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Engaging the Private Sector: Ian J. Stewart
Project on Proliferation Procurement and Anti-Proliferation in the Private Sector
Ian J. [email protected]
Lead Researcher, Project on Proliferation Procurement, King’s College LondonPhD Candidate, “Effectiveness of Export Controls and Sanctions” King’s College London
Research Fellow, Managing the Atom, Belfer Center, Harvard Kennedy School
Engaging the Private Sector: Ian J. Stewart
Research Overview / ContextRole and effectiveness of supply-side controls at preventing proliferation• Evaluating effectiveness of export controls and sanctions
Gaps and challenges:• No robust dataset• Indicators rather than measures of effectiveness • No causality known for sanctions (impact is not effectiveness)
• Improve performance• Information sharing / spread expertise • Engaging private sector • Develop export compliance standards
Presentation on 19th April 2012
Today
Engaging the Private Sector: Ian J. Stewart
Engaging the Private Sector: Overview
• Highlights current state-centric approach not sufficient to counter illicit procurement
• Suggests that current responses are important but not sufficient
• Explores whether private sector supply chains can supplement state-centric approach
• Identifies prerequisites to private sector engagement
Section 1: Supply-side controls overview Section 2: Challenges to current supply-side controlsSection 3: Anti-proliferation in the supply chain
Segways: Sanctions, Proliferaiton, Antiproliferaiton & DNA
Engaging the Private Sector: Ian J. Stewart
WMD?
Terrible phrase, but:• Nuclear, Chemical, Biological weapons • Delivery systems• Unsafeguarded nuclear fuel cycle activities• Nuclear fuel cycle activities subject to UN sanction
Engaging the Private Sector: Ian J. Stewart
Section 1
Current Supply Side Measures:Export Controls and Sanctions
Engaging the Private Sector: Ian J. Stewart
Overview of Export Controls
Export Controls: interpretation of NPT-like norms and commitments.
Three core elements of a export control system:• List of proliferation-sensitive technologies• Licensing process• Border enforcement: detect, deter
Additional desirable elements: consistent/transparent decision making, catchall controls, transshipment/re-export, brokering.
Engaging the Private Sector: Ian J. Stewart
Export Controls CoverageUNSCR 1540 • “Decides” all states will have export controls• Passed in response to the Khan network• Coverage expanded but not universalInternational export control regimes
Nuclear Suppliers Group – nuclear manufacturing statesMissile Technology CR – most BM producers, not ChinaWassenar: military / dual use - NATO/Warsaw pactAustralia Group (CBW) – NATO/Warsaw pact
“Non-discriminatory”
Engaging the Private Sector: Ian J. Stewart
Sanctions“To deny a target access to an economic resource… “ ?
Unilateral – imposed by one or more likeminded countriesMultilateral – imposed by the UNSC on target country for specific reason
Full economic embargo – high impact, high effectiveness?
Targeted sanctionsFocus on decision makers – travel bans, asset freezes
orAimed at proliferation-related activities:
Proliferation financingProliferation procurement
Iraq
Engaging the Private Sector: Ian J. Stewart
Targeted Sanctions in Practice• UN or national authority produce list:
– Designate entities– List technologies
• Private sector implement:– Financial services screen payments against lists– Shipping companies screen deliveries against lists– Manufacturers/exporters submit licences for controlled technologies
Issues:1: Broadening Scope: targeted sanctions could become economic sanctions:
Designating the Iranian banking system as a “money laundering concern”
2: Incomplete lists: proliferation is dynamic3: Implementation varies: National authority > private sector4. Causality?
Engaging the Private Sector: Ian J. Stewart
State-centric framework• Focus on compliance – National authorities legislate / enforce int. commitments
• State accountable for P/S non-compliance
– Private sector complies with national authority• Seeks licenses if
– goods controlled – End user designated (1.5% false positive). – Other suspicions
Encourages private sector to externalize proliferation risk
Engaging the Private Sector: Ian J. Stewart
Summary of section 1
Export controls:• Lists and criteria vary from country to country• Commonality achieved in likeminded states*
• Private Sector externalise risk
Sanctions:• Focus on countries of concern• List designated entities, activities and technologies
Implementation:• UNSC mandates implementation at the national level• Private sector’s role: be compliant
Engaging the Private Sector: Ian J. Stewart
Section 2
Challenges to the State-centric Model
Engaging the Private Sector: Ian J. Stewart
Proliferation
The NPT recognizes the right of every state to have peaceful nuclear energy, but with rights come responsibilities:• Safeguards• Declaration of Nuclear Fuel Cycle activities• Transparency / honesty
Engaging the Private Sector: Ian J. Stewart
Definition: ProliferationIn the defiance of UN resolutions/ international commitments:• The acquisition of WMD by states that previously did
not possess them • The growth in quantity or quality of already existing
unconventional arsenals • The illicit procurement of military capabilities
Proliferation through trade: Declared end use / end user of concernDeclared end use false Declared end user + end use false
Assuming insufficient indigenous capability…
EUU
Engaging the Private Sector: Ian J. Stewart
Relevance of Supply-side Controls
• The manufacturing base has spread• CAD/CAM design/manufacture• Information difficult to control
But… few (if any) countries have capability to manufacture every element of nuclear fuel cycle. – 7 companies manufacture vacuum equipment– A dozen countries have carbon fiber capability– Several firms make spark gaps
Challenges
Engaging the Private Sector: Ian J. Stewart
Illicit Procurement?
“Acquiring technology for something other than the declared end use”
International norms prohibit state-sanctioned exports to WMD programs, but…
• No norm formed against state-led illicit procurement• Weak punishments for nuclear traffickers • Proliferation high priority: state’s intelligence, military, and other
assets utilized to forward programs (and acquire technology)
Engaging the Private Sector: Ian J. Stewart
Technologies of concern(Is it the nuclear industry?)
Description Sensitivity Controllability ExampleIdentify
concerns from…
“Specifically designed for
…” High High Complete
centrifugeTechnology /
country
“Dual use goods” Medium Medium
Centrifuge sized high-
strength aluminum tube ?
“Non-listed goods” Low Low Motor winding
machine
Engaging the Private Sector: Ian J. Stewart
Illicit trade
Middle men
Middle men
Middle men
Middle men
AgentFalse end
user certificate Manufacturer
Licence application
Licensing authorityGoods
Country 1 Country 2 SupplierProliferant
Gov to Gov assurance
Engaging the Private Sector: Ian J. Stewart
Effectiveness of Supply-side Controls
Prerequisite to effectiveness: legislation and implementation in all appropriate countries.
Are there effective?• No technology manufacturers dataset• Implementation assessed on ‘indictors’ rather than measures
of ‘effectiveness’• Little transparency on prosecutions, licensing statistics etc.
Engaging the Private Sector: Ian J. Stewart
Stinnett et al: Complying by Denying: Explaining WhyStates Develop Nonproliferation Export Controls
Implementation assessed on ‘indictors’ rather than measures of ‘effectiveness’
Engaging the Private Sector: Ian J. Stewart
Dynamic Challenges
• Globalized manufacturing base– Outsourcing– Spread of information– Redistribution of equipment
• Globalising distribution pathways– Transshipment hub– Multinational / multisite manufacturing
Any one national authority has a decreasing ability to control trade.
Engaging the Private Sector: Ian J. Stewart
Summary to Section 2Challenges to the State-centric Model
National authorities take proliferation risk from private sector & P/S externalise proliferation riskBut risk may not be mitigated:• National authorities cant always get it right– Limited capacity– Dynamic nature of proliferation
• Not all goods of concern controlled• Supply chains are multinational• Some firms not compliant (ignorant or willful)
Engaging the Private Sector: Ian J. Stewart
Section 3
Concept:Anti-proliferation in the Supply Chain
Engaging the Private Sector: Ian J. Stewart
Private Sector: The Implementer
Companies possess:• Greatest understanding of:– Supply chains and market– Products & credibility of declared end uses
• Visibility of the enquiry and background • Knowledge to order• Knowledge of the customer• Resource
Private sector as the first line of defence against WMD proliferation
Engaging the Private Sector: Ian J. Stewart
Anti-proliferation in the Private Sector
• Implement proliferation-resistant compliance:– Increase vigilance in response to increased risk• Know / understand proliferation risk in technology• Understand proliferation risk posed by countries• Undertake due diligence on potentially risky exports
Beyond compliance: • Not just applying for licenses • More than just entity screening
Private Sector internalizes proliferation risk
Engaging the Private Sector: Ian J. Stewart
Illicit trade
Middle men
Middle men
Middle men
Middle men
AgentFalse end
user certificate Manufacturer
Licence application
Licensing authorityGoods
Country 1 Country 2 SupplierProliferant
Gov to Gov assurance
Engaging the Private Sector: Ian J. Stewart
Proliferation-resistant compliance systemsProliferation awareness:
Control status of goodsProliferation risks with technologyDiversion / proliferation risks with countries
Entity diligence:Red flag indicatorsSuppliers / Distributors due diligence
Prerequisites to Anti-proliferation
Engaging the Private Sector: Ian J. Stewart
Engaging the Private Sector
• Not Defence, Nuclear, Aerospace (DNA) firms that pose the proliferation risk, but their supply chains
• But… DNA key leveraging point– Hold influence over their supply chain– Are committed to compliance excellence– Can disseminate export compliance
Engaging the Private Sector: Ian J. Stewart
Technology-based ApproachFocus on highest risk technologies (chokepoints)
Carbon FibreHigh-strength alloysCorrosion-resistant metalsMetal powdersMaterials resistant to UF6Vacuum equipmentGlove boxesPrecursor chemicalsCasting / machine toolsInvertor’s Control systems*
Main markets:Defence,Nuclear,
Aerospace
Engaging the Private Sector: Ian J. Stewart
Mitigating Supply-chain Risk
• Suppliers and distributors present a compliance risk:– Reliance on suppliers to classify goods?– Possess your sensitive parts, components,
technical information – Not just export compliance issue: IPR etc.
Firms bear their proliferation risk; do they have confidence in suppliers and distributors export compliance system?
Engaging the Private Sector: Ian J. Stewart
Why Should Companies Care?
• Proliferation is a risk. – Legal implications (controlled goods or know /
suspect)– Reputational / market costs – even inadvertent
involvement in proliferation-related procurement can seriously affect company’s market position
• Corporate responsibility
Engaging the Private Sector: Ian J. Stewart
Dissemination of Anti-proliferation
Persuading Private Sector: Strategies: Normative: - relevant businesses are receptivePreventive: - make it less desirable to have no compliance Cognitive: - demonstrate costs / benefitsPunitive: - make it easier to focus on wrongdoers
• Code of Conduct / supply chain– DNA / government set standards
• Market forces– Insurance & investment
• Incentivisation?• Licensing structure
Engaging the Private Sector: Ian J. Stewart
BEST PRACTICE GUIDELINES ON CORPORATE STANDRDS SUPPORTING THE EFFORTS OF THE INTERNATIONAL COMMUNITY TO COUNTER-
PROLIFERATION OF WMD
1. Implement internal systems to ensure due-diligence checks are carried out on potential customers and business partners and the goods, software and technology that they wish to acquire, utilising public information provided by the United Nations, States and other parties with an interest in supporting the multilateral counter-proliferation effort,
2. Monitor, collate and vet enquiries relating to the acquisition of proliferation sensitive goods, software and technology,
3. Cease dealings with entities identified as being of proliferation concern either from public sources, from corporate monitoring systems or from contact with relevant competent authorities in states themselves,
4. Share information about attempts to procure items for illicit Weapons of Mass Destruction programmes with security and other relevant agencies in the State where they are established and with business partners and others in instances where the State judges that broader publicity would be appropriate,
5. Promote the adoption of due diligence and information sharing within the supply chain and with other business partners,
6. Incorporate counter-proliferation measures and export control compliance into existing Corporate Social responsibility statements,
7. Encourage relevant industry-wide trade and professional bodies to recognise the importance of supporting and encouraging the counter-proliferation effort and the measures set out herein.
Engaging the Private Sector: Ian J. Stewart
Certification Schemes
Risk Mitigation Assessor
Diversion risk Export Compliance Certification Private sector, national authority
Noncompliance risk Export Compliance Certification Private sector, national authority
Undesirable end use
Certified end user program Private sector, national authority
Entities can present three types of risk:
Emergence: companies naturally seek out others which embed antiprolieration.
Engaging the Private Sector: Ian J. Stewart
Overall findings
• Private sector has a role to play• Compliance with law not sufficient to mitigate proliferation
risks • For illicit procurement, mostly not the DNA that matters, but
the supply chain • Compliance systems and information currently available to
private sector not sufficient• Need for governments to think differently too
Engaging the Private Sector: Ian J. Stewart
Recommendations: System Architecture
• That national authorities should work with professional organizations for export compliance to encourage the structured training and development of compliance officials.
• That national authorities set up joint working groups to develop sector-specific anti-proliferation export compliance guidance.
• That competent authorities work with non-governmental organizations to develop a set of principles regarding antiproliferation in the supply chain.
• That competent authorities include in the provision of discretionary license types a requirement that exporters have in place an export compliance system
• That national authorities should establish a route through which desensitised suspicious enquiries could be anonymously shared with the national authority, international organizations, and others in the business sector.
• That national authorities in consultation with their private sector consider the merits of insentivisation structures to encourage the adoption of proliferation-resistant export compliance systems where incentives could include access to discretionary licensing categories or shorter target windows for export licensing decisions.
• That national authorities should encourage their private sector include a consideration of the effectiveness of a potential supplier or distributor’s export compliance process when considering entering business relationships in order to best mitigate supply chain risk.
• That competent authorities consider the merits and possible models of an extended end user certification scheme as an element of export control reform.
Engaging the Private Sector: Ian J. Stewart
Recommendations: Awareness• That national authorities support the development of web-based tools that articulate to both the export
licensing officials in third countries and their own private sector the proliferation concerns associated with controlled technologies
• That interested parties work through the export control regimes to define the scope of WMD programmes.
• That national authorities detail to exporters non-controlled goods, or categories of goods, of proliferation concern
• That national authorities provide to their private sector consolidated lists of all entities with which trade requires special consideration, including entities designated by international or unilateral sanctions together with sector-specific guidance on how to ensure compliance.
• That national authorities seek to highlight instances of non compliance to others in the business sector as the non-compliant firm
Engaging the Private Sector: Ian J. Stewart
To Summarise
• Proliferation risk currently taken by national authorities whereas risk is actually shared with P/S
• Antiproliferation needed in private sector to mitigate risk, but prerequisites: compliance systems, guidance, information, tools
• Compliant firms have a role too – promote compliance in their supply chains
Overall - it is in the interest of both the private sector and national authorities to get this right
Engaging the Private Sector: Ian J. Stewart
Resources (www.antiproliferation.com)
• Code of Conduct (NSG)Proliferation Briefs• Technology Briefs• Export compliance guidance• Due diligence / red flag guidance • Country profiles