via a pre-determined route without the need for a UK licence, provided that the exporter had complied with the laws of the originating country. The exception did not apply to a range of sensitive goods (landmines, torture and paramilitary equipment, and any goods destined for use in a WMD programme) and certain sensitive destinations (including all currently embargoed destinations). In practice this meant that transit/transhipment licences were required for any listed goods en route to Iran or North Korea; and for any goods on the Military list en route to any other embargoed destination. The legislation also placed an upper limit of 30 days on the time that the goods could stay in the UK, and stipulated that they must remain on board a vessel or aircraft, or be on a through bill of lading or through air waybill for the duration of that period. The Government made clear that the transit/transhipment legislation was therefore designed to facilitate legitimate trade by allowing goods to pass through the UK when they are not the subject of controls or have been appropriately approved in the originating country, whilst enabling the UK to intervene, and potentially halt, the onward movement in the case of goods or destinations of concern.[249]

182. HMRC told us that one of the steps it had put in place was a profiling exercise using its automated freight control systems "to get behind what is going on in terms of the use of OGELs and we need to understand the outcomes from that exercise". The exercise had been running for a year and HMRC had almost 500 checks as a result. HMRC said that outcome had "not discovered any discrepancies and, in fact, the emerging picture […] is that goods tend to be going where an OGEL is quoted because the goods are going, as you would expect, to a non-sensitive destination or the goods are less sensitive". HMRC said that, although there was a large amount of compliance, it was not satisfied as to the evidence either way in terms of degree of compliance.[250]

183. We found no evidence that the open general licences were being abused or that they provided a conduit for the export or transhipment of goods into the wrong hands. We welcome the profiling exercise that HMRC has been conducting on the operating of OGELs. We recommend that HMRC produce and publish a report on the outcome of the exercise it is conducting on the operation of Open General Export Licences and that HMRC conduct a similar exercise on the operation of the Open General Transhipment Licences in time for the results to be taken into account by the Government before it reaches conclusions on its Review of Exports Controls. In our view it is of crucial importance that not only sensitive goods such as landmines, torture and paramilitary equipment and goods destined for use in a WMD programme or goods destined for embargoed destinations are denied transit and transhipment through the UK but also goods destined for terrorists.

Compliance visits

184. The Government believes that the principal weapons in the fight to improve compliance are working with industry to improve awareness and a robust compliance auditing regime. It said that a "good deal of effort has already gone into this, and this is continuing, but the Export Control Organisation is open minded about suggestions to improve awareness activity or focus it specifically on identified problem areas".[251]

185. The Government supplied the following information about compliance visits:

186. In a memorandum in December 2006 the Government said that over the last 12 months ECO's Compliance Unit had been specifically targeting OGEL users, the largest increase in its client base, as sub-contractors to larger companies were being asked to export in their own right for the first time. The statistics therefore included an unusually high proportion of first time visits. The Government's said that many of the instances of non-compliance had been technical breaches of licence condition—for example, missing or incorrect undertakings or other supporting paperwork or licences incorrectly referenced on invoices. The Government said that its experience was that where such breaches occurred a revisit within three to six months had usually found the company had improved its processes dramatically and was compliant.[253] The Government added:

We have also, more recently taken a more robust approach to compliance in conjunction with making more help available to exporters. For example we have run seminars specifically on Compliance and published "Compliance Visits Explained" on our website http://www.dti.gov.uk/europeandtrade/strategic-export-control/help-advice/page33802.html. The latter acts as a companion to the Compliance Manual.

HMRC have also tightened up on minor breaches. Examples of fines levied can be found on the ECO website http://www.dti.gov.uk/europeandtrade/strategic-export-control/licensing-rating/guidance/page33980.html shows the latest, two companies were fined £10,000 and £8,000 respectively plus costs for exporting body armour and helmets without the appropriate licenses. We are also starting to look, with HMRS, [sic] at additional measures to those already available around the issue of enforcement.[254]

187. During compliance visits in 2006, 202 companies breached the conditions of the open licences they were using.[255] This broke down as follows:

188. After each compliance visit a letter was sent to the company. If any breaches were found, these were set out in the letter with the remedial actions the company needed to take to be compliant. The Government said that at least 26 breaches had been referred to HMRC, and many of these were still being investigated at the time the Government's memorandum was compiled. It assured us that work was continuing in ECO on improving the quality of the information it produced about breaches and the action taken against companies.[256]

189. We asked how many companies persistently in breach of open licences had been "deregistered" and prevented from using OGELs. The Government replied that companies were not "de-registered" from OGELs because exports covered by OGELs were by definition very low risk—that is, exports for which it would never refuse a licence. However, as part of an initiative to tighten compliance generally, the ECO was looking with HMRC at a range of additional enforcement options, on which it would report to the Committees in due course.[257]

190. In our view entitlement to use an open general licence is a privilege and possible sanctions against those who breach export control should include the loss of such privileges.[258] We recommend that those who fail to comply with open licences should be denied the privilege of open general licences for at least a year. We also conclude that for the public to have confidence in the system of open licences there needs to be a thorough system of regular compliance checking of those who use open general licences. We welcome the ECO's and HMRC's consideration of additional enforcement options and conclude that, when the Government has reached its conclusions, we should look at this matter again in our next report. At this stage we do not wish to pre-empt the ECO's and HMRC's consideration of additional enforcement options but we recommend that the Government also review whether resources dedicated to compliance visits and to outreach to industry are sufficient and ensure that the ECO and HMRC produce a joint strategy which, for example, could include joint compliance visits.

Dual-use

191. Transfer controls on dual-use items—that is, goods and technologies that have both civil and military applications, or may be used in connection with WMD programmes—are of crucial importance to prevent goods and technologies falling into the wrong hands. The EU Strategy against the Proliferation of Weapons of Mass Destruction, adopted in December 2003, highlights the importance of export controls.[259] UN Security Council Resolution 1540 of 2004 for the first time creates an international requirement to put effective export controls in place.[260]

192. We sought evidence of instances where exporters inadvertently but persistently breached export controls. EGAD responded that it knew that there were "large numbers of companies and individuals currently operating outside of the regulatory framework", both deliberately and inadvertently, and it argued that the Government had to put more effort into awareness raising and enforcement. EGAD believed "that one promising method of doing this will be through making greater use of regional industrial links and bodies, such as UKTI,[261] Chambers of Commerce and Business Links". EGAD was constrained by an obligation to keep matters in confidence and was not able to quote "chapter and verse of companies' infractions, to demonstrate the scale of the problem" as it would "only serve to dissuade others from approaching us and seeking the advice that they need to be brought back onto the path of export control righteousness, which we must be seeking to encourage and should have our highest priority".[262] EGAD was able, however, to offer some evidence as an indication of the scale of the problem in its view.

During the 2002/2003 and the 2004 Export Control Roadshows which we jointly undertook with the ECO, we were constantly coming across companies who had come along to learn about the new Export Control Act and what they needed to do to comply, who clearly were coming to realize at these events that they were actually operating in breach of the existing regulations. To take one instance, at the largest such event that we held, in Southampton in January 2004 (attended by over 110 industrialists), we can comfortably estimate that, from comments made at the event, at least 10-15% of the audience had become aware of aspects of the existing regulations that they were, inadvertently, infringing - and this was from an audience who were aware that they were caught by export controls. […]

When companies' shipments have been [intercepted by HMRC as a result of random selection or intelligence], and they approach us […] for help and advice, all-too-often […] the discussions between us will include the use of the phrase that: "But we have been doing this for XX years, and never had any problems before". […]

[T]he Government's own published figures, clearly indicate that something is array. For instance, taking the 2003 Annual Report and excluding EU (then) and CGEA (Community General Export Authorisation) countries for both military and dual-use (the latter of which would not be shown anyway for EU and CGEA nations), SIELs number:

Military List:    2,884

Dual-use Goods:   1,490

Even given the fact that everything "specially designed or modified for military use" is controlled and not everything which is "dual-use" falls within control parameters, it still takes some swallowing that there are double the number of military SIELs to those for dual-use goods. […]

Also, we understand from figures from the ECO that in the period from the start of 2004 through to 31st August 2004, whilst they had anticipated that some 20-40 companies would register for the new OGEL: Technology for Military Goods, in fact some 371 companies had registered to use it - we are not convinced that all of these companies can possibly be firms who were only and solely exporting technology intangibly, and, therefore, only coming within the remit of the regulations when the controls were extended to intangible transfer of technology. Logic dictates that they were exporting technology tangibly prior to this, and only became aware of the licensability of this activity when they were looking into the new regulations.

[…U]p until December 2005, 8A002f of the dual-use goods regulations caught: 'Electronic imaging systems, specially designed or modified for underwater use, capable of storing digitally more than 50 exposed images' (i.e. underwater digital cameras). In late-2005, realising that these goods had now become increasingly popular consumer items, it was decided within the Wassenaar Arrangement to de-control them. However, sight of the Annual and Quarterly Reports covering the period before December 2005 would seem to reveal that, despite ever increasing sales of underwater digital cameras here in the UK, there was a total paucity of export licences being applied for by people wishing to take them out of the country (and the EU) with them, for instance on holiday. Was really no-one ever taking these cameras with them on their holidays…or were they taking them and just unaware that they were licensable?[263]

193. We have set out EGAD's representations at some length for two reasons. First, in our view they show that there is evidence that dual-use goods are being exported, probably inadvertently, in breach of export controls. Second, they illustrate a conundrum at the heart of export controls on dual-use: should the authorities expend resources checking for goods and taking action against exporters of goods that would almost certainly be granted a licence if one were sought. In our view the answer has to be that action should be taken otherwise the integrity of the export control system is undermined. We recommend that as part of its review of export controls the Government bring forward proposals for penalties such as fixed fines to be imposed in cases where the authorities discover dual-use goods exported in breach of export controls but which would normally be given an export licence had the exporter applied for one.

Appeals

194. When our predecessor Committees carried out pre-legislative scrutiny they welcomed "the proposal to put the appeal procedure on some statutory footing" but considered that it would have to include some genuinely independent element and that there "would be advantage in putting this on the face of the Bill".[264] In the event it was not put on the face of the Act. In recent years the Committee has, however, received no complaints about the appeals process, and currently about a quarter to a third of appeals against refusals of licences are successful.

195. EGAD stated that as far as it was aware, the appeals arrangements were working satisfactorily, and it had not had any complaints registered by companies about the appeals procedures, even if companies complained "on occasion about the decision when the original refusal is upheld on appeal".[268] We conclude that the appeals procedures are working satisfactorily.

Exports to British forces operating overseas

196. In reviewing the secondary legislation our predecessor Committees were concerned that the "Government should ensure that the secondary legislation does not in any way impede the expeditious provision of support to the British armed forces, those equipping them and servicing that equipment, and their allies in combat and training operations".[269]

197. EGAD said in a memorandum that the creation of two Open General Export Licences in 2004—the OGEL: Military and Dual-Use Goods: Exports to UK Forces Deployed in Embargoed Destinations and the OGEL: Military and Dual Use Goods: Exports to UK Forces Deployed in Non-Embargoed Destinations—had greatly eased potential problems with the provision of support to British armed forces.[270] We conclude that the secondary legislation has not impeded the provision of support to British armed forces.

Internet

198. In our Report last year we concluded that the Government's response to the challenge of the Internet as an arms emporium was too passive and failed to take account of the role it now played in promoting and facilitating commerce and exports across the world.[271] In response the Government acknowledged the importance of the Internet and it proposed to consider the matter further.[272] Subsequently the Government started a pilot programme of Internet monitoring, to gauge the extent to which the Internet was used to promote or facilitate the export or transfer of goods that were subject to UK export controls. The Government indicated that it would report the outcome of the exercise to the Committees later this year.[273]

199. We unreservedly welcome the Internet monitoring exercise and we intend to consider this matter further when the Government reports the outcome of the exercise to us.

Arms fairs

200. In the 2007 Consultation Document that Government stated:

"The ECO has systematically sent out mail-shots to industry, both in the UK and overseas, advising them of the impact of the controls before trade fairs, to warn companies that they may need licences e.g. to advertise goods and to give them enough time to apply for them. The ECO, in conjunction with event organisers and other government departments, has also worked to ensure that stands where unlicensed activity is taking place have been withdrawn from exhibitions. However, trade fairs remain an area that, will, by nature, continue to generate administrative challenges.[274]"

201. We invited evidence on the impact of the Export Control Act 2002 on the organisers of arms fairs in the UK. In addition, in our Report last year we received evidence of a number of potential breaches of the Export Control Act 2002 at the Defence Systems and Equipment International (DSEi) arms fair in London in September 2005 and we recommended that, as well as providing guidance and attending arms fairs, the Government actively sought out breaches of export controls at arms fairs.[275] In its response the Government said that it continued to work with organisers of arms fairs to ensure they understood the brokering rules. It would also continue to seek out actively breaches of export controls and that it had made checks and followed up enquiries on several stalls at the Farnborough Air Show.[276]

202. Reed Exhibitions Ltd, which organised DSEi 05, explained to us in written evidence this year that the only significant impact of the legislation on them, "as an organiser of defence exhibitions, has been the time and effort required to understand the new legislation, to interpret, translate and then communicate it to exhibitors and visitors, and to handle the associated enquiries, particularly from overseas companies".[277] More specifically in respect of DSEi 05 Reed said it made the following efforts to communicate the new legislation to all exhibiting companies and visitors:

An explanation of how the legislation might affect individuals and companies was written into a pdf file with links to the relevant sections on the DTI website. This had been translated into several languages and sent to all exhibiting companies. The same information had been shown on the DSEi website.

Each company exhibiting at DSEi 05 had been required to sign a statement of compliance with UK law and UK's international undertakings, EU/UN law and EU/UN international undertakings. An additional paragraph had been added to the 2007 exhibitor contract that referred specifically to the UK Export Control Act 2002.

An explanation of the new legislation and the impact on exhibiting companies had been included in the exhibitor brochure and a flyer included in every access badge wallet sent to all visitors and exhibitors.

203. Reed added that during DSEi 05 two potential breaches of the law had been brought to its attention and that the appropriate authorities had been informed and the two offending exhibitors' stands closed down.[278]

204. We received no evidence from either companies organising arms fairs or their representative bodies that the Export Control Act 2002 imposed excessive burdens on arms fairs.

205. EGAD in its written evidence commented that it was not clear how many of the organisers of fairs organised in the UK, "have been as au fait with the new regulations as the organizers of the DSEi and Farnborough International Airshow exhibitions have been".[279] This was a prescient observation. We received a memorandum from Mr Mark Thomas who attended IFSEC 2007, an annual exhibition for the security industry, in Birmingham on 24 May 2007. He observed a Chinese company, Echo Industrial Co. Ltd, had electro-shock items on public display. Mr Thomas explained that the person in charge of the stall, Mr Xia, "offered to show me the stun weapons and discharged them in the fair. Electro shock weapons make a distinct and loud noise. Anyone walking past would easily have seen the blue electrical flashes". Mr Xia offered to sell supplies of the weapons to Mr Thomas. Mr Thomas reported the matter to fair organisers, CMP Information Ltd, who took prompt action. HMRC was not present at the exhibition.[280] Subsequently, according to press reports, Mr Xia was arrested, pleaded guilty to possessing three stun guns and a friction lock baton and was given a six-month jail sentence suspended for 12 months after the judge "accepted he did not realise he was acting illegally".[281]

206. Mr Thomas was concerned that the Crown Prosecution Service (CPS) had not brought charges of brokering or attempting to sell prohibited weapons. He reported that the police had said that the CPS had "decided not to bring charges, as they regarded Mr Xia as just a stool for the big boys". Mr Thomas said that Mr Xia had been deported, after serving a month on remand and having pleaded guilty. Mr Thomas questioned why the CPS had not brought a case when the evidence was obviously there. He commented that "once again the chance to enforce the legislation has been missed".[282]

207. We are grateful to Mr Thomas for his evidence. He brought the breaches of the 2002 Act to the attention of the authorities and organisers of DSEi 05 last year. We are concerned that he has with ease been able to observe yet another breach of the Act at the exhibition in Birmingham this year.

208. We conclude that the Export Control Act 2002 does not impose an excessive burden on those organising arms fairs and exhibitions in the UK and that the current legislation provides a reasonable framework for regulating arms fairs provided that the legislation is actively enforced by the authorities and the organisers of arms fairs and similar exhibitions. We have, however, serious concerns about enforcement. We recommend that the Government in responding to this report set out the criteria for HMRC attending arms fairs and similar exhibitions. It would also assist us to have an account (a) from HMRC of the breach of export controls which arose at IFSEC 2007 and what information about the requirements of the Act had been conveyed to the defendant in the recent court case; and (b) from the Crown Prosecution Service about the charges brought and why no charges concerning breach of export controls were initiated. We further recommend that where HMRC attends a fair or exhibition its officers patrol during the opening hours, inspect the goods being displayed and put questions to those on stalls to ensure that export controls are not being breached. In addition, we recommend, where HMRC does not assign officers to attend a fair or exhibition at which goods subject to export control are displayed, that HMRC send officers to carry out spot checks and provide expeditious access to officers to deal with matters raised by the organisers, exhibitors or those attending.

209. As a postscript we should add that Reed Exhibitions Ltd has invited the Committees to visit DSEi 07 and we have been pleased to accept the invitation.

End-use

210. In our Report last year we recommended that the Government establish a pilot programme of end-use monitoring focusing on cases where it had identified some degree of risk—though not sufficient to withhold the issue of a licence—when considering an application for an export licence and to report the outcome of the exercise in 2007.[283] The Government responded that the introduction of a process that allowed for the issue of licenses based on future end-use monitoring militated against the effective application of the EU Criteria at the licensing stage. The Government believed strongly that there was no substitute for a rigorous assessment of any proposed export at the time of application. The Government did not issue licences "where it has identified some degree of risk: if the issue of a licence is assessed to be inconsistent with the Consolidated Criteria then it will not be granted".[284] The end user's record in the use of equipment, whether from the UK or other supplier, in a manner inconsistent with the criteria, was taken fully into account by the Government when assessing export licence applications. On this basis, the Government argued that detailed end-use monitoring of specific UK exports would add little to future assessment of export licence applications.

211. We are disappointed that the Government has rejected the recommendation we made last year and this is an issue we may return to again. This year with the review of export controls in view we have focussed on the need for obligations in export contracts as a condition for the issue of an export licence.

212. The UK Working Group took the view that there was always some risk of equipment or technology being misused or diverted.[285] It considered that there was a case for including obligations in the contract, which would make it clear in advance what the obligations of all parties to the transaction were. In this way if there was reason to suspect that there was a problem then a monitoring inspection could be requested. The Working Group pointed out that this was done in other areas: in weapons of mass destruction it was an accepted way of operating by the UK Government in terms of biological weapons protocols.[286] The Working Group also called for additional procedures:

a)  specific restrictions to be included in the contract and/or the licence on use or retransfer, for example, the prohibition of re-export without permission;

b)  the licence and/or contract to state that the UK Government reserved the right to conduct end-use checks; and

c)  the licence to make clear what the implications of breaching end-use undertakings would involve, i.e. that all licences connected to the equipment or technology in question would be revoked, and that future licensing decisions would take any breaches into account.[287]

213. During our visits to the Export Control Organisation and Foreign and Commonwealth Office and in written and oral questions we asked the Government about end-use checking and monitoring. The Government explained that its

preferred position […] remains to issue export licences without end-use conditions, undertaking instead strict risk assessment at the pre-licensing stage and refusing a licence when there is an unacceptable risk of diversion or misuse. In addition, UK Overseas Posts have standing instructions to report any misuse of UK-origin defence equipment. If the conditions of a licence were breached, this would be taken fully into account when the Government assesses any subsequent licence applications. The Government may also, if appropriate, revoke other related licences, and consider whether to prosecute if any criminal offence has been committed.[288]

214. We noted, however, in respect of Israel that the then Foreign Secretary pointed out

[o]ur Embassy keeps a very close eye on these things; they are extremely conscious of the interest, the concern and the political sensitivity of these matters, and if there are any reports that indicate that there is misuse of material that might have been exported many years ago then clearly they look at it and draw it to the attention of the relevant authorities. So we monitor to the greatest degree we can but we go back [to] the difficulty of detailed end-use monitoring.[289]

215. Following press reports we asked the Foreign Secretary about reports that maritime-patrol aircraft which had been exported from the UK to India were to be sold by the Indian government to Burma and suggested that the export licence should have required a clause in the contract restricting resale.[290] The Foreign Secretary commented:

With the benefit of hindsight I suppose one could say it might have been desirable [emphasis added] but I think the original contract would have been rather a long time ago, possibly even decades […] because we are talking about quite elderly aircraft, but certainly obviously that is something that if a similar export took place today one would consider. We have been in touch with the Government of India to express our concern and they have assured us that these are unarmed aircraft and it is thought that that will remain the position, and obviously we would look very carefully to see whether any requests that were being made for military components in the future might be relevant to these aircraft because […] there was nothing in the original contract.[291]

216. The Government confirmed that it had complete discretion to revoke an export licence. Subject to due process and proper consideration, this discretion was not fettered in any way, including the possibility that compensation may need to be paid.[292]

217. While we accept that little can now be done in respect of the proposed export of British-made maritime-patrol aircraft from India to Burma, we recommend that it should become a standard requirement of licensing that export contracts for goods on the Military List contain a clause preventing re-export to a destination subject to UN or EU embargo. In addition, the contracts should include a subrogation clause allowing the UK Government to stand in the place of the exporter to enforce the contract in British or foreign courts. We also recommend that the Government require as a condition of licensing that all export contracts make provision to allow for end-use inspections.

218. After we had taken evidence in July 2007 European and international NGOs, including Amnesty International and Saferworld, claimed in a report[293] that a transfer to Burma of a military helicopter containing components and technology from as many as six European Union countries—including the UK—threatened to undermine an EU arms embargo on Burma. We have raised the case with the Government.

END-USE CONTROLS ON TORTURE EQUIPMENT

219. The Trade in Goods (Control) Order 2003[294] classified as "Restricted Goods" a limited range of security and paramilitary equipment that was already subject to UK export controls because of evidence of use in torture. The goods covered included, among others, electric-shock belts and outsize cuffs. Under the Order any person within the United Kingdom, or a United Kingdom person anywhere within the world is prohibited from supplying or delivering, or doing any act calculated to promote the supply or delivery of goods without a licence from the Secretary of State. In 2006, the Export Control (Security and Para-Military Goods) Order,[295] implementing the EU Torture Regulation, expanded the range of goods to include most equipment controlled by that Regulation, including thumb-cuffs, shackle boards and leg irons.

220. In the 2007 Consultation Document the Government pointed out that, although controls on torture equipment were as stringent as any within the UK legislative framework, they covered items which it had been agreed at EU level constituted the greatest risk of use in torture. They did not control any other general purpose equipment that could conceivably be used for torture such as ropes, blowtorches, and power drills. It noted that there had been calls for the current controls to be extended to include more items, or for an end-use control for equipment that could be used for torture or for cruel, inhumane or degrading treatment to be introduced. Such extensions would clearly be in line with the UK's support for international human rights and the strong lead that the Government had already taken in the field of torture equipment. The Government set out options for extending the controls: adding items to the list of torture equipment; an end-use control on torture equipment; or no change.[296]

221. In their evidence to us the UK Working Group and EGAD agreed on the need to introduce a torture equipment end-use control. The Working Group again pointed out that "catch-all clauses exist with regard to chemical, biological or nuclear weapons programmes and regarding military end-use to embargoed destinations" and said that "most stakeholders appear to see value in extending this approach to items which will be used in torture, degrading treatment or executions, or in connection with terrorist acts".[297] The Working Group explained:

The purpose of such a clause would be to state that "if" the exporter is aware, or ought to be aware, that the intended use of items is to facilitate such prohibited acts, irrespective of whether the item was on a control list, the transfer would be prohibited without the express permission of the Government in the form of an export licence. It should be noted that while acts of terrorism and international crime and the development of WMD are included in the relevant consequences section of the 2002 Export Control Act, the facilitation of torture or other forms of cruel or degrading treatment are not. It is clear that such acts do fall within the definitions of internal repression and human rights violations, but it would seem sensible at this juncture to update the primary legislation to specifically include acts of torture under the relevant consequences section to bring the Act in line with existing UK Government and EU policy in this area.[298]

222. In its oral evidence the Working Group added this "is about the end-use and whether the exporter ought to be aware that the outcome of his transaction is to facilitate these acts. This is not saying that a list based system is not something we should be pursuing, of course we should; this is belt and braces, it is to make sure that the activity is brought under control and not necessarily just the goods themselves."[299] In addition "by having such a clause it means that once it does become known you can put whatever information you need to put around [for example] the DIY community that certain end users may well be using electric drills for torture. When you go to this particular area all sorts of things could be used for torture and it is not fair to expect industry to know the outcome of everything."[300]

223. EGAD put on record the industry's support for the Working Group's proposals for something more effective than was currently in place to control the export of, and trade in, torture equipment. It believed that the only effective way in which this could be done was through the creation of a torture equipment end-use control. EGAD pointed out that it was possible to use anything for torture and drew attention to recent reports of the use of electric drills in Iraq for this purpose. A control mechanism needed to be in place which was able to catch anything, rather than going down the EU's approach of trying to come up with a definitive list of torture equipment items. Technological advancements and new products developments, as well as the ease with which almost any item could be used for torture purposes, clearly demonstrated to EGAD the deficiencies of adopting a finite list based approach.[301] EGAD envisaged that the arrangement would work as follows:

To take the scenario of the building company used as a front, it is probably very unlikely that the British exporter would know that that building company was a front. There is a greater possibility that the intelligence services might know that that company was a front. We would envisage a scenario where the Government notifies the exporter—as is the case within WMD—that it is making a particular export licensable under the end-use control because it has reason to believe that the goods are going to be used for the purposes of torture. At that point the transaction becomes licensable.[302]

There will be a very small percentage of cases where you could be argued to know. There have been perfectly open procurement attempts for what may be described as torture equipment from the security services of various countries. The exporter there would clearly know that there was a risk that that equipment was going to be used for torture. In the vast majority of cases you would be talking about the other situation where it is a front company, the exporter has no way of knowing and the only thing that is likely to prevent it is the intervention of the intelligence services.[303]

224. The Government commented that exporters had a legal obligation to contact the ECO if they knew or suspected that their exports would be used in connection with a WMD programme or associated WMD delivery systems. The ECO website provided extensive guidance to exporters, highlighting a number of factors that could reasonably raise the exporter's suspicions.[304] In the 2007 Consultation Document the Government said that the control could bite if a person had either been informed by the Government, or knew, that the equipment that he was intending to export would be used for torture. There is also the option of including a "suspicion" clause, though this might widen the net too far, and place unrealistic burdens of due diligence on the exporter given the range of household items that could potentially be caught.

225. We consider that the UK Working Group and EGAD have made a strong case for a "catch-all" or end-use control on equipment used for torture or to inflict inhuman or degrading punishment. We recommend that the Government bring forward proposals for an end-use control on equipment used for torture or to inflict inhuman or degrading treatment. We conclude that given the range of items that could potentially be caught it would be unreasonable to impose a requirement of due diligence on all exporters for all goods. There are, however, two less stringent obligations we recommend the Government impose on exporters. First, there be a requirement to withhold an export where an exporter has reason to believe that the goods are to be used for torture or degrading treatment. Second, there be an obligation on exporters to inform the Government if they know or have reason to believe that an export is to be used for torture or degrading treatment. Irrespective of the duty on the exporter, we recommend that there should be an obligation on the Government to investigate reports that exports from the UK are being used for torture or to inflict cruel, inhumane or degrading treatment. We recommend that, where the Government establishes a reasonable suspicion of abuse, it be under an obligation to inform exporters who would then be in breach of export control if they exported the goods to the destinations or end users notified by the Government.

175   Cm 5988, p 2 Back

176   For example, HC (2005-06) 873, para 75 ff Back

177   Ev 78, para 7 Back

178   Ibid. Back

179   Ev 80, para 8 Back

180   Ev 80, para 11 Back

181   Ev 80, para 18 Back

182   Ev 78, para 6 Back

183   Ev 57 Back

184   Compound penalty is defined at para 135. Back

185   Ev 83, para 9 Back

186   Q 150 Back

187   Ev 78, para 5 Back

188   HC (2005-06) 873, para 118  Back

189   Qq 156-57 Both cases that were settled by compounded penalty involved limited companies and in one case the employee who had committed the wrongful acts had left the company. The person who would have ended up being arraigned as a representative of the company in the magistrates' court would have been the person who was actually working with HMRC to put things right within the company's export control systems. With that and the fact that the company was prepared to work with HMRC, HMRC felt that added up to a case where it would offer a compound penalty. The second case had different factors. The company brought the breach to HMRC's attention voluntarily before either receiving an audit from HMRC or the DTI Compliance Unit. The factors were fairly straightforward and HMRC wanted to encourage other companies to report matters. Back

190   Q 158 Back

191   Q 160 Back

192   Q 168 Eurojust is a European Union body established in 2002 "to enhance the effectiveness of the competent authorities within Member States when they are dealing with the investigation and prosecution of serious cross-border and organised crime"- http://eurojust.europa.eu/.  Back

193   Ev 147, para 3 Back

194   One prosecution in 2005-06 (see Cm 6882, p 9) as opposed to two in 2006-07 (see para 133) Back

195   Ev 57 Back

196   Ev 137, section 2.2 Back

197   Ev 137, section 4 Back

198   2007 Consultation Document, para 2.4.3 Back

199   Ev 44, para 49 Back

200   Ev 78, para 6 Back

201   Presidency conclusions Thessaloniki European Council, 19 and 20 June 2003, Annex II, para 5 Back

202   Ev 57 Back

203   Ibid. Back

204   Ev 80, para 5 Back

205   Ev 78, para 8 Back

206   Ev 80, para 16 Back

207   Ev 83, para 9 Back

208   Q 163 Back

209   Q 165 (Mr Fuchter) Back

210   Q 165 (Mr Westhead) Back

211   2007 Consultation Document, para 1.4.iv Back

212   Ev 78, para 1 Back

213   Ev 78, para 8 Back

214   Ev 83, para 10 Back

215   Ev 137, section 1 Back

216   Ev 57 Back

217   Ev 78 Back

218   Cm 6882, pp 8-9 Back

219   Q 135 Back

220   Ev 78, para 1 Back

221   Ev 57 Back

222   Ev 137, section 1 Back

223   Ev 147, para 1 Back

224   Ev 80, para 15 Back

225   Ev 57 Back

226   HC (2005-06) 873, para 126 Back

227   Ev 114 Back

228   See table Cm 6954, p9 for list of penalties imposed, the maximum of which was 18 months imprisonment suspended for two years with a ban from being company director for ten years and an asset forfeiture order for £69,980. Back

229   HC (2000-01) 445, para 77 Back

230   HC (2002-03) 620, para 29 Back

231   HL Deb, 4 March 2002, col 38; HC Deb, 24 June 2002, col 673; HL Deb, 16 December 2003, cols 1080-91 Back

232   HC (2000-01) 445, para 74 Back

233   Ev 104, para 23 Back

234   2007 Consultation Document, para 1.3.5 Back

235   Ev 104, para 23 Back

236   Q 154 Back

237   Ev 121 Back

238   Ev 130 Back

239   Ev 118 Back

240   Ibid. Back

241   2001 Consultation Document, para 3.7-3.8, p 16, and para 4.33, p 34 Back

242   HC (2002-03) 620, para 76 Back

243   Ibid. Back

244   HC (2002-03) 620, para 77 Back

245   Ev 57 Back

246   Ev 44, para 32 Back

247   Ev 44, para 33 Back

248   Ev 44, para 34 Back

249   2007 Consultation Document, paras 2.7.1-2.7.3 Back

250   Q 149 Back

251   Ev 104, para 10 Back

252   Additional figures for "2005 to end September" to enable comparison with the 2006 figures Back

253   Ev 83, para 22 Back

254   Ibid. Back

255   Ev 97, para 6 Back

256   Ev 97, para 6 Back

257   Ev 97, para 7 Back

258   Ev 137, section 2.2 Back

259   Strategy Against Proliferation of Weapons of Mass Destruction, Council of the European Union, 15708/03, December 2003 - http://www.consilium.europa.eu/uedocs/cmsUpload/st15708.en03.pdf  Back

260   Non-proliferation of weapons of mass destruction, United Nations Security Council, 1540 (2004) See also Ev 137, section 1. Back

261   UK Trade and Investment Back

262   Ev 57 Back

263   Ev 57 Back

264   HC (2000-01) 445, para 65 Back

265   Information taken from UK Annual Reports on Strategic Export ControlsFigures include appeals against refusals to issue SIELs and revocations of SIELs.  Back

266   No Licence Required Back

267   Includes 2 refusals to issue a SITCL Back

268   Ev 57 Back

269   HC (2002-03) 620, para 110 Back

270   Ev 57 Back

271   HC (2005-06) 873, para 82 Back

272   Cm 6954, p 14 Back

273   HC Deb, 22 February 2007, col 184WH Back

274   2007 Consultation Document, para 1.2.7 Back

275   HC (2005-06) 873, para 86 Back

276   Cm 6954, p 15 Back

277   Ev 116 Back

278   Ev 116 Back

279   Ev 57 Back

280   Ev 152 Back

281   "Man sold stun guns at NEC fair", Birmingham Mail , p 6, 23 June 2007; "MP in call over stun gun sales", Birmingham Mail , p 19, 27 June 2007 Back

282   Ev 157, paras 6-7 Back

283   HC (2005-06) 873, para 91 Back

284   Cm 6954, p 15 Back

285   Q 29 Back

286   Ibid. Back

287   Ev 44, para 46 Back

288   Ev 82 Back

289   Q 247 Back

290   "Curbs apply only to aircraft spares: UK," The Hindu, 4 February 2006, http://www.hindu.com/2006/02/04/stories/2006020403311300.htm  Back

291   Q 232 Back

292   Ev 146, question 2; the 2007 Consultation Document paras 2.6.1-2 Back

293   Indian helicopters for Myanmar: making a mockery of the EU arms embargo?, European and international NGOs, including Amnesty International and Saferworld, July 2007 Back

294   S.I. 2765/2003  Back

295   S.I .1696/2006  Back

296   2007 Consultation Document, paras 2.6.3-2.6.10 Back

297   Ev 44, para 28 Back

298   Ev 44, para 29 Back

299   Q 26 Back

300   Q 27 Back

301   Ev 57 Back

302   Q 43 Back

303   Q 44 Back

304   Ev 104, para 26 Back