Presentation belfer

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


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: 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


WMD?

Terrible phrase, but:• Nuclear, Chemical, Biological weapons • Delivery systems• Unsafeguarded nuclear fuel cycle activities• Nuclear fuel cycle activities subject to UN sanction


Section 1

Current Supply Side Measures:Export Controls and Sanctions


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.


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”


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


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?


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


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


Section 2

Challenges to the State-centric Model


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


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


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


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)


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


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


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.


Stinnett et al: Complying by Denying: Explaining WhyStates Develop Nonproliferation Export Controls

Implementation assessed on ‘indictors’ rather than measures of ‘effectiveness’


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.


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)


Section 3

Concept:Anti-proliferation in the Supply Chain


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


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


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


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

• 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


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


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?


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


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


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.


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.


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


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.


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


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


Resources (www.antiproliferation.com)

• Code of Conduct (NSG)Proliferation Briefs• Technology Briefs• Export compliance guidance• Due diligence / red flag guidance • Country profiles