Earlier this week the International Committee of the Red Cross announced that the fighting in Syria had become so widespread that the uprising should now be regarded as a civil war. This announcement coincided with the publication of a report by the four House of Commons Select Committees on Arms Export Controls (the CAEC report), which were set up to scrutinise the government’s policies and performance on arms controls. In light of Syria’s descent into chaos over the past year, it was surprising to learn from the CAEC report that the government permitted the export of military armoured vehicles and hazardous chemicals to Syria over the same period.
These Syrian exports are one illustration of the big theme of the CAEC report: the ease with which military and dual use goods have recently been sold in (or through) the UK to customers located in the Arab Spring countries or in countries with poor human rights records, particularly China. The CAEC report recommends that the government takes a significantly more cautious approach when considering export licence applications in respect of authoritarian regimes where the goods might be used to facilitate internal repression. Sir John Stanley, the CAEC chairman, voiced his suspicion that the UK was simply following its own policy on approving arms sales to certain regimes.
Most businesses which conduct international trade through the UK will be aware of their obligation to stay compliant with the UK’s panoply of export controls. The parameters of those controls regularly chop and change – witness the recent and unprecedented revocation of 158 licences for goods exported to countries including Egypt, Tunisia and Bahrain. But just as the licensing landscape is driven by political interests and foreign policy considerations, so too is the enforcement of export controls.
The CAEC report is implicitly critical of the government’s prosecution policy: it wants the government to explain why it “encounters difficulties” in enforcing export controls (or, to put the question less politely, why it doesn’t bring more prosecutions). The cynical answer to this question is that the government goes after the easy targets – the small backroom operations which are determinedly non-compliant in all respects. To some degree the cynicism is justified. No large multinational company has been prosecuted for breaches of export controls. But in this firm’s experience, it would be a mistake to assume that size guarantees safety: small and medium sized companies have become the subject of protracted criminal investigations.
The reason so few investigations turn into prosecutions is not simply because the CPS is nervous about taking on larger and well-resourced defendants. It is also because many investigations into alleged export control breaches end with a compound penalty. This is a fine by which HMRC can offer companies the chance to settle a case which would justify being referred to the CPS for prosecution. They are on the rise. The CAEC report notes that the government’s policy since April 2010 has been to make greater use of compound penalties in lieu of prosecution: in the past two years HMRC has agreed a large number of compound penalties (larger than the number of prosecutions) ranging from £1,000 to £575,000.
If a company discovers a compliance problem, the key tactical choice is between making a voluntary disclosure to HMRC of all of the company’s problems or alternatively brushing the problems under the carpet and hoping that BIS will never discover them. The former approach has the virtue of transparency. But transparency brings no guarantee of immunity and the decision to proceed with a voluntary disclosure can only sensibly be made if there are meaningful incentives for doing so. This is where compound penalties can be a valuable negotiating chip. They enable HMRC to punish a company’s acknowledged wrongdoing (which may be ring-fenced to the compliance problems which HMRC knows about) with a step short of prosecution, and with far more limited publicity for the company than a prosecution would entail.
Historically the problem was that, unlike in tax investigations, there was no detailed guidance concerning when a compound penalty was likely to be accepted by HMRC in export control cases, or how such penalties would be calculated. In evidence given to CAEC in previous years, the Export Group for Aerospace and Defence, a well-respected industry body, called the system of compound penalties “completely opaque”. In April 2011 CAEC recommended that the government make public the criteria used for imposing compound penalties. The government finally responded this week: see pages 74 and 75 of the CAEC report. That response includes a list of the following non-exhaustive criteria for calculating the penalty:
• the seriousness of the alleged offence
• whether fraudulent intent can be proven
• the extent of the offender’s efforts to perpetrate the alleged offence
• the type and value of any goods involved
• the offender’s previous history
• the level of penalties known to have been imposed by courts for similar offences.
These criteria are somewhat vague but they are at least a starting point for negotiations with HMRC. Their publication is especially welcome given how easy it is for companies to fall foul of the shifting licensing landscape – and how much easier it will become if the CAEC report’s recommendations are implemented.
Corker Binning’s criminal lawyers have substantial experience of advising and representing companies and individuals on import/export and other trade control issues, including sanctions, particularly where there is a risk of criminal offences being committed or where a criminal investigation has already started. For more information on how we can help, visit our website or call us on 0207 353 6000.