Category Archives: News and Events

Big Data and Non-proliferation: The Alpha Proliferation Open Source Tool (Alpha-POST)

Over the last two years, Ian Stewart, director of Project Alpha, has been developing a ‘big data’ platform for non-proliferation purposes. This platform is used to inform Project Alpha’s work and acts as a test bed for big data and machine learning approaches in the non-proliferation sphere. Today, Project Alpha is publishing a paper on Alpha-POST’s design and capabilities to provide background on the platform.

The abstract of this paper, which can be downloaded HERE, reads as follows.

This paper outlines the Alpha-Proliferation Open Source Platform (Alpha-POST), developed by Project Alpha to leverage big data analysis for non-proliferation purposes. The article demonstrates how a variety of open source software tools can be fused together into a ‘software stack’ capable of ingesting, processing and leveraging vast quantities of data to aid human analysts. While Alpha-POST leverages tools such as Natural Language Processing (NLP), link chart analysis and machine learning in the non-proliferation domain, Project Alpha argues that the approaches outlined in this paper could be applied to any discipline or sphere .

A forthcoming article in the Journal of Nuclear Material Management will examine how the big data approaches developed in this platform can be used more generally in the non-proliferation domain.  Additionally, the platform will be demonstrated at the 2018 IAEA safeguards symposium.

 

 

 

 

 

 

 

Karl Lee, where is he now?

Daniel Liu, Researcher (daniel.liu@kcl.ac.uk)

Click here to access the Report: Karl Lee where is he now ?

  • Internationally sanctioned and alleged nuclear proliferator Li Fangwei (李方伟) a.k.a: Karl Lee, almost certainly remains active in Dalian China, where he continues to attempt to export Graphite and Graphene related goods internationally.
  • Li’s current most likely locations are: Songshuzhen, Wafangdian County, Dalian, Liaoning, China (中国辽宁省大连市瓦房店市松树镇), and 2501-2508 Yuexiu Building, No. 82 Xinkai Road, Xigang District, Dalian Liaoning, China(中国辽宁西岗区新开路82号越秀大厦2501-2508室).
  • Li’s network of shell companies continues to morph in corporate officers and owners to avoid sanctions scrutiny. Yet core individuals, companies’ Chinese name and physical assets remain the same. The current fourth iteration of this proliferation network is probably focused around Sinotech Carbon, a.k.a: TST Carbon, a.k.a: Dalian Zhongchuang Carbon(大连中创炭素有限公司).
  • The network is run by more than just Li Fangwei. Court records, company ownership data and local government tax records show that Li Fangwei’s family and other close associates are actively taking part in the network’s business activity. They act as sales representatives, lawyers and shareholders across many companies in the Li network. Li is also not above committing identity fraud by using the name of a deceased woman believed to be his late mother to register shareholdings.
  • From 2015 to 2016, around the time of US indictment and seizure of Li’s US based financial assets, the network has embarked on a series of highly opportunistic law suits in Chinese civil courts. This was possible done to recoup their losses. These cases typically involved using loopholes in Chinese commercial caselaw to compel Chinese companies to complete a sale to Li network companies despite their objects of proliferation risk, or intervention by local export control authorities, then requesting further damages for lost profits.
  • Yet after years of international sanctions and asset freezes, the Li network may be under strain and local government tolerance may be waning. As of September 2018, local government bodies have issued a cease and desist order on Sinotech Carbon due to environmental protection concerns.

Iran and the FATF: More Efforts Needed

Emma Scott and Jean-Annet de Saint Rapt

Public Statement Issued by the Plenary

The FATF plenary which took place on 17-19 October 2018 decided to continue the suspension of counter-measures against Iran. The Plenary said it was disappointed with the pace of Iran’s AML/CFT reforms. Iran now has until February 2019 to bring the necessary legislation into force, in line with international standards or risk a call for counter-measures.

Iran has been categorised as a high-risk jurisdiction and is one of only two countries on the FATF ‘call for action’ list (or blacklist), together with the DPRK. A call for action requests all countries to impose countermeasures against the jurisdiction. Countermeasures include, but are not limited to 1) the application of enhanced due diligence, 2) refusing the establishment of subsidiaries, branches or representative offices of financial institutions, 3) limiting business relationships or financial transactions with the identified country or persons in that country, and 4) requiring financial institutions to review and amend, or even terminate, correspondent relationships with financial institutions in the country concerned.[1] Since the FATF implemented its new monitoring system in 2008, Iran has been permanently on the black list. Although, the FATF has recognised that Iran made some efforts to comply, the risk of terrorism financing emanating from Iran remains a significant obstacle.

 

Iran Tries to Ease its Relationship with the FATF

In 2016, Tehran agreed to cooperate with the FATF financial body. Tehran’s motivation was that it wanted to escape the FATF blacklist to help it better integrate into the world economy after the signing of the Joint Comprehensive Plan of Action (JCPOA). Simultaneously, President Hassan Rouhani initiated major banking sector reforms, which aimed to contribute to the development of the economy and attract foreign investment. Transparency and regulation are key to such reforms as these would bring Iran into compliance with international norms such as the Basel Standards, International Accounting Standards (IFRS) and FATF recommendations.

To address its AML/CFT deficiencies, in 2016, the FATF set an Action Plan which Iran had to complete. Iran agreed to follow this Action Plan,[2] and in response the FATF suspended the call for countermeasures for a 12-month period but left Iran on its public statement. The FATF pubic statement currently includes a short summary of the recent actions taken by Iran in accordance with its Action Plan, and lists the remaining deficiencies, that still need to be addressed, in its ani-money laundering and combating the financing of terrorism regime. Only when all the action points are complete will Iran be in full compliance with the FATF requirements. In 2017, “In light of Iran’s demonstration of its political commitment and the relevant steps it has taken in line with its Action Plan”,[3] the FATF decided to continue its suspension.

Outstanding Issues of the FATF Action Plan on Iran
1) Criminalise terrorist financing (including removing exemptions)
2) Freeze terrorist assets
3) Ensure a customer due diligence regime
4) An independent Financial Intelligence Unit
5) Identify and sanction unlicensed money/value transfer service providers
6) Implement the Palermo and TF Conventions  
7) Verify wire transfers contain complete information
8) Establish a range of penalties for ML offense
9) Ensure legislation to provide for confiscation of property of corresponding value

In February 2018, for the same reason, the FATF prolonged again the suspension of counter-measures,[4] but in June 2018, in its public statement, the FATF expressed its disappointment with Iran for failing to implement the Action Plan. However, it maintained the suspension “Given the Iranian government’s continued efforts to finalize and pass amendments to its AML and CFT laws[5].

By this stage, the need for Iran to cooperate with the FATF became even more pressing. The U.S., under the Trump Presidency, had withdrawn from the JCPOA and decided to re-impose sanctions. Consequently, Iran’s economy witnessed a withdrawal of foreign investment and a depreciation of the rial. By complying with the FATF recommendations, Iran hopes to resolve its economic problems and minimise its differences with the remainder of the international community.

A number of pieces of legislation were sent to the Iran’s Parliament. The Parliament had already approved the Bill of Amendment to the Countering Financing of Terrorism Act, which amongst other things, lays out a legal basis for the confiscation of assets or funds to commit terrorism financing, and a Bill of Amendment to the Anti-Money Laundering Act. In September it passed a bill to join the UN Convention Against Transnational Organised Crime (i.e. the Palermo Convention), and finally, Sunday 7 October saw the Parliament pass a bill to join the 1999 International Convention for the Suppression of the Financing of Terrorism, albeit with a number of exemptions.

 

Iran’s Definition of Terrorism

The FATF Action Plan for Iran requires it to criminalise terrorist financing, “including by removing the exemption for designated groups “attempting to end foreign occupation, colonialism and racism””.[6] In Iran’s domestic legislation bringing into force the 1999 Convention for the Suppression of the Financing of Terrorism, Iran’s lawmakers carved out an exemption to article 2(b) of the Convention by stating that struggle against colonial domination and foreign occupation does not apply to the country’s definition of terrorism. The Parliamentarians further carved out an exemption to Article 6, maintaining that it doesn’t apply to the right of legitimate struggle.

That said, a number of other Middle Eastern regional states including Egypt, Jordan, and Yemen, issued reservations when joining the 1999 Convention, stating that they do not consider acts of national liberation as terrorism, and they are not on the FATF blacklist. So, that should not be an impediment to Iran’s implementation of the FATF’s standards. While the FATF may overlook Iran’s non-compliance with action point 1 if it complies with the other action points, so far, this is not been the case. The difficulty for Rouhani’s government will be to take concrete steps in freezing assets and implementing the laws passed, which is what the FATF expects.

 

Iran’s Banking Problems: Get in the Way

A broader problem for Iran is the implementation of the banking sector reform. Last March, the International Monetary Fund pointed out that the Iranian banking system had been in “distress” now for a number of years.[7] The IMF called for urgent comprehensive restructuring and recapitalisation of the banks. Since that report, the economic situation in the country has deteriorated due to the U.S. withdrawal from the JCPOA and the re-imposition of sanctions. Thus, reform has become even more critical as the monetary crisis and inflation have worsened.

The problem with Iran’s economy is that for decades, the Iranian financial sector consists not only of regulated but also unregulated financial actors, which is one of the issues the FATF has with Iran. Some of these unlicensed actors, usually affiliated with politico-religious groups, have very limited due diligence procedures on their clients and transactions. Additionally, such unregulated actors  can promise to pay high interest rates on deposits to fund credit activities, and subsequently go bankrupt resulting in significant losses for Iranian businesses and individuals. This situation also acts as a deterrent to foreign investors willing to take a risk to invest in Iran. Furthermore, international standards on credit analysis and capital requirements are not often met.

Rouhani’s reforms need to restructure the banking system in a way that will help the economy recover. The intension is to place all credit and financial institutions under Central Bank supervision, while the Central Bank intends to comply with the Basel Standards, which, for instance, set capital requirements for credit activities. For starters, in 2017, the latter issued new policies to be implemented by financial institutions.

Thus, as part of the banking reforms, Rouhani and his administration have decided to implement the FATF recommendations. The implementation of these international standards will make Iran more likely to be accepted into the international finance system. As a senior member of the Iranian government put it: “there is no guarantee all our problems would be solved if we comply […with the FATF] but I am sure that not complying would give the U.S. more excuses to increase our problems.”

 

Reaching a Consensus at the FATF: A Long Process

The decision to remove Iran from the blacklist is a FATF Plenary consensus decision. However, the U.S., holding the influential position of Chair for a one-year period, is likely to continue to push for Iran to remain on the list. The other countries may not want to keep Iran on the list if it continues its efforts to comply with the recommendations.

An on-site inspection team needs to deploy to Tehran, and report back to the Plenary on the implementation of the Action Plan, before Iran is removed from the list. The improvement of Iran’s relationship with the FATF will continue to be a gradual process as Iran slowly attempts to improve and implement a more stringent regulatory environment and reform its banking system.

Ultimately, even if Iran complies with the FATF recommendations and takes action against designated individuals or entities on UN sanctions lists, the issue of U.S. sanctions lists will remain. As a result, even with Iranian reforms, there remains the risk that any entity trading with Iran will be accused by the U.S. of sanctions evasion, and henceforth could become the target of secondary sanctions.

 

[1] The FATF Recommendations: International standards on combating money laundering and the financing of terrorism and proliferation, updated February 2018,available at http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html

[2] Outcomes of the Plenary meeting of the FATF, Busan Korea, 22–24 June 2016, available at http://www.fatf-gafi.org/countries/a-c/austria/documents/plenary-outcomes-june-2016.html#iran

[3] FATF Public Statement, 23 June 2017, available at http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-june-2017.html

[4] FATF Public Statement, 23 February 2018, available at http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-february-2018.html

[5] FATF Public Statement, 29 June 2018, available at http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-june-2018.html

[6] FATF Public Statement, 19 October 2018, http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-october-2018.html

[7] International Monetary Fund, Islamic Republic of Iran, IMF Country Report Mo. 18/93, March 2018 available at https://www.imf.org/~/media/Files/Publications/CR/2018/cr1893.ashx

Latest Report of the UN Secretary General on Security Council Resolution 2231: Its nuclear- and ballistic missile-related provisions

On 12 June 2018 and following the United States withdrawal from the Joint Comprehensive Plan of Action (Iran Nuclear Deal) on 8 May 2018, the UN Secretary General released his fifth report on the implementation of Security Council Resolution 2231 (2015). The UN Secretary General is required to report to the Security Council on the implementation of the resolution every six months. Therefore, this 5th report provides an assessment on the implementation of the resolution since the issuance of the 4th report on 8 December 2017.

 

Key Findings included:

  • 13 new proposals submitted through the Procurement Channel bringing the total number of submissions to 37
  • 6 cases of illicit procurement activity, which would have required advanced approval by the UN Security Council
  • Component parts of missile launches fired by the Houthis at Saudi territory were manufactured in Iran, and features of the missiles were consistent with the Qiam-1

 

Usage of the Procurement Channel

There were 13 proposals submitted through the Procurement Channel to participate in or permit activities with Iran for nuclear or non-nuclear civilian end uses. This figure is up from 8 proposals submitted in the previous reporting period and brings the total number of proposals submitted since Implementation Day (16 January 2016) to 37. Of these 37, 24 proposals have been approved by the Council, 3 have been disapproved, 7 have been withdrawn by the proposing state, and 3 are currently under review.

While more frequently used than in the first year, the number of submissions demonstrates that activity in the procurement channel remains quite low in comparison to expectations, and this is partly due to a lack of awareness by sellers, and in some cases national authorities of its existence.[1]

 

Procurement of Nuclear-related Dual Use Items

Information was submitted from 2 member states (the United Arab Emirates (UAE) and the United States of America about attempts by Iran to procure apparently-controlled dual-use items outside of the authorised channels Notably four shipments were seized by the UAE while in transit to Iran. The items involved 40 cylindrical segments of tungsten, 1 inductively coupled plasma mass spectrometer, 10 capacitors, and 1 titanium rod. As these materials are control list items governed by the Nuclear Supplier Group Guidelines of Nuclear Related Dual-Use Equipment, they would have required advanced approval by the Security Council in line with the provisions of paragraph 2 of Annex B of resolution 2231 (2015).

U.S. authorities informed the Secretariat that two commodities – carbon fibre and aluminium alloys again governed by the Nuclear Supplier Group Guidelines of Nuclear Related Dual-Use Equipment had been transferred to Iran over the last year without prior approval of the Security Council as would have been required for such items.

Iran responded to the accusation by stating that it was the responsibility of the exporting state to seek approval through the procurement channel. While this is true, the response negates the fact that Iran is required to issue end user certificates for all such items before they are imported to the country so that the Iranian government cannot claim that it was not aware of the imports. As such, the statements in the UNSGs report assert that Iran has violated UNSCR2231 and the JCPOA, albeit in a relatively narrow and technical way.

 

Ballistic Missile related transfers

In examining 5 of 11 ballistic missile launches (22 July and 4 November 2017, and 19 December 2017 and 5 and 30 January 2018) by Yemen’s Houthi rebels at Saudi territory, the Secretariat found that some component parts in the debris of launches had been manufactured in Iran. Specifically, the Secretariat found that the features of the 5 missiles examined are consistent with those of the Iranian Qiam-1 short-range ballistic missile.

This latter finding supports that of the UN Panel of Experts on Yemen in January 2018, which reported that the Borkan-2H short-range ballistic missile fired at King Khaled International Airport in Riyadh, Saudi Arabia, in November 2017 “was a derived lighter version, designed specifically by the manufacturers of the Qiam-1” missile.

The Secretariat further assessed that the logo on the jet vane actuators matches that of the Iranian entity Shahid Bagheri Industries (S.B.I.), an Iranian entity linked to composite rocket fuel and missile technology.[2] The Secretariat also observed that a printed circuit board was marked with SHIG 6081, where SHIG is an abbreviation for the Shahid Hemmat Industrial Group, reportedly responsible for Iran’s liquid fuelled ballistic missiles.

 

To read the full report, please click here. The next report of the Secretary General will be issued in December 2018.

[1] Paulina Izewicz, Assessing the JCPOA Procurement Channel, The International Institute of Strategic Studies, 29 March 2018, https://www.iiss.org/blogs/analysis/2018/03/jcpoa-procurement-channel

[2] Iran Watch, Shahid Bagheri Industrial Group, last modified 1 January 2009, https://www.iranwatch.org/iranian-entities/shahid-bagheri-industrial-group

Suspected New Pakistan Enrichment Facility Nears Completion

To complement the Institute for Science and International Security (ISIS)  recent analytical report (link) on Pakistan’s growing enrichment, Project Alpha has worked with Planet Labs LLC to create a time lapse of the construction of the new Kahuta facility. This facility was first publicly identified in Project Alpha’s ‘Alpha-in-Depth’ report on Pakistan’s nuclear programme in 2016. The time-lapse shows construction since 2016 and mirrors Pakistan’s rapid build-up of nuclear weapons capabilities in recent years.

As can be seen in the higher resolution image below, the facility is close to completion, although it appears that the facility will not be operational for a number of months more given that construction of the roof has only recently been completed.

KRL facility on 2018 04 21 courtesy of Planet Labs LLC.

ISIS noted about the site:

New Centrifuge Plant?

The Institute first started receiving notice from government sources in the summer of 2015 that Pakistan was receiving specialized equipment for an extension of its centrifuge program at Kahuta and that a new building was being constructed there.

In 2016, IHS Janes in collaboration with Project Alpha at King’s College published a satellite imagery study, backed up by centrifuge-related procurement data, about this site at Kahuta.1 Although the report listed the site as a probable centrifuge plant, it also listed anomalies that pointed away from this conclusion and said little about the site’s intended purpose or ultimate enrichment capacity. 2 In combination with the Institute’s information, public information supports that more than one government has identified this site as related to gas centrifuge enrichment.

There are sufficient reasons to believe this assessment and investigate the site’s potential capacity for both civil and military enrichment purposes. However, determining its exact purpose remains difficult without more information from Pakistan or perhaps intelligence communities.

The facility, whether for military or civil purposes, will soon be completed. This timing is certain to make more complex Pakistan’s efforts to join the Nuclear Suppliers Group.

 

Can Europe save the JCPOA?

Ian J Stewart, Director of Project Alpha

Click here to access the full article: Bulletin of the Atomic Scientists

On May 8, President Trump “withdrew” the United States from a deal agreed by his predecessor to prevent Iran from obtaining nuclear weapons. US withdrawal was not foreseen when the agreement was drafted, nor was the possibility that the United States might stand in isolation from its closest international partners. Withdrawal also did not mean that the deal ended, but US actions have caused a crisis and could well result in the deal coming to an end. Some have argued that the European states might be able to save the JCPOA. It is important for them to bolster the agreement to the extent that they can, even if the tools available to salvage it are limited.

There appears to be three broad scenarios for what might happen next. The first is that Iran decides to stay in the JCPOA. The immediate response of Iranian officials has been to say that the country will remain in the agreement if the Europeans—and the other parties—can assure Iran receives the benefits it expected when the deal was concluded. A second foreseeable scenario would have Iran withdraw from the JCPOA and resume its nuclear program. There are a couple of different ways this could happen. The third path forward could see the US trigger a snapback of UN sanctions. The re-imposition of UN sanctions would put the EU in the impossible situation of having to decide between complying with the UN Charter or complying with a legally non-binding nuclear agreement with Iran. Ultimately, it will be for Iran to decide whether to continue with the JCPOA or to terminate the agreement.

The Atomic Archives and the Future of the JCPOA

By Ian Stewart and Emma Scott

On 30 April, Israel’s Prime Minister, Benjamin Netanyahu, gave a presentation in which he outlined what he claimed was a vast cache of nuclear weapons design information collected by Israeli intelligence in a raid on an ‘atomic archive’ in Iran. The video of Netanyahu’s presentation is embedded below. The US Secretary of State later also issued a statement about the matter.

Key Points:

  • The archive if real shows Iran keeping the nuclear weapons option open;
  • The presentation didn’t reveal anything about Iran’s past not already known, although the underlying documents might;
  • The presentation was clearly timed to influence President Trump on recertification of the JCPOA on 12 May;
  • It’s unlikely to sway European thinking unless something more comes to light.

The presentation (click here) fuelled an already fiery debate about the future of the nuclear deal with Iran. Some use the accusations to make the case for US withdrawal from the nuclear deal. Others claim the accusations highlight the need for the nuclear deal to ensure Iran cannot obtain nuclear weapons. Almost everyone believes the presentation and alleged new material simply highlight what was already known: that Iran had a secret nuclear weapons programme at some point in the past. If, on the other hand, the archive does in fact prove to be authentic, it will show that Iran was keeping the nuclear weapons option open.

The announcement of the materials comes at a particularly sensitive time. On 12 May, President Trump must again decide whether to certify Iran pursuant to section 1245 of the National Defence Authorisation Act (NDAA), which basically waives some of the US unilateral sanctions on Iran. In October, President Trump decertified the deal under the Iran Nuclear Agreement Review Act (INARA) citing US national security interests. In January, despite waiving the sanctions for a third time, said he would withdraw the US from the agreement unless the other parties to it, including the Europeans, agreed to strengthen its provisions in certain areas. Specifically, President Trump demanded that Iran allow immediate inspections at all sites requested by international inspectors, called on the deal to ensure that Iran never even comes close to possessing a nuclear weapon, called for provisions that have no expiration dates, and for US legislation explicitly linking Iran’s long-range missile and nuclear weapons programs.

Within this context, Prime Minister Netanyahu’s objectives, in view of the timing of the presentation, were doubtless intended to influence President Trump into withdrawing from the deal. His announcement, whether or not the so-called atomic archive contains anything new, will make implementation of the agreement much more complex.

Some of the complications include:

  • Determining whether the archive materials are authentic: Israel has said it will give the materials to the IAEA. The IAEA may then ask to visit the alleged site of the archive in Iran. It seems unlikely that Iran would immediately allow access unless the remaining materials have been removed from the facility. Even if they have, there is always a chance that the IAEA will detect particles of uranium or other materials if they had at any point been stored at a nuclear site, which would help to substantiate the authenticity of the materials Israel now holds.
  • If the archive contains new material as Israel claims, the IAEA’s task of reaching a ‘broader conclusion’ about the nature of Iran’s nuclear program during the first decade of the deal will be next to impossible. By default, a situation would then arise in which nuclear restrictions begin to be eased without the IAEA being able to confirm that all nuclear materials and activity in the country are peaceful in nature. Politically, this now seems untenable.
  • The archive materials may point to new sites in Iran at which nuclear activity is alleged to have been undertaken. Some of these sites may be military-related. The IAEA would have little choice but to request access, but Iran, however, has stated it will not allow access to military sites. An impasse could result.
  • Should the archive material contain information on clandestine nuclear cooperation with other countries, the IAEA would have to investigate. Iran is thought to have received some weaponisation information from the AQ Khan network and there have been occasional accusations so far unsubstantiated about limited nuclear weapons cooperation between Iran and DPRK. The archive material might well provide further information on either connection or on further, hitherto unknown, foreign cooperation. The IAEA would have therefore have to investigate.

What happens next?

Despite all of these points, the nuclear deal is still a solid mechanism to ensure that Iran cannot obtain nuclear weapons, at least in the medium term. The nuclear deal does have limitations, both in terms of the sunset clauses and the lack of clear provisions on missiles. The question for the international community, therefore, is whether to end the nuclear deal now or to use the time that provides to secure a more thorough accommodation with Iran. Parties to the nuclear deal other than the US appear to favour the latter course. The archived material is unlikely to sway the Europeans, who rhetorically at least, remain committed to the deal. President Trump will make his decision on 12 May.

 

Preventing the Proliferation of WMDs: Measuring the Success of UN Security Council Resolution 1540

Editors: Daniel Salisbury, Ian J. Stewart, Andrea Viski

Click here to access the book_Preventing the Proliferation of WMDs: Measuring the Success of UN Security Council Resolution 1540

 

This edited volume provides a fresh analysis for researcher and practitioners regarding United Nations Security Council resolution 1540, the status of its implementation, and its future by providing an original evaluation of progress in implementation and challenges faced during the resolution’s first decade. In doing so, the book will consider the resolution’s utility as a non-proliferation tool with a view to identifying what further actions are required for the objectives and goals embodied by UNSCR 1540 to be achieved and sustained.  The book progresses by exploring the history of the resolution, implementation trends, implementation from a regional perspective, challenges, and future ways forward. The book appeals to a wide readership of scholars, policymakers, and other stakeholders of the 1540 process.

Non-Proliferation and Foreign Direct Investment Reviews: Implications for Reform in the UK

Felix Ruechardt, Researcher (felix.ruechardt@kcl.ac.uk)

Click here to access the report: Foreign Investment Reviews and Non-Proliferation: Implications for Reform in the UK

In October 2017, the UK government published a Green Paper entitled “National Security and Infrastructure Investment Review” which outlined short-term and long-term proposals to reform the nation’s Foreign Direct Investment (FDI) review system. It currently rests on limited powers granted to the government in the Enterprise Act of 2002. By expanding the scope of its FDI review system, the government seeks to counter increased foreign (especially Chinese) investments into UK infrastructure and critical technology sectors.

However, the Green Paper does not address the role that an FDI review on national security grounds will take in enhancing the export control and non-proliferation regimes of the United Kingdom. While not dismissing the valid and important security concerns regarding critical infrastructure and critical technology sectors, this report emphasises the importance of including non-proliferation as a key function of a reformed FDI review system in the UK.

Using strategic FDI transactions has in the past been a successful stratagem by proliferation actors in the cases of the weapons of mass destruction (WMD) programme of Iraq and the alleged WMD programme of Iran. This is demonstrated by three case studies in this report in which proliferation actors circumvented export control and non-proliferation rules by purchasing Western companies holding technologies of proliferation concern: Matrix Churchill (UK) and H+H Metalform (GER), two companies that were purchased by an Iraqi proliferation network in the 1980s, and MCS Technologies (GER), a company secretly bought by Iran in 2003. The UK government should use its current reform efforts to close this gap that remains an issue today.

FDI review systems that have non-proliferation as one of their functions are able to address this evasion strategy. Two allies of the United Kingdom, the United States and Germany, have successfully demonstrated this in their FDI review procedures. Both countries tie the powers to scrutinize FDI transactions and potentially block them to whether businesses manufacture goods or hold technologies that are subject to export control rules. In Germany, a stricter reviewing procedure and a mandatory notification regime even apply in these cases – something that is debated in the United States currently as well.

The UK government can learn from the abovementioned cases of FDI as a proliferation strategy as well as the systems the United States and Germany have put in place to counter said strategy. This report calls for it to:

  • Make non-proliferation a clearly stated function of the reformed FDI review system while not dismissing other key functions such as protecting critical infrastructure;
  • Base a mandatory notification regime for mergers and tightened rules on the Strategic Export Control Lists and companies who manufacture goods on those;
  • Refrain from excluding smaller companies from falling under the scope of an FDI review system as those companies are also increasingly holding proliferation-relevant technologies.

The direction of the reform process will to a certain extent of course depend on the outcome of the negotiations the UK government is currently holding with the other EU member states over their relationship after the UK leaves the EU bloc. But if the UK government strengthens the non-proliferation component of its FDI review reform proposals, those will set it on track to establish a system that is comparable to those in other countries that have national security based FDI reviews in place to date.

Brexit and Export Controls: Challenges Facing the UK and the EU in Controls and Enforcement, and the Implications for Proliferation and National Security

Steve Osborne, Research Associate (stephen.osborne@kcl.ac.uk)

Biographical Sketch

Steve Osborne recently joined King’s College London as a research associate for Project Alpha, a programme dedicated to the countering of illicit trade. He has many years’ experience of counter-proliferation and export control in the UK government.

Abstract

Strategic trade controls for Weapons of Mass Destruction (WMD) exist to help prevent the proliferation of goods and materials that might benefit the WMD programmes of countries of concern. As such they are an essential component of national security. For instance, the EU’s single market has allowed, indeed required, development of complex systems that encourage the free trade of dual-use goods within the EU, but control their export from it. The UK benefits from, but has also contributed strongly to, these processes. Brexit will bring about considerable change in this area, as in so many others. This paper seeks to understand the risks, challenges and ramifications of Brexit for the maintenance and continued enforcement of strategic trade controls. As well as drawing on a number of actual cases, the paper constructs a series of scenarios designed to expose potential points of weakness in the systems working to prevent the spread of sensitive goods and technology. It seeks then to draw on this analysis to propose a number of recommendations to help maintain effective counter-proliferation after Brexit.

Introduction

On 23 June 2016, the UK electorate voted by referendum to withdraw from the European Union, thus setting in motion the dismantlement of structures steadily built up since the UK joined the European Community in 1973. As part of this, the UK must extricate itself from the EU’s shared strategic trade control criteria. But as the UK disengages from EU processes, risks may grow that illicit procurement networks or sanctioned entities obtain dual-use goods more easily from the UK or the EU than before. Such an outcome would have clear proliferation and national security implications. The opposite might equally be true – that Brexit reduces the risk of proliferation. It is important therefore to try to identify all possible risks, so that these can be addressed as Brexit takes shape. This paper seeks to examine those questions by looking at the regulations and structures themselves, and then by examining actual cases and also imagined scenarios. It will examine issues of legislation, enforcement and information sharing.

It will also look at the five key challenges identified at the April 2017 workshop run jointly by King’s College London and the University of Liege to examine the implications of Brexit on strategic trade controls, namely: the UK’s as-yet uncertain position vis-à-vis the single market (the so-called Norway question); harmonising controls to maintain a united front against illicit procurement attempts; the ongoing need to share relevant information; the increased licensing and enforcement burden arising from the UK’s departure from the single market; and the loss of the UK’s significant contribution to the EU’s export control structures[1].

The article will be structured as follows: first, it will examine the current structures, in terms of strategic goods, sanctions and other end use concerns, and what challenges these face at Brexit; second, it will analyse the question of enforcement and penalties, and whether a system of harmonisation would be useful; thirdly, it will examine case studies and scenarios; fourth, it will examine how Brexit is likely to affect the EU’s and the UK’s ability to deal with similar cases or scenarios in future; and finally, it will offer a number of recommendations.

Export Controls

At its core, the issue of export control is common to all responsible trading nations: how to achieve the appropriate balance between promoting exports – the prosperity agenda – and maintaining control of sensitive goods – the national security agenda.

Under the current EU system, the EU’s Dual-Use Regulation, also known as Council Regulation 428/2009[2], forms the EU’s main legal basis for controls on dual-use goods. It was issued in August 2009, subsequently updated as 388/2012, and contains the EU Dual-Use list of controlled items. The latest update to Regulation’s Annex I list was made on 26 September 2017[3]. The Regulation, and the list, apply directly in all EU member states. In the UK, the list is also incorporated in the UK’s consolidated Strategic Export Control Lists[4]. 428/2009 provides an objective, shared basis across the whole EU for licensing and enforcement; and as a publicly published list, it is the primary guide to exporters as to whether to seek a license. Implementation is coordinated by European Council’s Working Party on Dual-Use Goods.[5]

On Brexit, the UK may adopt a national regulation on export control under the ‘Repeal Act’. This would mean that, instead of continuing to draw on Council Regulation 428/2009, the UK would derive its regulations directly from the international export control regimes on which 428/2009 is primarily based (UNSCR 1540[6], NPT[7], BTWC[8], CWC[9], MTCR[10], Australia Group[11] and the Wassenaar Arrangement)[12]. Although the UK and EU will both continue to update their lists to keep pace with technology and to reflect changes in the international control regimes, the UK’s process will be separate from the EU’s. This will mean that EU and UK export controls are likely to diverge in time[13].

What does this mean for UK (and EU) based companies? The divergence of the lists will be a gradual process, which should mean that, at first anyway, the UK’s and EU’s regulatory provisions for export control are relatively little affected by Brexit. Council Regulation 428/2009 will remain in place, and the UK’s Strategic Export Control Lists will continue to apply. Nevertheless, divergence is likely over time. The UK might partially address this by following the precedent set by Norway, namely to maintain alignment with the EU Regulation, but that would be to ignore the UK’s useful role in helping to set and amend the provisions, as well as in related programmes such as the P2P (Partner-to-Partner) Export Control Programme[14]. The UK’s participation in the bodies responsible for maintaining the listings and agreeing a consistent interpretation (the EC Dual-use Working Party and the EU WMD Monitoring Unit) is likely to cease. Negotiations on the future trade relationship between the UK and the EU might usefully address this divergence and separation process by identifying a mechanism for continued UK participation.

The biggest change is likely to be felt, however, where dual-use goods are being traded between the UK and other EU member states. Currently most such transactions are classed as intra-EU transfers rather than imports or exports, and thus are not subject to controls, except for the particularly sensitive items listed under Annex IV of Regulation 428/2009, which remain controlled for movement between member states. With the obvious caveat that the UK’s future position vis-à-vis the European single market is not yet resolved, what is clear is that movements to and from the UK that currently count as intra-EU transfers will become imports and exports once more, with clear implications for regulation, licensing and enforcement. Clearly, UK and EU companies alike will benefit from as de-regulated a process as can maintain sufficient control.

Another area that will need to be resolved at Brexit is End Use controls, also known as Catch-All controls (where the goods themselves are not listed, yet there may be specific concerns about military or WMD end use). They apply where unlisted goods, that nevertheless could contribute to a military programme, are sought by or through an entity with known connections to an end use or end user of concern. Catch-all controls rely on collateral information or suspicion, rather than a list, suggesting that this is already a much harder area in which to achieve EU-wide consistency, and one that relies heavily at EU level on case-by-case information sharing to prevent a procurer from tapping up suppliers in one EU state after another.

Finding a post-Brexit solution to maintain Catch-All provisions will be vital to enable the UK and the EU to continue to impede proliferation, in cases where procurers seek goods that undershoot the control thresholds, or use obscure networks that have been uncovered by just one member state. Yet many points remain unclear: whether Brexit will make Catch-All controls more effective or less effective for non-proliferation purposes; whether trade is facilitated or impeded; where any additional burdens are likely to fall – the EU or the UK. On the one hand, Catch-All harmonisation within a common market is already problematic, so introducing a new point of control may be a useful addition. The fact that the UK will no longer be bound by the decision of another member state (for instance in the case of goods leaving the EU via the UK) may also be an advantage. Nor should we assume that the current level of information sharing on this topic is fully effective. On the other hand, it is clear that information sharing and harmonisation, both within the EU and between the EU and the UK, will be particularly important in building and maintaining a system of Catch-All provisions.

The second pillar of export control is sanctions. As a major global economy, the UK’s adherence to sanctions, as well as its key role on sanctions within the EU, have been central to their effectiveness. The EU may not necessarily originate sanctions, but it has been successful in aligning EU member states with international sanctions, and harmonising the position of all EU states and, in some cases, issuing specific EU-restrictive measures. Whether the UK will continue to enforce sanctions after Brexit is not in question. Of concern is whether sufficient harmonisation within the EU, and between the UK and the EU, can be maintained, and whether a way can be found for the UK’s significant contributions (for instance in providing evidentiary support for designations) to continue in future.

Enforcement

Enforcement, or rather the harmonisation of enforcement, is another area that is already challenging, and will require careful attention at Brexit. One of the main existing issues is that while regulation is set at EU level, enforcement occurs at national level. Common legislation is nationally applied. The EU’s non-proliferation framework, like UN Security Council Resolution 1540 on which it draws, makes member states responsible for establishing effective law enforcement measures and penalties. Article 19 of EC Dual-Use Regulation 428/2009 requires that “Each Member State should determine effective, proportionate and dissuasive penalties applicable in the event of breach of the provisions of this Regulation[15]”. Unsurprisingly, a survey carried out by the EU in 2006 showed considerable variation in penalties from state to state. The Stockholm International Peace Research Institute (SIPRI), in its 2009 report “Enforcing European Union Law on exports of Dual-use Goods”[16] highlighted some of these. According to SIPRI, at the time of the survey, the maximum penalties for breaches of the EU legislation on dual-use goods ranged from 12 months’ imprisonment (in Ireland) to 15 years (in Germany). All states participating in the survey applied criminal sanctions for serious violations of the EC Dual-Use Regulation’s licensing requirements, but while 15 of the then 22 member states imposed strict liability for violators, 7 considered only intentional violations to be criminal. Common to most administrations were fines, license revocations and warning letters.

SIPRI addressed this again in its 2013 paper “WMD-related dual-use trade control offences in the European Union: penalties and prosecutions”. The paper argued that the main barriers to effective enforcement and prosecution were discrepancies in penalties, the lack of a shared legal framework, and differing interpretations of key terms such as ‘transit’, ‘trans-shipment’ and ‘brokering’[17]. The Chaudfontaine Group, in its 2011 Green Paper “The dual-use export control system of the European Union: Ensuring security and competitiveness in a changing world”, highlighted widespread discrepancies among EU member states in regulation and implementation, and considered how to balance competitiveness, both within and beyond the EU, with harmonisation of controls[18].

It should be said that, since its adoption in 2013, the EU Customs Code[19] has provided valuable guidance on enforcement, setting procedures, establishing common information systems, and providing a harmonised set of definitions. Enforcement goes beyond the matter of penalties, being equally a product of the legal, technical and human resources available, and the relation between bodies responsible for enforcement, licensing and prosecution. The Customs Code goes a long way towards providing harmonisation in these areas.

In enforcement, as in the case of Catch-all controls, Brexit appears to offer potential benefits as well as risks. The introduction of a new, independent point of control may be a useful addition. Dual-use and exports from, and via, the UK will inevitably require more scrutiny than before, which may well make enforcement more effective (though increasing the administrative burden). The increased option for the UK and the EU to deny exports to each other may also have benefits for enforcement. On the other hand, even though the UK’s systems will separate and diverge from those of the EU, the issue of harmonisation will not go away. Harmonisation is necessary, and will remain necessary, to help prevent procurement agents from targeting countries where controls are (perceived to be) weakest.

If export controls are perceived to be more permissive in the UK than in the EU (whether this is a matter of the severity of the penalty, the interpretation of the law, the ease of obtaining an export license, the effectiveness of customs, the capacity of intelligence, or the appetite and capacity for legal proceedings), UK exporters will potentially be at a competitive advantage against their EU counterparts, but could become a target for procurement networks looking for goods for military or WMD programmes. Conversely, if the controls are perceived to be more effective in the UK than in the EU, UK industry will be put at a competitive disadvantage, but the UK will not be especially targeted by WMD procurement networks.

Licensing and enforcement “shopping” could have a knock-on effect on the trade of dual-use goods between the UK and the EU. As mentioned above, Brexit introduces (or reinstates) the option for the UK and the EU to deny exports to each other. Any perception that the UK is a ‘back door’ out of the EU would tend to make EU member states (and their respective licensing authorities) reluctant to export dual-use goods to the UK. The same would apply in reverse. The studies by SIPRI and the Chaudefontaine Group referred to above strongly suggest that such weak points already exist, and are a systemic feature of a model that regulates at EU level yet enforces at national level. Whether this is true or not, Brexit cannot afford to overlook this factor, as it has implications for national security and for the facilitation of trade.

Logically, a post-Brexit solution will consist of two elements. Firstly, it will ensure that the UK’s implementation and enforcement of export controls are perceived to be at least as strict as those of EU member states. That at least would prevent the UK from being targeted as a soft touch by procurement agents. Secondly, it will allow for continued collaboration and information sharing, to help prevent procurement agents from exploiting discrepancies between the UK and the EU, whether in penalties, capacity, customs effectiveness, intelligence capacity or other factors. Underpinning both those elements is the continuing process of harmonisation. Harmonisation is clearly a work in progress, and the question at Brexit must be how that work proceeds.

Case Studies

Statistics published by the UK’s Department for International Trade (DIT) suggest the UK’s current licensing effectiveness is high, particularly from a trade facilitation perspective. According to the DIT’s Strategic Export Control summary for the 4th quarter of 2016, out of 3428 Standard Individual Export Licenses applied for, 3340 were issued, and 88 were either refused or revoked. Over 98% were decided within the statutory timeframe of 60 days. Of the refusals, 15 were for exports to Iran, 22 to Pakistan, 13 to Russia, and 19 to China[20][21]. However, these figures do not shed light on the UK’s effectiveness in other aspects of export control, such as enforcement, intelligence, or non-proliferation activities such as outreach and awareness raising. Though useful, a gauge of the wider effectiveness of the UK’s export control effectiveness would be far more difficult to achieve.

Such statistics are also self-selecting, to the extent that they describe only that proportion of dual-use exports that are following a legal route (goods ‘snagged’ by customs and subsequently entering the licensing system are included, but separate figures on these are not published), and there is no obvious way to assess how large a proportion that may be. If we wish, therefore, to examine the specific problem of illicit exports from the EU (and look at how Brexit might increase or reduce the risk of these), it makes sense to look at specific cases where illicit exports have occurred. Over the years, a number of cases have been reported, and have only been detected after the event, and it is by looking at these that we might establish something of the methodology of the procurers, and the performance of the export control structures.

Case I: Hossein Tanideh

First, the case of Hossein Tanideh, an Iranian national based in Turkey who, between 2007 and 2013, facilitated the purchase, and shipment via Turkey, of multiple consignments of valves manufactured in Germany and India. By the time Turkish authorities arrested Tanideh in January 2013, he had procured possibly over a thousand valves for Iran’s Arak heavy water reactor, including 92 specialised valves from Germany[22]. In November 2013, a German court convicted four of Tanideh’s German-based accomplices (Rudolf Mayer, owner of German company MIT Weimar, Gholamali Kazemi and his son Kianzad, and Hamid Khouran, who acted as middleman between the Kazemis and Mayer)[23][24][25]. German authorities requested Tanideh’s extradition, but this was denied by Turkey, who instead released Tanideh without charge in 2014, allowing him probably to return to Iran[26]. Listed by the UN under UNSCR 1929[27], by the US in its list of Specially Designated Nationals[28][29], and by the EU, all associated entities have now been de-listed again as part of the Joint Comprehensive Plan of Action on Iran[30]. This was a sanctions-related case rather than a dual-use export control violation, and some of those sanctions have now been lifted. Nevertheless, this case sheds light on the methods of illicit procurement.

It is not possible to reach a judgement on how typical this case is for Europe. Certainly, the cases reported are few and far between. However, there is no means of knowing how much successful illicit procurement has occurred undetected. It is important therefore to analyse this not as an indication of the scale of the problem, but as a methodology that can be used to evade export controls.

The success of the enterprise relied on complicit suppliers based in the EU (in this case Germany), and the presence of a complicit intermediary in Turkey, whose links to sanctioned entities in Iran were not initially apparent to German authorities. By the time Germany became aware of those links, and took what action it could against the network, a lot of goods had already been shipped.

The question with regard to Brexit is clear? In future, could procurers within a WMD programme, whether subject to sanctions (in the case of North Korea or Iran) or subject to dual-use and/or catch-all controls (such as Pakistan), successfully obtain goods from the UK or the EU using that method? Clearly, many factors remain unaffected by Brexit. Nothing substantive appears to have happened in Turkey since that case to make it less susceptible to such exploitation. Detection and disruption would depend, then as now, on being able to establish a connection between an end user of concern and either the Turkey-based intermediary or the complicit supplier in the EU or UK. If the goods were on the dual-use list, then a license application (if applied for) might prompt an investigation in the supplier country as to the intended use and destination. If the goods were themselves unlisted, a license would only be required if end use or end user concerns could be demonstrated.

Where Brexit might make a positive difference is in the introduction of an additional point of control (if the UK was in the supply or transportation chain). The risk from Brexit is diminished information and intelligence sharing. If an EU member state had information that might raise concerns in the UK as supplier country, or vice versa, will it be possible to share such information as effectively as currently?

Case II: Hamid Reza Hashemi and Murat Taskiran

Second, the case of Hamid Reza Hashemi and Murat Taskiran, charged in the US in late 2012 for illegal exports from the US to Iran. According to the Iran Watch website published by the Wisconsin Project on Nuclear Arms Control, Hashemi was accused of procuring a number of consignments of carbon fibre from 2007 onwards. His principal broker was Turkey-based Taskiran. Along with an EU-based broker, Hashemi and Taskiran were alleged to have shipped carbon fibre from the US via the EU and the UAE to Hashemi’s company in Iran[31]. In late 2013 Hashemi pleaded guilty and was sentenced to 46 months’ imprisonment[32]. Turkey’s Hurriyet reported in March 2016 that Taskiran was still at large in Turkey[33].

This case too assists understanding of how a successful procurement enterprise works. Like the Tanideh case, it relied on a complicit intermediary in Turkey (Taskiran), whose links to Iran were not apparent at the time of the transactions. Like the Tanideh case too, the network needed a complicit EU based entity – in this case a broker rather than a supplier, as the goods were being imported from the US.

The Brexit question again: could this still work, and, moreover, could it work if the broker, or supplier, were in post-Brexit UK? The answer is similar. Turkey as a diversionary destination remains a risk. Detection would continue to depend on establishing a link between an end user of concern and either the Turkey-based intermediary or the complicit broker. In this case the goods were dual-use, and it was the failure to seek authorisation to export them from the US that formed part of the eventual charges. After Brexit, if the supplier were based in the UK, a license would be required to export carbon fibre (certainly beyond the EU, and perhaps even to the EU), which would give the UK licensing authorities the opportunity to check against risks of diversion or links to known illicit networks. The risk lies in how well separately operating export control systems in the UK and the EU might be able to share and access information from each other that might be crucial to a licensing decision.

Case III: Machine tools from Spain

The 2014 annual report by the UN Panel of Experts on Iran refers to a report by Spain of its investigation of a Spanish company regarding transfers from Bilbao, Spain, to an alleged front company in Turkey of electrical discharge machine tools and their components[34]. The end user of the tools was identified as Mapna Turbine Blade Manufacturing Engineering Co., in Tehran, designated by Canada, the United Kingdom and Japan on grounds of links to Iran’s nuclear and ballistic missile programmes. The Turkish front company is not named. In this case too, the common element is the presence of an intermediary in Turkey. The difference in this case appears to be that the Spanish supplier was unaware that Iran would be the final destination for the goods. Evidently it is possible for successful illicit procurement to occur using an unwitting supplier.

In considering the implication of Brexit for the Spanish case it is interesting to note that the Iranian entity was listed by the UK (along with Canada and Japan) but not the rest of the EU. The Panel of Experts report does not make clear what prompted the Spanish authorities’ concern, or at what point the Spanish authorities became aware that the end user appeared on designation lists in other countries, but clearly there is a risk that, after Brexit, the sharing of such information as might trigger Spanish concerns might be hampered by the separation of the UK’s export control structures from those of the EU.

Scenarios

These cases make it possible to construct other plausible scenarios of how procurement agents might obtain goods from the EU undetected, and to test how these scenarios might be affected by Brexit.

Take for example a hypothetical situation in which Shahid Hemmat Industrial Group (SHIG), a sanctioned end-user in Iran and one of the main organisations believed to be responsible for developing Iran’s Ballistic Missiles, would need to obtain specialised goods from Europe. SHIG cannot trade outside Iran under its own name, because of sanctions, so it tasks a local agent in Iran. That agent establishes a presence in an EU member state, or a relationship with a freight forwarder in an EU member state. It also appoints a complicit agent in Turkey. The agent in Iran, (though pretending to be elsewhere), approaches a seller in, say, Germany, and arranges to buy goods for export to, say, the UAE. The terms being ex-works, a situation where the seller is required to make goods ready for pickup at his or her place of business, the buyer then arranges for its EU-based accomplice to pick up the goods, and the seller has nothing more to do. The complicit agent takes the goods to an EU border (e.g. the land border between Bulgaria and Turkey), where, for the first time, documentation must be produced. He declares the goods for export to the UAE. Neither Bulgarian nor Turkish Customs officials would necessarily challenge this. Once delivered to the Turkish warehouse, the goods can in effect be re-sold to the Iranian buyer. This involves issuing a new Bill of Lading. Bill of Lading Switching is a service offered even by the most reputable freight companies, though these levy a burden of evidence on the parties to prove the switch is for legitimate purposes, for example in cases where the original buyer goes out of business and the goods are re-sold in transit, rather than for illicit diversion. Whatever the context, switching a bill of lading is legal, and straightforward. The goods can now continue, overland or by any other route, to Iran, where the Iranian agent can hand them over to the final buyer, SHIG.

The ex-works terms of sale contribute to the challenge. As explained earlier, ex-works is a widely-used commercial term defined by the International Chamber of Commerce, under the terms of which the buyer arranges collection of the freight from the seller’s location, and is responsible both for clearing the goods through customs and for completing all export documentation. In other words, ex-works terms place minimum responsibility on the seller, and maximum responsibility on the buyer or freight agent, to bring the goods to their final destination[35]. In the scenario described, the complicit freight agent, as the EU-based entity acting for the buyer, appears to take on responsibility for the export.

Under EU rules, the exporter must be based in the EU, so an illicit procurement network would find it useful to appoint a complicit node in an EU member state. It makes sense for this accomplice to be a freight agent, who can obtain goods from a variety of unwitting suppliers across the EU and arrange their export, rather than the network having to co-opt, or deceive, each supplier in turn.

The free movement of goods within the single market is also a factor. With the exception of Annex IV items, goods on the dual-use list can pass from one EU country to another without a customs declaration, counting as intra-EU transfers rather than exports. The above scenario appears to show how this feature can be exploited. Assuming the complicit freight agent has (in the case of dual-use goods) either obtained a license by giving false information, or decided to try to export illegally without a license, the customs burden is felt at the EU border rather than the country of origin. Regardless of motivation or responsibility, the capacity of customs at, say, the Bulgaria-Turkey border, to identify shipments to WMD-related end users, or unlicensed exports of dual-use goods to any destination, will be limited.

A slightly different scenario involves an illicit procurement network in, say, Iran, Syria or Pakistan setting up or co-opting a company in an EU country, a company whose main purpose is then to procure goods to order and to ship them to the final buyer within a WMD programme. This company would take care of supply and all arrangements for export from the EU (under EU regulations the exporter must be within an EU member state). This scenario might entail exporting without a license or obtaining a license based on false information. Obtaining a license would rely either on diverting the goods via a third country, or at least declaring them for a third country at the point of exit from the EU. Detection and disruption would rest on being able to establish a connection between the EU-based members of the procurement network and the WMD programme which they serve – a connection that would not be apparent on any company or freight documentation.

This is a scenario familiar to licensing authorities across the EU, whose mission includes establishing the credibility of end use declarations, and the risk of diversion. In the UK the Department for International Trade achieves this through maintaining control lists, maintaining the online export licensing system SPIRE[36], and drawing on the expertise of other departments through the Restricted Enforcement Unit[37]. Leaving the single market may make the UK a less attractive base for such activity, as goods entering the UK from the EU will presumably become imports rather than intra-EU transfers. However, case-by-case examination of license applications as well as in-depth investigations of suspected illicit procurement companies will continue to depend on effective information and intelligence sharing, and the UK’s departure from the EU may affect the UK’s ability to benefit from, and contribute to, a common information base.

Another ploy to obtain key goods from the European Union (or post-Brexit UK) would be to understate the specifications of the goods. The specification thresholds at which, say, a vacuum pump, a lathe or a high-speed camera become controlled are published in the EU Regulation (and the UK Control Lists), and this same information that is so helpful to responsible exporters is also a handbook to those who would circumvent the controls. Although the threshold is a licensing issue, once deliberately understated it becomes a customs problem. If paperwork accompanying a controlled item to the EU border describes an item that looks similar but which falls below the control threshold and so allegedly requires no license, it may be too technically difficult for customs authorities on the spot to identify the goods as potentially listed. In this scenario too, Brexit may bring advantages to the UK, by introducing an additional point of customs control.

The same scenarios after Brexit

What happens to these scenarios after Brexit? The sanctioned end-user in Iran (SHIG), still needs to obtain specialised goods from Europe. How has the picture changed? Much will depend on the UK’s relationship with, or access to, the single market after Brexit. Consider first a Brexit without single market access. In the scenarios described above, illicit networks may it find less attractive to operate in, or acquire goods from, the UK after Brexit than before, for a variety of reasons. Firstly, a complicit freight forwarder or procurement company whose role is to acquire goods from unwitting suppliers is faced with a narrowed supply base. Secondly, goods being shipped out of the UK will be subject to an additional point of control. In other words, the UK may be better placed to counter such activity once it has recovered the ability to control the transfer of goods to the mainland. A Brexit that retains single market access, on the other hand, may leave the UK as susceptible as the rest of the EU to such activities, but the mutual benefits of information sharing and a common framework would mitigate this.

With or without single market access, illicit procurement with no UK connection (i.e. no UK entities in the supply chain, or along the transportation route) would occur as easily after Brexit as before. Structures governing trade within the EU single market, and export from it, will all continue to operate as they do currently – with the result that the same activities designed to circumvent the controls will continue to work. Furthermore, detection of illicit activity, and maintenance of lists of goods and entities of concern, will become more challenging unless a means is found to retain the UK’s input into information-sharing arrangements.

Direct acquisition from the UK will remain difficult. If, say, SHIG (operating through a front company) tried to organise a direct shipment from the UK to Iran, the export would attract scrutiny from UK licensing authorities. Operating through an intermediary in a third country, say Turkey or the UAE, might conceal the Iranian end user, but UK authorities will continue to be alert to the risks of onward diversion of dual-use goods to end users of concern. This is not to downplay the challenges of this area of implementation, merely to note that it will not be made any more, or less, challenging by Brexit.

The shipment of goods from the UK via the EU, or from the EU via the UK to a deliberately obscured end user of concern is a scenario where Brexit may create new risks; likewise the shipment of dual-use goods from the UK via the EU, or from the EU via the UK, to any destination. There are implications for licensing, customs and intelligence. If the UK leaves the single market, it remains in the mutual interest of the UK and the EU for trade to be as de-regulated as the terms of Brexit will allow, and this will include dual-use goods. This suggests that a complicit agent based in an EU member state may still be able to procure dual-use items relatively easily from the UK, particularly on an ex-works basis, and arrange export via the EU. It is not clear whether it would be up to the UK supplier or the EU-based freight forwarder to apply for a license to export from the EU. Clearly there will have been a UK, or an EU, export control violation, or both, but thwarting it in the UK or the EU would only be possible if licensing or customs bodies could either establish a connection between the complicit agent and an end user of concern, or detect an attempt to export a dual-use item without a license. Even assuming that the EU’s export controls work as well as they do now, reduced information and intelligence sharing between the UK and the EU after Brexit, combined with a pragmatically de-regulated system for trading dual-use goods between the UK and the EU, might create the risk that UK companies will be deliberately targeted as sources of dual-use goods for export via the EU.

Assuming the UK instates effective legislation to replace EU Dual Use Regulation 428/20009, there is in theory little risk that complicit agents could acquire dual-use or controlled goods from the EU, import them to the UK, then re-export them to a country of concern. The classification of the goods, under EC Regulation 428/2009 or its equivalent post-Brexit UK system, should provide a robust basis for control. In the case of unlisted goods, however, such illicit trade could easily occur, if the ostensible buyer could not be linked to an end use or end user of concern, or was based in a country about which the UK licensing authorities had no, or low, concerns. Again, there are implications for licensing, customs and intelligence. Collaboration in all three areas would be needed to maximise the chance of uncovering and taking enforcement action against illicit procurement networks using this route.

Recommendations

At the time of writing, the in-depth negotiations that will shape the post-Brexit trade relationship between the UK and the EU have only just begun. The above analysis suggests the following practical considerations should be taken into account as part of the negotiations.

  • Information and intelligence sharing on a case-by-case basis. There is already a risk that a procurement agent acting clandestinely for an overseas WMD programme could approach suppliers in multiple EU member states simultaneously or in quick succession. It might be argued that the departure of the UK from the single market effectively removes one supplier or intermediary from the system, thereby reducing opportunities for parallel shopping. But the only way to counter-act such activity is through the sharing of official and confidential intelligence, and Brexit may put this at risk. Maintaining the flow of official and confidential intelligence between the UK and its EU partners, during and after the UK leaves the EU, is therefore recommended.
  • Continued UK participation in EU bodies such as the European Council’s Dual-use Working Party and the EU WMD Monitoring Unit. This will allow the UK to continue to input to lists and regulations, and be an effective way to ensure long-term correlation between UK and EU dual-use controls, and sanctions listings.
  • Sharing of license denial information. Currently EU member states share all license denial information. This is an important tool to try to prevent illicit procurers from attempting to buy from one member state after another. With the UK’s departure from the EU it is not clear how, or indeed whether, denial information can continue to be shared. As there need be no national security concerns about the UK and the EU continuing to share denial information, a mechanism could be sought to allow such sharing to continue after Brexit.
  • Special arrangements covering the transfer of dual-use goods between the UK and EU member states. If UK company believes the goods listed on the dual-use list it is exporting to an EU member state are remaining in the EU, then logically a solution can be sought to make this process efficient. The same will apply when an EU member state is exporting items from the dual use list to the UK. The challenge will be to provide assurance that there will be no onward diversion to a country of concern, while simultaneously minimising the burden on exporters, licensing and customs authorities. There may be scope for applying the UK’s existing system of Open General Export Licenses (OGEL) for this purpose (and the EU’s equivalent system the General Export Authorisation (GEA)). Both EU and UK-based companies will have a strong interest in as de-regulated a system as possible for trade between the UK and the EU in dual-use goods. A general export license may be an efficient solution. An important element of such an arrangement will be trust. Licensing and Customs authorities in the UK and any EU member state would need confidence that dual-use goods exported from the EU to the UK or vice versa would not be at risk of diversion to any country of concern.
  • The UK should maintain an association with the Customs Union. While most debate on this issue focusses on customs duties, it is the sharing of information and intelligence that is the main benefit against WMD-related exports. As part of an overall strategy to maintain the integrity of dual-use controls post-Brexit, the UK should consider either maintaining membership of the Customs Union, or at least negotiating the means to maintain the information-sharing benefits[38].

Taking the above into account should help to ensure that potential risks arising from the UK’s departure from the single market and exclusion from EU collaborative work are mitigated. However, the ongoing review (recast) of the EU’s Dual-Use Regulation 428/2009 will need to go beyond merely trying to maintain the integrity of the export control process after Brexit[39]. The real-life cases and constructed scenarios presented above show clearly that the EU’s export control processes, while robust, workable, accessible and transparent, do nevertheless have vulnerabilities that can be exploited by illicit procurement networks. To address these, the review might usefully consider the following:

  • A more detailed sharing of entities of concern. Such listings are currently held confidentially within member states, but not shared. The reasons for not sharing all such data are understandable – the datasets are populated from covert as well as overt investigations – but a greater level of sharing would nevertheless strengthen member states’ ability to detect activity by an illicit procurement network. Such a measure would be most effective if the UK were to participate in it after Brexit.
  • The unequal burden on certain member states. Clearly airports and seaports create EU borders all over the place, but for overland transport the burden falls most heavily on the member states on the EU’s eastern border, particularly Bulgaria. Most reporting on Bulgaria’s location on the EU’s border tends to focus on refugee issues, namely the challenges for Bulgaria as one of the main entry points to EU[40]. But the enforcement of export controls is also an area where Bulgaria bears an unequal burden, as it is one of the main transit routes for goods leaving the EU over land. The free movement of goods within the single market means that the first customs control point encountered is at an EU border, such as the one between Bulgaria and Turkey. Documents shown at this point may falsely declare the goods or the destination, and furthermore may be in any of the EU’s 24 official languages. Universal checks by Bulgarian customs and border officials would significantly delay and disrupt legitimate trade. The long-awaited recast of EU Dual-Use Regulation 428/2009 might therefore usefully explore options to ease the burden particularly on Bulgaria, as well as on other significant countries of exit. Measures might include additional funding specifically to support export control (for goods transiting Bulgaria on their way out of the EU); or the establishment of a multi-national, multi-lingual team, either at the border or more centrally located, with access to any shared intelligence, both current and aggregated. The cases and scenarios described earlier in this article argue strongly that any new measures should be with the participation of the post-Brexit UK, which has a clear stake in helping the EU maintain a strong export control system.
  • Considering enhanced responsibilities for suppliers of dual-use goods throughout the EU (and, possibly, post-Brexit UK). Suppliers could be required to notify their national customs of any transfer of goods on the dual-use list to any other member state (thus extending obligations beyond those in place for Annex IV items). No permission or license would be required, but at least customs authorities across the EU would have the means, if they needed it, to track movements of such goods, information that would evidently make it harder for illicit procurement networks to buy dual-use goods from one country and export them via another. Such a measure might also assist a (relatively) de-regulated trade in dual-use goods between post-Brexit UK and the EU, although it is questionable how it would be compatible with EU single market principles.
  • The level of guidance offered by national licensing authorities to suppliers, exporters and freight forwarders varies considerably across the EU. However, no member state appears to suggest checks that a potential supplier might carry out to test the credentials of cold-calling buyers. It is relatively simple to look up an IP address to see if a sender is located where he claims to be. Simple too to check the timestamp of the received message, as this reflects the timezone in which the sender is located. The potential seller might also check the website of the would-be buyer, to check if it appears authentic. The licensing bodies of EU member states (and the UK) might usefully consider offering this guidance in their on-line resources, to assist the process of due diligence. This is another area where the UK will retain a clear interest in helping the EU maximise its effectiveness in future.

Conclusions

In focussing on the national security agenda, this study has perhaps overlooked the obvious point that nearly all trade occurring between any EU member state and a non-EU member state is entirely lawful and legitimate. It is important not to lose sight of the trade facilitation imperative, for the EU or the UK. It is also important to realise that the UK’s trading relationships beyond the EU also need to be re-set, once it resumes trading as an independent country rather than an EU member state. This evidently has implications for global non-proliferation, which would require further study to analyse in proper depth.

Brexit may offer the UK some opportunities for improved export control. However, it also raises risks to export control for the UK and the rest of the EU, risks which, if not addressed, will have clear national security implications. These risks fall broadly into the following categories: divergence i.e. a reversal of the harmonisation and alignment process undertaken by the EU in terms of regulation, enforcement and penalties; the UK’s exclusion from export control fora and from information-sharing; the future trade of dual-use goods between the UK and the EU. The chance exists to mitigate all of these, by continued information and intelligence sharing, continued UK input to EU regulations, continued UK collaboration with EU export control and sanctions bodies, and by maintaining alignment with EU regulations.

This study also shows that there are vulnerabilities in the EU’s export control structures and practice that are not of Brexit’s making. Yet it is in the UK’s interest, as much after Brexit as before, to help the EU to maintain and strengthen those structures.

 

[1] Stewart, Ian J, and Michel, Quentin. “Brexit and Strategic Trade Controls: Key Implications,” a write-up of the 24 -25 April 2017 workshop, published on the Project Alpha website on 03 May 2017. A full text of the write-up can be found at https://projectalpha.eu/brexit-and-strategic-trade-controls-key-implications/.

[2] The full (English language) text of Council Regulation (EC) No 428/2009 can be found here. http://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A32009R0428. The legislation is also available in other official EU languages at the same website.

[3] The 26 September update can be found here: http://trade.ec.europa.eu/doclib/docs/2017/october/tradoc_156134.pdf

[4] Strategic Control Lists are published by the Export Control Organisation of the UK Department of International Trade. They can be accessed at https://www.gov.uk/guidance/uk-strategic-export-control-lists-the-consolidated-list-of-strategic-military-and-dual-use-items.

[5] The EC Working Party on Dual-Use Goods meets approximately monthly. Minutes of the meetings are only partially accessible to the public, but are available on request from the Council. Minutes of the 14 June 2017 meeting can be accessed on request from the European Council under reference ST 10683 2017 INIT. The online stub is at: http://www.consilium.europa.eu/register/en/content/out/?&typ=ENTRY&i=LD&DOC_ID=ST-10683-2017-INIT.

[6] UN Security Council Resolution 1540 was passed on 28 April 2004. The full text can be accessed from the UN website at https://www.un.org/press/en/2004/sc8076.doc.htm.

[7] The Treaty on the Non-Proliferation of Nuclear Weapons entered into force in 1970, with one of its aims being to prevent the spread of nuclear weapons and weapons technology. The full text can be found here: https://www.iaea.org/sites/default/files/publications/documents/infcircs/1970/infcirc140.pdf.

[8] The Biological and Toxin Weapons Convention (BTWC), also known as the Biological Weapons Convention, came into force in 1975. The full text can be found here: https://www.un.org/disarmament/geneva/bwc/.

[9] The Chemical Weapons Convention came into force in 1997. The full text can be found here: https://www.opcw.org/chemical-weapons-convention/download-the-cwc/.

[10] The Missile Technology Control Regime was established in 1987, and now has 35 members. The current version of the Equipment, Software and Technology annex, last updated on 18 May 2017, can be found on the MTCR website at http://mtcr.info/mtcr-annex/.

[11] The Australia Group was established in 1985, and has some 40 members. Its objective is to prevent the spread of chemical and biological weapons technology through the harmonisation of export controls. The Australia Group control lists can be found here: http://www.australiagroup.net/en/controllists.html.

[12] The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies was established in 1995. The control list, published as Public Documents, Vol II – List of Dual-Use Goods and Technologies and Munitions List (WA-LIST (16) 1 Corr. 1), can be found at http://www.wassenaar.org/control-lists/.

[13] A tool intended to allow, among other things, cross-referencing among the various lists, is The Big Table, devised by the EU’s Joint Research Centre. Details are found at http://www.biological-arms-control.org/projects_trademonitoring/MSP2012%20-%20Cristina%20Versino%20-%20The%20Big%20Table%20and%20the%20Trade%20Flow%20tools.pdf., and also at http://publications.jrc.ec.europa.eu/repository/bitstream/JRC62804/reqno_jrc62804_lb-na-24823-en-n.pdf%5b1%5d.pdf

[14] The P2P Programme is a capacity building and outreach project with strong UK involvement. Details are found at https://export-control.jrc.ec.europa.eu/.

[15] Article 19, Counicl Regulation (EC) No 428/2009, 05 May 2009, setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items.

[16] Wetter, Anna, “Enforcing European Union Law on Exports of Dual-Use Goods”. Stockholm International Peace Research Institute (SIPRI) Research Report 24 (Oxford, Oxford University Press 2009)

[17] Bauer, Sibylle, “WMD-Related Dual-Use Trade Control Offences in the European Union: Penalties and Prosecutions”, Non-Proliferation Paper No 230 of the EU Non-Proliferation Consortium (comprising: The Foundation for Strategic Research; The Peace Research Institute in Frankfurt; The International Institute for Strategic Studies, and the Stockholm International Peace Research Institute), 2013.

[18] Professor Dr Michel, Quentin et al.“Green Paper: The dual-use export control system of the European Union: Ensuring security and competitiveness in a changing world – Contribution of the “Chaudfontaine Group”, Chaudfontaine, Belgium 2011.

[19] “Union Customs Code” European Union Taxation and Customs Union https://ec.europa.eu/taxation_customs/business/union-customs-code_en

[20] Strategic Export Control Summary, 4th Quarter 2016, UK Department for International Trade.

[21] This study has not examined equivalent statistics that might be published by other EU member states.

[22] “Haftstrafen fuer Embargo-Verstoss: Gericht verurteilt vier Geschaeftsleute,” Die Welt, November 9, 2013

[23] Salisbury, Daniel, “Illicit Procurement of German and Indian Valves for Iran’s Arak Heavy Water Reactor,” Project Alpha, 14th April 2015, published on the Project Alpha website, Centre for Science and Security Studies, King’s College London (https://projectalpha.eu/illicit-procurement-of-german-and-indian-valves-for-irans-arak-heavy-water-reactor/).

[24] “Final Report of the Panel of Experts Established Pursuant to Resolution 1929 (2010),” Report No S/2013/331, U.N. Security Council, 03 June 2013, p 11.

[25] Gilbert, Cathrin, Stark, Holger and Ulrich, Andreas, “Nuclear Technology for Iran: German Investigators Uncover Illegal Exports,” Spiegel Online, October 1, 2012.

[26] “German Authorities Sentence Four Men for Supplying Iran with Valves for Heavy Water Reactor”, Iran Watch website (the website is published by the Wisconsin Project on Nuclear Arms Control), 25 February 2015.

[27] “Security Council Imposes Additional Sanctions on Iran, Voting 12 in Favour to 2 Against, with 1 Abstention”, UN coverage of Security Council Meeting SC/9948, 09 June 2010.

[28] “Recent OFAC Actions: Specially Designated nationals Update”, Issued by the U.S.Treasury on 21 November 2011.

[29] “Factsheet: Executive Order 13382 Designations on Iran, November 21 2011”, published on the Iran Watch website on 21 November 2011.

[30] “JCPOA-related Designation Removals, JCPOA Designation Updates, Foreign Sanctions Evaders Removals, NS-ISA List Removals; 13599 List Changes”, US Department of Treasury, 16 January 2016.

[31] Indictment of Hamid Reza Hashemi and Murat Taskiran, United States District Court, Southern District of New York, December 2012.

[32] Hamid Reza Hashemi was added to the Iranian Entities section of the Iran Watch website (the website is published by the Wisconsin Project on Nuclear Arms Control) on 09 September 2014.

[33] Canikligil, Riza: “US attorney in Zarrab case probing two other Turkish men”, Hurriyet Online (www.hurriyetdailynews.com), 25 March 2016 (accessed on 16 August 2017).

[34] “Final Report of the Panel of Experts Established Pursuant to Resolution 1929 (2010),” Report No S/2014/394, U.N. Security Council, 05 June, 2014

[35] INCOTERMS are published by the International Chamber of Commerce, and can be found at https://iccwbo.org/resources-for-business/incoterms-rules/

[36] https://www.spire.trade.gov.uk/spire/fox/espire/LOGIN/login

[37] A description of the REU’s work is given in the minutes of the Foreign Affairs Select Committee for 1998. https://publications.parliament.uk/pa/cm199798/cmselect/cmfaff/745/8051417.htm

[38] This is currently governed by Council Regulation 515/97 “on mutual assistance between the administrative authorities of the Member States and cooperation between the latter and the Commission to ensure the correct application of the law on customs and agricultural matters”. This can be found at http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A31997R0515.

[39] The European Commission’s proposal to modernise and strengthen controls on exports of dual-use items (the recast), was announced in an EC press release on 28 September 2016. The item can be found here: http://europa.eu/rapid/press-release_IP-16-3190_en.htm.

[40] Koroutchev, Rossen Kostadinov, “The Current Refugee Crisis and the Challenges for Bulgaria as an Entry Gate for the European Union” Journal of Liberty and International Affairs, Vol.3, No.1, 2017, published online by the Institute for Research and European Studies on 05 May 2017.