Machine Tools - Temporary Licences for Baghdad Fair

Return to an Address of the Honourable the House of Commons
dated 18 July 1996 for the Appendices to the Report of the Inquiry into the Export of Defence Equipment and Dual-Use Goods to Iraq and Related Prosecutions laid before The House on 15 February 1996*

Volume Two
Section D Arms and Defence-Related Exports to Iraq
Chapter 6 Specific Export Licence Applications after the Cease-Fire

Excerpt:
(III) MACHINE TOOLS: TEMPORARY LICENCES FOR THE NOVEMBER 1988 BAGHDAD TRADE FAIR

D6.55 At the time of the cease-fire in August 1988, two Matrix Churchill ELAs were outstanding, namely:

D6.56 As to ELA 0439, further information on the end use of the lathes was awaited from the DIS. At the IDC meeting on 14 July 1988 it had been agreed that the IDC “could not approve exports of such equipment if it knew the machinery was destined for Iraqi munitions factories”. *110 But at the extraordinary meeting of the IDC on 2 August 1988 the DTI argued that dual-use equipment “should be looked on more favourably following a ceasefire”. *111 At the next meeting of the IDC, on 11 August 1988, the MOD representatives recommended that ELA 0439 should be refused on the grounds that the equipment would be used in the production of shell cases but the FCO and DTI suggested that “a refusal at this stage was too severe. There was evidence that this equipment might also be used for general civil industrial purposes, and with the prospect of a ceasefire, this had become more likely...”. *112 In the event, a ruling was later made by the DTI that the lathes were not licensable under the current EG(C)O. So an export licence was unnecessary, the ELA was withdrawn and the lathes were exported to the consignee, Hutteen. *113 No civilian manufacture took place at Hutteen. There is no doubt but that the ELA 0439 lathes were used at Hutteen in the manufacture of munitions.

D6.57 ELA 2413 was not circulated by the DTI to the MOD or to the FCO for their comments. It was dealt with by Mr Steadman personally in conjunction with ELA 52039.

D6.58 ELA 52039 was dated 7 September 1988 and, on 9 September, was circulated to FCO/MED and to MOD/DESS. The ELA related to a Two Series 2 Axis Lathe with Fanuc Control, to an R1000 N.C. External Cylindrical Grinder and to a Fanuc S-Model 700 Robot Conveyor System. As with ELA 2413, a temporary licence was sought authorising the export of the equipment for the purpose of exhibition at the November Baghdad Trade Fair. In ELA 52039 the “Proposed Date of Return” of the equipment was stated to be “December 1988” *114; in ELA 2413, the “Proposed Date of Return” was stated to be “December 1988/January 1989”. *115

D6.59 ELA 52039 (but, since it had not been circulated to the departments, not ELA 2413) was among the ELAs considered at the IDC meeting held on 22 September 1988. The ELAs listed to be considered at that meeting included, also, two ELAs from 600 Services Ltd (3G/62107/88 and 3G/62108/88) seeking temporary licences to enable machine tools to be exhibited at the November Baghdad Trade Fair. A Note dated 12 September 1988 from Mr Hextall (DESS2A) to the MODWG members and to FCO/MED referred to the 600 Services ELAs and warned that “...there can be no guarantee that the 8 machines will be subsequently returned to UK”. The Note called for “early views on their export in the context of the current Ministerial guidelines” and said also that “In view of the timescale involved - shipment must take place before the end of September - it is our intention to submit these export licence applications to Ministers following urgent IDC consideration ex-Committee”. Mr Hextall called for MODWG comments “by c.o.p Friday 16 September”. *116

D6.60 In a Note dated 20 September 1988 Mr J, (DI (Def. Sales)), responded to Mr Hextall’s Note. He referred to the risk of technology transfer to the Soviet Union and to the “risk that despite assurances they [i.e the 600 Services machines] could be purchased for use in some of the facilities that are known to the DIS as arms production plants”. However, despite unease about the proposed temporary export, Mr J said that DIS would offer no substantive objection subject to four caveats. The caveats were “(a) The company must make every endeavour to ensure that [the] machines are returned to the UK after the exhibition (b) If the machines are sold ‘off the stand’ the company should obtain a satisfactory end user statement (c) They should try and avoid sale to the known arms production plants *117 but if this is inevitable [DIS] defer to the FCO as to whether HMG can ride the presentational storm (d) Any further exports of these machines to Iraq will be subject to rigorous examination and we will need flawless end user documentation”. Mr J added that “...the DIS will reserve its right to object if it feels that the intelligence points to the machines being obtained for other purposes notwithstanding previous clearances.” *118 None of the other MODWG members raised any objection to 600 Services’ ELAs and, by a letter to Mr Hextall dated 20 September 1988, Mr Lillie, FCO/MED, said that “In the light of discussions in the IDC we would have no objections to granting a licence for this equipment. This seems to us a prime example of equipment which could be released at an early stage for permanent export.” *119

D6.61 The Summary Record of the IDC meeting on 22 September records that, in the discussion about the 600 Services ELAs and Matrix Churchill’s ELA 52039, “Concern was expressed whether the equipment would leave Iraq again after the Trade Fair” and that the Matrix Churchill ELA “may require ministerial clearance.” *120

D6.62 Mr Steadman had not been present at the 22 September IDC meeting but, nonetheless, pre-empted any Ministerial consideration by approving the issue of the temporary licences without more ado. He approved, also, the issue of the licence sought under ELA 2413, notwithstanding that this ELA had not been brought to the attention of the FCO or the MOD at all. In a manuscript Note written on ELA 2413 and dated 29 September 1988, Mr Steadman said this:

“Together with 3G/52039 this licence can be issued. It is required urgently for shipment of the goods for exhibition at the Baghdad [Trade] Fair and we are therefore acting in advance of formal FCO/MOD Ministerial approval since the IDC has already recommended that these goods for exhibition purposes should be approved and that a refusal would be more difficult to defend presentationally than a rejection. In addition in the policy paper to be circulated by FCO Ministers this week machine tools are one of the items for immediate relaxation under the guidelines.” *121

And, in a manuscript Note written on ELA 52039 on the same date, Mr Steadman said:

“Please issue. In view of the IDC recommendations that to refuse applications for temporary exports for exhibition purposes would be difficult to defend presentationally in the present climate and that Ministers are considering M/C tools for relaxation under the guidelines, DTI now can issue this licence in advance of formal FCO/MOD Ministerial approval. This action is taken in view of the short time before delivery.” *122

On each of the two 600 Services ELAs Mr Steadman wrote “Telephone approval from FCO/MED and MOD.26/9.” The licences were issued on the same day. *123

D6.63 In evidence to the Inquiry, Mr Steadman defended his pre-emptive issuing of the licences by saying that “In the context of the ceasefire and the more relaxed approach to machine tools which was under active consideration, I anticipated the decision. Being a temporary licence the equipment was recoverable... I cannot recall consulting anyone in DTI before taking this decision”. *124 Mr Steadman pointed out, also, that his issuing of the licences had been retrospectively approved by the FCO. Mr Lillie, in a Note dated 30 September 1988 relating to Matrix Churchill’s ELA 52039, said that the FCO had been “assured by the MOD that this general purpose equipment would not significantly enhance the efficiency of the Iraqi armaments industry.” *125 Mr Lillie recommended that “...we give retrospective FCO approval for issue of the licence”. Mr Blackley, in a manuscript Note endorsed on Mr Lillie’s Note, agreed and added “A pity DTI did not go through the hoops but release of this sort of equipment is consistent with the policy recommendations to Ministers from the IDC following the end of hostilities.” *126

D6.64 Mr Barrett, who had not been present at the IDC meeting on 22 September, did not brief Lord Trefgarne, the Minister (DP), on this temporary licence issue until 19 October 1988. Mr Barrett’s Note of that date said that the IDC had “agreed to recommend approval of those temporary exports for the Trade Fair, subject to the Companies agreeing to make every endeavour to ensure that the machines are indeed returned to UK after exhibition and are not sold ‘off the stand’”, and went on “FCO officials undertook to brief Embassy staff in Baghdad to monitor these machines and assist in ensuring their return. Since the meeting, DTI officials, faced with a final deadline for shipment to enable the machines to be included in the Trade Fair, decided, in the light of the Committee’s recommendation, to grant the temporary licences. Minister (DP) is asked to note that the machines have now been shipped. I will report further concerning their return to UK once the exhibition is over...” *127 Mr Barrett did not, in his submission to the Minister, draw the Minister’s attention to Mr J’s concerns. In his written evidence to the Inquiry, however, Mr Barrett said that he had informed the Minister about Mr J’s caveats, although without attributing them to the DIS. *128

D6.65 The fact that these temporary licences had been granted was not drawn to FCO Ministers’ attention. There was no communication with the British Embassy in Baghdad requesting the monitoring of the machine tools which had been licensed to go to the Trade Fair with a view to ensuring their return. The exporting companies were not approached and asked to make every endeavour to ensure the machines were returned to the United Kingdom. On 6 January 1989 an ELB official sent to Matrix Churchill a standard form letter (ELB 12) referring to the fact the temporary licences had been granted on condition that the DTI be informed in writing of the return of the goods to the United Kingdom and that no such notification had yet been received, and seeking to know the current position. The company replied on 13 January 1989 that the lathe and grinding machine were remaining in Iraq for a further exhibition but that the robot conveyor system had been returned to the United Kingdom. *129 In the event, save for the robot conveyor system, none of these machine tools ever returned to the UK. The machining centre comprised in ELA 2413 and the CNC Lathe and Cylindrical Grinder comprised in ELA 52039 eventually found their way to Nassr’s Project 1728, a missile project. *130

D6.66 As to the 600 Services machine tools which had been exported under the temporary licences issued on 26 September 1988, Mr Steadman attached a manuscript note dated 7 November to the files of the two ELAs. *131 The Note referred to an indication that had been given by a 600 Services executive that some of the machine tools might be sold to the Iraqi Railways and continued:

A note on the file made by an ELA official in March 1989 indicates that the 600 Services executive had informed the DTI that “the goods were held in bond at the Trade Fair” and records that the executive “will chase up the position on end-user details”.

D6.67 The eventual destination of the 600 Services machine tools was disclosed to the DTI by a letter dated 2 May 1990 from the company. The letter was in response to a DTI letter dated 1 May 1990 apparently asking what had become of the machines. *132 The 2 May 1990 letter *133 disclosed that “final customers” for all bar one of the machines exported under ELAs 62107 and 62108 *134 for exhibition at the Trade Fair “were found at the exhibition, or very soon afterwards”. The letter then gave details of the destinations to which the respective machines were dispatched. The details given were, as follows:-

D6.69 A Customs ID report dated 4 March 1992, produced in the course of a Customs investigation into the 600 Services machine tool exports, referred to the information that an executive officer of the company had given to Mr Steadman. The report said the officer had informed Mr Steadman that, if the goods were sold after the fair, the Iraqi Railways would be the likely end-user. The report then continued:

D6.70 Mr Steadman was, therefore, made aware in November 1988 that the machines were about to be sold. A belief that Iraqi Railways were the likely purchasers may explain why for a while no step was taken to try and bring about the return of the machines to the UK. It appears, however, that after March 1989 nothing was done about the machines until, in May 1990, Mr Tam Dalyell’s question prompted the ELB to take some action. To have done nothing for over a year was, in my opinion, unacceptable negligence. Mr Steadman has told the Inquiry that he did not remain “personally involved” in the “follow-up procedures” operating within the ELB.

D6.71 The history of the machine tools comprised in 600 Services temporary licences underlines the force of the MOD view that an application for a temporary licence should not be granted unless a permanent licence would have been granted. The reality of the situation brought about by the grant of a temporary licence was that if, after the export of the goods in question, the goods were sold, the goods would not be returned to the United Kingdom. The change in the law brought into effect in 1990, whereby a breach of a condition on which a licence had been granted, eg a condition for the return of the goods, became a criminal offence, gave the DTI some leverage against the exporter. *137 But the reality of the situation was and remained that, if the country to which the goods had been “temporarily” exported wanted to retain them and use them, the goods would be retained and used accordingly and would not be returned to the United Kingdom. The DTI practice of paying less than rigorous attention to applications for temporary licences produced an inevitable relaxation of the rigour of export controls.

D6.72 Mr Beston has taken strong issue with the proposition (from time to time put forward by members of the MODWG) that an application for a temporary licence should not be granted unless a permanent licence would have been granted. He has made the obvious point that an applicant for a temporary licence cannot be expected to give any information at all about the proposed purchaser or the intended end-use. He has made the point, also, that international trade ‘fairs’ represented a major source of new business for British companies and that “it was essential that companies should be able to display their most attractive equipment (even if this would not readily be licensed for permanent export to all countries)....” *138 There seems to me, however, no reason at all why applications for temporary licences in respect of defence equipment, and in respect of dual-use goods such as machine tools where there was a real possibility of diversion to military purposes, should not have been considered on the realistic footing that return of the equipment to the UK might never happen and that the equipment might be used for military purposes.

Endnotes
*109 - Mr Beston and Mr Steadman have made the point that they were not aware that Hutteen was solely concerned with munitions manufacture. They understood that it had, also, a civil manufacturing capacity and believed that, after the cease-fire, Iraqi factories would be switching over to civil production. No advice they received at the time contradicted that view.

*110 - DTI/157.1.13664 at 3665, paragraph 3; the equipment referred to included, as well as the Matrix Churchill Lathes, digital hardness testing machines for which an export licence was being sought by another company. The DIS end use inquiry related also to these machines.

*122 - DTI/100.2.6894-6918. In comments submitted on 12 June 1995, Mr Steadman said that he believed that he would have discussed with the FCO and the MOD what he proposed to do.

*124 - Mr Steadman’s written statement submitted on 25 November 1993 paragraph C.13.2.

*128 - Mr Barrett’s written statement submitted on 27 October 1993, paragraph 35 (p. 60)

*132 - The letter dated 1 May 1990 was not made available to the Inquiry. Presumably a copy could not be found. The letter dated 2 May 1990 and the correspondence that followed were not made available to the Inquiry until 15 March 1995 (despite a specific request for the documents made in June 1994).

*137 - Prior to the change in the law the only sanction available to the DTI was the refusal of future licence applications made by the company concerned.

*The Full report is available from The Stationery Office Ltd., PO Box 276, London, SW8 5DT.