EXPORT CONTROL ACT 2002
Review of Export Control
Legislation (2007)
Government’s Initial Response
to the Public Consultation
6 FEBRUARY 2008
CONTENTS
Introduction
3
Areas for change
3
1. Extra territorial trade controls
Structure
Coverage
Benefits and costings
Further work
3
3
5
6
8
2. Torture Equipment
8
Benefits and costings
Further work
9
10
3. Legal Tidying up work
11
Areas where change is not needed
11
4. Transport Services
11
5. Weapons of mass destruction (WMD) controls
12
6. The case for a terrorism end use control
13
Areas where no decision can be made pending further research13
7. Overseas Production
13
Export of controlled goods
Export of non-controlled goods
Overseas subsidiaries
15
16
14
8. A Pre-Licensing Registration System
18
9. Transit and transhipment
18
10. Trade Controls “Receipt of a fee or commission”
20
11. Differing definitions of technology
20
12. Other Issues
21
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Conclusion
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INTRODUCTION
On 18TH June 2007, the Government launched a public consultation on the subject of
export controls. The public consultation document, “2007 Review of Export Control
Legislation: A consultative document”, sought the views of respondents, both on
the impact and effectiveness of the controls that were introduced in 2004, and on a
number of options for further change.
The Government received, prior to the closure of the consultation period on 30
September 2007, a total of 23 substantive responses and 5,134 brief E-Mails and
letters. All the substantive responses1, and a sample of the brief E-Mail responses,
have now been posted to the BERR website
(http://www.berr.gov.uk/consultations/page39910.html - for main consultation
page;
http://www.berr.gov.uk/europeandtrade/strategic-exportcontrol/legislation/export-control-act-2002/review/index.html - for ECO
consultation page) and are available for viewing. We thank all those who responded
for their contributions.
Since 30 September, the Government has been analysing responses and considering
the case for change. This has involved a good deal of detailed work across a number
of Government Departments. The response below sets out the Government’s
position at this time, but it is very much an initial response. Whilst in some areas, it
is possible to make a clear statement of principle about what will or will not be done,
in many others there is a need for more detailed work and further analysis. The
Government aims to finalise its position on all these areas, and issue a further
response together with a costed Impact Assessment in Spring 2008.
This response deals first with areas where the Government accepts the case for
change, second with areas where it does not see a case for change and finally,
provides an update on those areas where research and analysis work is ongoing.
Areas for change
1.
Extra territorial trade controls
Structure
1.1
Currently, trade controls have a two category structure;

1
for trading in “Restricted Goods”, or in Military List equipment for
supply to an embargoed destination, the most rigorous controls apply.
Trading in these goods between two countries overseas is controlled
whether undertaken from the UK, or by a UK person based anywhere in
the world; and the control extends to any act calculated to promote the
This does not include copies of responses that respondants have been asked to be kept confidential.
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supply or delivery of these goods. This includes general acts of
advertising and promotion such as displaying the goods at trade fairs or
advertising in periodicals.

for all other “Controlled Goods” (i.e. all other items on the Military List),
trading between two countries overseas is controlled only if carried out
from within the UK, and controls do not extend to the provision of
ancillary services, namely transport, financing/financial services,
insurance or re-insurance, and general advertising and promotion.
1.2
The Government is now convinced that this two tier structure is no longer
the most effective model. It is clear that whilst there remains a need to apply the
most rigorous controls to a limited range of equipment whose supply is inherently
undesirable, there is another distinct category of goods for which the risks posed
justify extra controls, but not to the full extent currently applied to “Restricted
Goods”. The Government will therefore introduce a three-tiered structure for trade
controls, as follows;


Category 1 will include only goods whose supply is inherently
undesirable. For Category 1 goods, the following activities will be
controlled:

trading activities by any person within the UK;

trading activities by UK persons anywhere in the world; and

any act calculated to promote the supply or delivery of such goods
Category 2 will include goods in respect of which there is legitimate
trade, but which, on the basis of international consensus, have been
identified as being of heightened concern. Whilst a precise form of
legal drafting is yet to be agreed to cover what follows, for Category 2
goods, the following activities will be controlled: .

trading activities within the UK;

trading activities by UK persons anywhere in the world;

other activities directly related to that trading, including direct and
targeted acts of promotion (the Government is currently
considering what specific acts should be controlled, as explained at
1.10 below);
but the following will not be controlled:

peripheral acts such as general promotion or advertising at trade
fairs or in periodicals.
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
Category 3 will include any items on the Military List which do not fall
within Categories 1 or 2. For Category 3 goods, the following will be
controlled:

trading between two countries overseas only if carried out from
within the UK
Under Category 3, the following will not be controlled:

indirectly associated activities, including the provision of transport,
financing/financial services, insurance or re-insurance, and general
advertising and promotion.
Coverage
1.3
The coverage of each category will be as follows;

Category 1 will cover Torture Equipment (as currently controlled in
export control legislation), plus those cluster munitions which cause
unacceptable harm to civilians2. In addition, the supply of any
Controlled Goods to an embargoed destination will fall under Category
1.

Category 2 will cover Small Arms and Light Weapons3, (thus fulfilling
the commitment made by the Prime Minister in his speech delivered at
the Mansion House on 12 November 2007). Long Range Missiles
(including Unmanned Air Vehicles) and MANPADs. We see Small Arms
as;
“Weapons and related accessories, controlled in ML1 and ML2, and designed
for individual use, to include, inter alia,revolvers self-loading pistols, shotguns,
rifles, carbines, sub-machine guns, assault rifles and light machine guns, and
any specially designed components therefor; and any ammunition controlled in
ML3 for the above weapons”.
We see Light Weapons as;
“Weapons and related accessories, controlled in ML2 and ML4, designed for
both individual use or by two or three persons serving as a crew, although some
may be carried and used by a single person. They include, inter alia, heavy
machine guns, hand-held under barrel and mounted grenade launchers, manportable anti-aircraft guns, man-portable anti-tank guns, recoilless rifles, man2
Although there is neither an internationally accepted definition of a cluster munition, nor a definition of
those which cause unacceptable harm to civilians, the UK judges this to mean the ‘dumb’ variants; those
which have no target discrimination capability or a fail-safe mechanism, such as the RBL-755 and MLRS
M26, both of which were withdrawn from UK service in March 2007.
3
There is no internationally agreed definition of small arms and/or light weapons. The definitions used
here are based upon the International Marking and Tracing Instrument.
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portable launchers of anti-tank missiles and rocket systems, man-portable
launchers of anti-aircraft missile systems, and mortars of a calibre of less than
75 millimetres, and any specially designed components therefor, and any
ammunition, grenades, rockets or missiles controlled in ML3 or ML4 for the
above weapons”.
However, there may be scope for drafting changes when the necessary legislation is
prepared.

Category 3 will cover all other goods on the Military List not specified in
Categories 1 or 2.
1.4
The above changes represent an adjustment of the controls on Long Range
Missiles and UAVs, where the Government sees Category 2 status as more
appropriate. This is because this equipment is a legitimate defence requirement for
many nations (including the UK) and therefore generates legitimate business
transactions. Therefore, controlling general acts of advertising and promotion is
difficult to justify – but Category 2 status will enable us to continue to control any
activities directly related to their trade, thus ensuring that the UK’s multilateral
commitments under the Missile Technology Control Regime can be fully met. In
contrast, controls on Small Arms and Light Weapons and MANPADs have been
enhanced to reflect the fact that, whilst not prohibited, these are categories of
equipment that are subject to increased levels of concern as reflected in
internationally agreed instruments, and multilateral guidelines to which the UK has
chosen to commit itself. The Government believes that this combination of a more
nuanced structure to the trade controls and the consequent changes in coverage
represents a balanced and logical approach, more accurately reflecting the risks
associated with each category of items.
Benefits and costings
1.5 The above is a package of change to more accurately align extra-territorial
trade controls to risk. All these change proposals were specifically put forward in
the public consultation document, and received broad consensus across the
spectrum of respondents; including both those representing industry interests and
individual exporters and Non Governmental Organisations with an interest in arms
control issues.
1.6 Businesses who wish to display UAVs and LRMs at trade fairs, place adverts in
periodicals, or undertake other similarly generalised acts of advertising or
promotion will no longer need to apply for a licence to do so, thus saving both their
administrative time and the Government’s time in processing the necessary
applications.
1.7 Where controls will be tightened – ie in respect of Small Arms and Light
Weapons, MANPADs, and Cluster Munitions which cause unacceptable harm to
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civilians, - the clear benefit will be to enable the Government to control, and where
necessary refuse, UK involvement in the trading of these weapons of heightened
concern, and thus ensure that unscrupulous traders cannot pursue deals that
concern the UK simply by carrying out the business from another country. There
will of course, be some extra business burdens for those traders operating extraterritorially in these goods who will now need to apply for licences, but the
Government’s view is that this is appropriate to the risk concerned. Where
appropriate, we will consider open licensing for transactions that are clearly not of
concern.
1.8 Whilst the public consultation document sought information on these costings,
no such information was forthcoming from respondents. However, the Government
is confident that extra-territorial trading in the narrow definition of Small Arms and
Light Weapons provided earlier in this document, is very much a minority activity
(no respondents to the public consultation identified an involvement in these
activities) and that costs will therefore be small.
1.9 Business costs may though, become a more significant issue if the coverage of
Category 2 were to be extended beyond the current definitions of Small Arms and
Light Weapons and into a broader range of Military List equipment, or even to the
whole of the Military List. Radical expansions would start to catch legitimate
transactions by mainstream defence companies who were moving equipment,
including components, between overseas linked companies as part of the
production process. Since radical extensions were not specifically stated as an
option in the consultation document, the Government will need to re-consult
industry to establish the extent of the burden imposed. The results of that further
consultation, together with a fully costed Impact Assessment of the current
changes, will then be published.
Further work
1.10 The Government is currently carrying out further research to establish which
supporting activities should be controlled under Category 2, including transport and
promotional activities. Particular care will need to be taken to distinguish between
general promotion and active or targeted promotion geared to securing a particular
business deal - an activity which our international commitments in respect of Long
Range Missiles falling within Category 14 of the Missile Technology Control Regime
and MANPADs oblige us to control.
4
MTCR defines Category 1 for Rockets as;
“Complete rocket systems (including ballistic missile systems, space launch vehicles, and sounding
rockets)capable of delivering at least a 500 kg "payload" to a "range" of at least 300 km”.
MTCR defines Category 1 for UAVs as;
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1.11 The Government is currently examining how the definitions of Small Arms
and Light Weapons referred to above would relate to corresponding Military List
categories and also the case for extending the range of goods covered by Category
2 further. As explained above, it will report back on its findings when it provides its
further response. However, the Military List is not confined to those weapons with
lethal capability or the ability to be deployed aggressively. Some of the items on it
are considerably lower risk – such as camoflague nets or de-mining equipment – and
so would be difficult on a risk basis, to justify as appropriate for more rigorous
control.
2.
Torture equipment
2.1
The most rigorous controls already apply to a range of equipment which has
been identified as having been used in torture. These are controlled by a
combination of a European Council Regulation, which is directly applicable in all EU
Member States, and national controls. The range of goods covered include, electric
shock belts, restraint chairs and shackle boards, leg-irons, gang chains, cuffs and
shackles bracelets, thumb-cuffs and thumb-screws, portable electric shock devices
including electric shock batons, electric shock shields, stun guns and electric shock
dart guns. These are all considered to be “Restricted Goods”, which means that in
addition to the normal controls on export from the UK, their trading from the UK, or
indeed from anywhere in the world when carried out by a UK person, requires a
licence as does any other act calculated to support trading, even to the extent of
controlling acts of general advertising or promotion. However, in the light of
responses received and the level of concern expressed, the Government has now
decided to make two further changes in this area.
2.2 The first change will be to add sting sticks to the UK national list. Sting sticks
are not a general purpose item that could be used in acts of torture. They are
designed for the purposes of torture or similar inhumane acts and have no other
legitimate use. Whilst adding them to this list is not expected to have a significant
impact in terms of volume – since the Government is not aware that sting sticks are
being produced in, or exported from the UK - the Government sees a clear case for
introducing this extra safeguard, so that the full rigour of controls, as set out above,
is applied to them.
2.3 The second change is that the Government has decided, in principle, to
introduce an end use control on torture equipment, thus enabling the UK to licence
– and thus refuse – the export of any goods from the UK which were destined for use
in torture or similar inhumane or degrading acts. Since this control is more general
in nature, the Government would seek to introduce it at EU level, rather than
nationally, in order to ensure that the rest of the EU was operating to UK standards
and that UK exporters could not circumvent the control simply by temporarily
“Complete unmanned aerial vehicle systems (including cruise missile systems, target drones and
reconnaissance drones) capable of delivering at least a 500 kg "payload" to a "range" of at least
300 km”.
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exporting from other nearby EU countries. It would be introduced on the basis that
if the Government had information or intelligence, that the export in question was
likely to be used for these purposes, then it would inform the exporter, who would
then be required to apply for a licence. Exporters would also need to apply for a
licence if they knew that the export was intended for such use. Once a licence
application had been received, it would then go through the same rigorous
assessment process used for licences under the other end use controls, and any
decision to refuse it would be subject to appeal by the exporter.
2.4 The Government has considered carefully the case for exporters to be required
to apply for a licence if they suspected that their goods would be misused. It has,
however, concluded that if we required exporters to apply on the basis of general
suspicions, this would run the risk of generating licence applications for large
numbers of general purpose goods in circumstances which did not really generate
concern. On the other hand, we believe that procurers would be extremely unlikely
in practice to provide documentation which made the intended use in torture
apparent; therefore any control that applied only where exporters could identify
specific grounds for suspicion would be likely to catch few if any additional cases.
2.5 The control would extend to UK exports only: it would not cover trading in
torture equipment. No other end use controls apply to trade, and in practice a
control of this type would be virtually impossible to enforce.
Benefits and costings
2.6 The Government sees these measures primarily as a safety net. Our
understanding, based on research carried out before the EU Torture Regulation was
introduced, and on the number of reports received since of UK involvement in
torture equipment (which are few and far between and relate primarily to the
display or torture equipment at trade fairs rather than its export from the UK) is that
there is little if any UK activity in this area. We anticipate that the control will
primarily be invoked by the Government on the basis of specific information, after it
had been verified, and, to a lesser extent, on intelligence. The Government would
not be able to act on the basis of unfounded allegations, nor to proactively look for
instances of torture operations overseas on a speculative basis; and currently,
intelligence resources are focussed on counter-proliferation and counter-terrorism.
2.7 All this leads the Government to believe that in practice, this power is likely to
be used rarely and so we are likely to require licence applications to be made, or
refuse them, only on an occasional basis. It does however, have significant benefit
as an important extra tool to control the export of equipment that can cause great
suffering, even if that tool is used infrequently in practice.
2.8 The option of introducing a torture end use control was specifically put forward
in the public consultation document and views were sought both on its desirability
and any business burdens that would be generated. There was broad consensus
that further action on torture equipment was needed, and that a targeted and
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focussed end use control, operating as explained above, would be the most efficient
and effective way of taking that action.
2.9 Understandably, respondents found it difficult to give costings estimates for a
control like this, which is triggered not by categories of goods or destinations, but
by the specific nature and intent of individual transactions - although industry
respondents did advise that the cost of implementing the control in this targeted
and focussed way would be minimal. The Government’s further response will
include a costed Impact Assessment that will try to quantify costs to the best of our
ability – but the Government remains confident, for all the reasons set out above,
that the industry view is correct.
Further work
2.10 The Government is working on the exact drafting of these measures, and
investigating the extent to which it would be possible to provide additional
information to exporters, to raise awareness and enable them to identify entities
that are known to be involved in torture. The Government is also committed to
working with interested parties in industry and elsewhere on the details of how the
end use control will operate, to providing the necessary guidance for exporters, and
to working with those in industries who may be affected, to raise awareness of this
new control. All this work can commence early in 2008 and the Government will
provide a progress update in its further response.
3.
Legal tidying up work
3.1
In the consultation document (page 49) we identified an anomaly which has
resulted in the coverage of non-military explosive goods under trade controls being
incomplete. Responses to the consultation indicate broad support for correcting this
anomaly and do not identify that any unforeseen business consequences would be
generated by doing so. The Government will therefore take action to remove the
anomaly and thus extend controls to extra-territorial trading in these goods to
supply embargoed destinations, plus the provision of associated ancillary services.
Areas where change is not needed
4.
Transport services
4.1
The consultation document (pages 27 -29), discussed the case for requiring
transporters who transport controlled goods between third countries to obtain
documentary evidence that the services they supply are to support an appropriately
licensed transaction. The Government received a range of responses on this issue,
but has decided that on balance there is not a convincing case for placing these
extra burdens on transport providers, when that requirement will often be difficult
or impossible to fulfil for valid logistical reasons.
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4.2. An example of practical difficulties that could occur would be where a UK
transport provider, based in say, Malaysia, was asked to transport goods from
Singapore to Taiwan, in support of a non-UK broker operating from Australia.
Whilst that transport provider would know the type of goods and the destination, in
order to seek documentary evidence that the export of the goods was properly
licensed, the transport provider would need to choose between two options:

The provider could approach the Australian broker, but whilst that
broker might be able to provide proof that the brokering was licensed
(if the country in question, in this case Australia, has controls on
trading), he might well not have a copy of the licence from Singapore
authorising the export of the goods. In addition the provision of the
documentation would rely on the goodwill of the Australian broker. To
fulfil the request of the UK provider, the Australian broker would need
to ask for documentary proof from the Singapore exporter, thus asking
that exporter to breach their commercial confidentiality on behalf of a
third party, namely the UK provider. The Singapore exporter might
not be prepared to do this and might instead ask the Australian broker
to find an alternative transport provider – in which case, the export
(potentially of concern) happens but without UK involvement; and even
if the Singapore exporter were prepared, the process would take time
and potentially undermine the deal for that reason.

Alternatively, the provider could approach the Singapore exporter
direct (if he knew their identity), but would then face the difficult
choice of whether to do so with the consent of the Australian broker or
not. If consent was sought, then all the difficulties referred to above
come into play. If consent was not sought, then the direct approach
might have a better chance of eliciting the documentation sought, but
may still lead to the Singapore exporter placing the business with other
providers who do not make these stipulations, and could also, if it came
to light subsequently, jeopardise the relationship between the UK
provider and the Australian broker.
4.3
The end result of both the above situations may well be that UK business lost
the opportunity to transport goods in circumstances that did not concern us; or
alternatively, that the transport of an export of concern was re-assigned to a nonUK provider – neither of which outcomes deals with the root concern.
4.4
Currently the provision of transport is controlled under the Trade Controls
where the goods transported fall within the “Restricted Goods” categorisation for
transport between any two third countries, and where any Controlled Goods are
being transported from one third country to another embargoed destination. The
Government accepts that it is entirely justified to take its own measures to control
the provision of transport where the circumstances and risk justify doing so; but we
believe this is best achieved by the UK identifying goods which warrant transport
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controls and legislating accordingly; not by in effect using the transport industry as a
go-between to verify the licensing decisions of other countries.
5.
Weapons of Mass Destruction (WMD) controls
5.1
The consultation document did not offer any specific options for change in
this area. Instead, it asked readers to indicate whether they thought change was
needed and if so, what change they proposed and why.
5.2
The only comments received came from representatives of the Chemical
Biological Radiological and Nuclear (CBRN) sector, who raised a number of
concerns. These concerns do not take account of recent changes to the coverage of
Open General Licences, which we believe have dealt with the underlying concerns
to the greatest extent that the Government is able.
5.3
The Government does not therefore intend to make any legislative change in
the field of WMD controls. It does however, accept that the guidance provided in
this area is in need of review and updating, both in a general sense and also more
specifically to deal with issues arising in some specialist areas. The prime example
of this is the academic sector, where we accept that there is a need both to produce
new guidance and to seek other ways to raise awareness of how existing controls
impact. We are already in discussions with representatives of the sector on these
issues, with a view to developing an awareness raising plan in the New Year.
5.4
The Government are also committed to looking at the coverage of open
licences, whether Open General Export Licence or Open Individual Export Licences,
where there is a genuine and demonstrable business need.
6.
The case for a terrorism end use control
6.1
This idea was not specifically mentioned in the consultation document, but
was put forward by respondents. However, the Government, having considered the
argument, is content that the risk of non-controlled goods being supplied for use in
acts of terrorism is adequately covered by other legislation and that further changes
to export control legislation are not necessary.
Areas where no decision can be made pending further research
There are a number of areas where no obvious solutions have been identified. Whilst
research and analytical work in all of these areas is well advanced, more needs to be
done, both internally in Government and in conjunction with stakeholders, in 2008.
The areas are as follows;
7.
Overseas production
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7.1
The consultation responses on these issues have convinced the Government
that, in attempting to find solutions to this complex problem, there is a clear
distinction to be made between the export of controlled goods for use in overseas
production and the export of non-controlled goods.
Export of controlled goods
7.2
Currently, any export of controlled goods or technology to an overseas
Licensed Production Facility (LPF), an overseas subsidiary of a UK concern, or
indeed in any other circumstance in which controlled goods will be incorporated into
larger items of military equipment, requires an export licence When applying for the
licence, the exporter is asked whether the export is for the purposes of overseas
production and is required to give a Yes/No answer and to provide further details if
the answer is Yes. This ensures that any such proposed exports are clearly visible to
the Export Control Organisation and allows a risk assessment to be made on the
basis of two destinations; the initial destination in which the goods will be
incorporated or used in production and the onward destination to which the final
product will be exported.
7.3
If the export from the LPF or subsidiary to the onward destination causes
concern, then the export licence application can be refused under the Consolidated
EU and National Arms Export Licensing Criteria. Licence applications have indeed
been refused on this basis. Similarly, if information subsequently comes to light
which shows that the goods were exported from the initial destination other than as
originally described (ie they went to a country of concern that was not divulged in
the original application) then the licence can be revoked. The LPF or overseas
subsidiary in question then also becomes a diversion risk and this can be factored
into any future applications to export controlled goods or technology to it - thus
providing the potential to refuse future applications on the grounds of risk of
diversion (Criterion 7).
7.4
In this area, two change options were put forward in the consultation
document:
(i)
Control the licensed production agreement itself
(ii)
Make export licences for supplies to licensed production facilities or
subsidiaries subject to conditions relating to the relevant commercial
contracts.
7.5
Option (i) received little support from respondents and the Government
believes that the reasons identified as challenges in the consultation document
remain valid and preclude pursuing it. The major difficulty here is that the main
point of licensing the production agreement would be to control the single event of
setting up an LPF. However, a new control could not affect the establishment of
LPFs that already exist (Article 7 of the European Convention on Human Rights
prevents us criminalising conduct that has already taken place).
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7.6
Views on option (ii) were more evenly divided, with a number of respondents
recognising the case for linking the licence to the underlying commercial contract
between the UK exporter and its overseas link. The Government has therefore
considered option (ii) seriously, but has concluded that its flaw is that ultimately, a
contract is only as good as the will of the two parties to abide by it. If the parties
have no real collective interest in preventing onward supplies of concern, the
overseas entity is unlikely to advise its UK link of breaches and the UK exporter will
be less inclined to pursue such matters through the courts, particularly in an
overseas jurisdiction. And even if legal action was pursued on the basis of the
contract, it is far from certain that the remedy would do anything to prevent the
export of concern; damages or other financial remedies might be granted, but that
would not solve the problem of goods or technology ending up in a destination we
were unhappy about. So, from an export licensing perspective, any follow up action
by the UK exporter serves little purpose other than as a warning to the overseas
entity not to export to undesirable destinations in future. But the UK Government
already has the ability to revoke licences or refuse future applications - which is a
very powerful sanction – and in addition, any control specifically linked to licensed
production could give rise to arguments over the status of the facility in question
and thus whether the control applied. So the Government therefore considers that
in practice, option (ii) imposes extra burdens and complications without giving the
licensing authorities any significant additional leverage.
7.7
We are still considering whether including conditions relating to contracts on
the licence would add anything to the military end use approach set out below.
There are some legal and practical difficulties with licence conditions, although
these may not be insurmountable, and we are attempting to obtain compliance
costings from business to assist our analysis. But the Government has concluded
that there is no convincing case for enhancing controls on the exports of controlled
goods specifically in relation to licensed production.
Export of non-controlled goods
7.8
In contrast, the Government accepts that there is, in principle, a stronger
case for tightening controls on the export of non-controlled goods. The examples
which are regularly quoted in support of the case for more rigorous control relate to
the export of goods that did not require a licence when they left the UK; which were
either militarised in a third country before being sold on and used in a destination of
concern, or they were of use in that destination in their non-licensable state (for
example, heavy vehicles and similar equipment not made to a military specification
but nevertheless, as is the case with many civilian vehicles, capable of deployment
for military purposes).
7.9
In practice therefore, these issues are all to do with military end use of noncontrolled items in embargoed destinations or other destinations of concern. This
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suggests moving the focus away from licensed production per se, and instead
towards expanded military end use controls.
7.10 The Military End Use Control (MEUC), is at present the only means that can
be used to control the export of non-controlled items for military use. The
Government recognises that there are shortcomings in the MEUC. It does not
control complete items that, whilst not strategically controlled, could nevertheless
be of significant use to the military in an embargoed destination; neither does it
control any exports to non-embargoed destinations, some of which might be of
considerable concern. However, addressing these shortcomings in the current
MEUC in a way that will work in practice, and would not impose unreasonable
burdens on industry, is not necessarily straightforward. To avoid overloading the
licensing system and creating burdens for exporters in relation to exports which
pose no significant risk, any expansion would have to build in some form of
significance parameter, and the basis for that is not easy to determine. The
Government’s starting point would also be that it would seek to introduce any
expanded control by obtaining consensus at EU level, since this would avoid placing
UK exporters at a competitive disadvantage in comparison to their near neighbours
and competitors in other Member States operating less stringent controls than the
UK. There is an associated risk that unscrupulous exporters would make exports
from those other Member States in order to circumvent UK controls.
7.11 The Government has started work on all these issues, but more work is
needed, including more accurately estimating the compliance costs for business.
We are however, committed to investigating whether there is a workable way of
expanding the MEUC to cover complete items of equipment, and potentially to
extend it to non-embargoed destinations of significant concern, and will report back
on this.
Overseas subsidiaries
7.12 The Government remains of the view that to attempt to directly control the
activities of overseas subsidiaries – in effect to treat them as though they are based
in the UK – is not legally viable and would be virtually impossible to enforce. Some
respondents have however, suggested that existing legislation could be used to
control exports from overseas subsidiaries where they could be demonstrated to be
institutionally controlled by a UK company (for example on the basis of share
ownership, representation of UK nationals on the Board, etc).
7.13 Our view is that the Export Control Act 2002 does not clearly allow us to
penalise a UK company for the activities of its subsidiary solely on the basis that it
has institutional control when those activities happen. Consequently, there would
be concerns about our powers to make secondary legislation on this point. So
following this route of judging control on an institutional basis – as opposed to our
current policy of looking at the extent to which a particular action of concern was
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carried out by others under the direction of a UK person could give rise to legal
problems.
7.14 But perhaps more important are the practical and enforcement difficulties
that strongly point towards not adopting the “institutional control” approach,
namely;

Following a set of institutional control parameters could lead to some
perverse outcomes. The conclusion might be that institutional control
existed, but the UK company might nevertheless be able to
demonstrate that they had no significant part in the specific
transaction of concern. It might then be difficult to maintain that there
was a public interest in pursuing a prosecution against an “innocent”
party.

Evidence gathering would be largely dependent on gaining agreement
from the ‘host’ country to locate evidence of the export itself; it is
possible that the UK offence will not be recognised in that country’s
law, or alternatively that comparable controls will exist in that country’s
own legislation, making it difficult to secure that country’s cooperation. Attempts to gain evidence relating to exports are likely to
be disproportionately expensive both in monetary and resource terms.

The notion of institutional control implies that evidence will be
primarily contractual in nature or will relate the constitutional
documents of companies. HMRC is not geared to examinations of this
nature, which arguably are beyond its functions as set out in the
framework of the Commissioners for Revenue and Customs Act 2005.
In all likelihood, the work would have to be located elsewhere or extra
expertise would need to be brought into HMRC; while these changes
might be achievable, they do add another cost and delay factor.

Perhaps most important of all, the institutional control parameters that
have been suggested could be relatively easy to circumvent (e.g. by
changes in share structure or changing the make up of the Board).
7.15 The Government does not therefore intend to attempt to use existing
legislation to control the actions of overseas subsidiaries on the basis of establishing
institutional control; both for the reasons set out above, and more generally,
because it is not convinced that special measures are necessary to control overseas
subsidiaries. It is difficult to envisage many situations in which overseas subsidiaries
who need to manufacture military equipment can survive without being supplied
with goods or technology from the UK parent, either initially or on an on going
basis. Where the UK parent exports controlled goods or technology, the
Government’s view is that current controls are adequate. Where the UK parent
exports non-controlled goods the Government is actively investigating the case for
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tightening controls under the military end use control in a way that would apply on
the basis of the risk generated in each case.
8.
A Pre-Licensing Registration System
8.1
The Government is still considering the case for introducing a pre-licensing
registration system. This is an extremely complex area and one where it is not
possible to take a decision simply on the basis of principle. A range of operational
details need to be covered in order to draw up a full model of how such a system
might work in practice, since without this model it is not possible to determine
whether the system could deliver benefits without imposing disproportionate
burdens. This work is currently underway.
9.
Transit and transhipment
9.1
The Government judges that in this area, there are three key issues;
(i)
Should the coverage of export control legislation be altered, so that a
broader range of goods transitting or being transhipped via the UK
require an export licence?
(ii)
Is the system for transhipment licensing in need of radical change?;
and
(iii) Can more be done to explain the system better to those directly
involved and/or to raise awareness of what transit and transhipment
movements require UK licences under the export control system?
9.2
The answer to (i) is linked to broader proposed changes to trade controls (see
section 1). The Government has now announced the introduction of a new category
(Category 2) under those controls, which will be populated by goods in respect of
which there is legitimate trade but which, on the basis of international consensus,
have been identified as being of heightened concern. The full coverage of that
Category has not yet been determined, but the Government is of the view that
these goods of heightened concern, along with goods in Category 1, should require
a licence to transit or tranship via the UK. In principle, the Government is minded to
adjust the scope of the current transit and transhipment legislative exemptions so
that there can be no exemption for goods that are finally agreed to fall within
Category 1 or 2 (a transit or transhipment licence is already required for much of the
proposed Category 1).
9.3
On (ii), the Government does not accept that transit or transhipment
controls are fundamentally flawed, nor that HMRC – who enforce these controls –
do not have the information they need to operate effectively. Customs controls are
based on Community/common Transit (CT) procedures which have been agreed
across the European Union. Consignments entering or departing the UK under CT
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must be accompanied by a CT declaration, a Community Status document or T5
Control Copy as appropriate. This system is underpinned by the New Computerised
Transit System (NCTS), which is used to manage and control CT movements.
Consignments destined for a non-EC country also require an export declaration to
be entered into the UK’s New Export System (NES) at the point of departure.
However, whilst the methods of entry and the associated paperwork may differ in
the details, HMRC is confident that in every case, the procedures give them the
information that they need to identify goods of interest and thus perform their
control checks. The use of the Community Transit procedure does not affect the
requirement to comply with UK prohibitions and restrictions.
9.4
The HMRC ‘Statement of Service’ requires transit staff to check at least 2%
of transit movements at the office of departure. HMRC has also developed risk
management systems that enable them to target specific transit/transhipment
consignments where there is high-quality intelligence that they contain
illegal/unlicensed goods. Checks are made on a risk- and intelligence-led basis to
prevent the shipment of sensitive goods to embargoed and other listed destinations
(particularly in relation to suspected WMD procurement). HMRC will also act on
evidence received from freight forwarders or shipping agents should they express
concerns about a particular consignment.
9.5
The Government accepts that there is scope to improve its guidance and
awareness effort in the transit and transhipment area (point (iii). HMRC and BERR
will therefore be jointly engaging with representatives of industry – both defence
exporters and the broader transport and freight forwarding industries – to explain
the expanded coverage of transit and transhipment licensing when that coverage
has been finalised, and to clearly identify how guidance can be improved and
awareness raised.
10.
Trade Controls: “Receipt of a fee or commission”
10.1 The controls on the trading of Controlled Goods currently state that “any act
calculated to promote the arrangement or negotiation of a contract” for their
acquisition or disposal between two third countries is controlled only when that act
is done “in return for a fee, commission or other consideration”. The public
consultation document (page 50) sought views on the case for removing this
stipulation.
10.2 A number of responses were received on this issue, many highlighting the
difficulties that might be caused to business by removing the stipulation. The
Government accepts that there is potential for the removal to inadvertently control
a range of everyday business transactions which generate no significant risk; but
equally, we remain concerned at the current potential for undesirable trading to be
supported by those who would be prepared to provide their services without
payment.
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10.3 Work therefore continues to quantify the business burdens that might be
generated by removing the stipulation and to investigate whether any alternative
method might be found to distinguish those activities linked to trading that concern
us from those that do not. We also need to factor in the changes to trade controls
generated by moving to the new three tier categorisation (see section 1 above) and
identify their impact on this area. The Government will announce its conclusions in
its further response in Spring 2008.
11.
Differing definitions of technology
11.1 The public consultation document (page 49) sought views on whether the
harmonisation of the three definitions of technology currently used in export control
legislation would be desirable and asked respondents to indicate the business
impact of doing this.
11.2 These questions received a relatively low level of response. Those who did
respond saw benefit in harmonisation, but tended to see the current legislation as a
minor irritation rather than as a significant impediment to their business.
11.3 The Government is therefore currently taking legal advice on the extent to
which harmonisation is achievable; how it might be effected and whether
harmonisation could have any unforeseen consequences. We need to be very sure
that in changing words to make them more user-friendly we do not inadvertently
change the scope of the legislation. The Government will provide an update on this
work in its further response in Spring 2008.
12.
Other issues
12.1
Some respondents argued the case for change in a number of areas that
were outside the Terms of Reference for this Review. These included the case for
end use monitoring of UK-exported goods, prior Parliamentary scrutiny of export
licence applications, and organisational changes to the way in which export
licensing administration and enforcement is handled within Government.
12.2 The Government recognises these concerns, but its first priority must be to
make progress on the Review itself. The Government will therefore issue separate
responses to those that put them forward as soon as it is able to do so, bearing in
mind the need to avoid diverting resources and attention away from the key issues
identified above.
CONCLUSION
During the coming months, the Government will both finalise its position on all
outstanding issues and work closely with industry and other groups on the detail of
how new controls will operate in practice. It will also determine what changes to
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Open General Licences will be needed. The Government will also provide the
guidance and awareness that industry will need to understand any new controls.
The Government’s further response will provide a costed Impact Assessment of
both the agreed changes set out in this document and any further changes that are
agreed as a result of ongoing work.
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