Presentation belfer

Project on Proliferation Procurement
and Anti-Proliferation in the Private
Sector
Ian J. Stewart
ian.stewart@kcl.ac.uk
Lead Researcher, Project on Proliferation Procurement, King’s College London
PhD 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 / Context
Role and effectiveness of supply-side controls at preventing
proliferation
• Evaluating effectiveness of export controls and sanctions
Gaps and challenges: Presentation on
• No robust dataset 19th April 2012
• Indicators rather than measures of effectiveness
• No causality known for sanctions (impact is not effectiveness)
• Improve performance
• Information sharing / spread expertise
• Engaging private sector Today
• Develop export compliance standards


Engaging the Private Sector: Overview
Section 1: Supply-side controls overview
Section 2: Challenges to current supply-side controls
Section 3: Anti-proliferation in the supply chain

• 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

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 Coverage
UNSCR 1540
• “Decides” all states will have export controls
• Passed in response to the Khan network
• Coverage expanded but not universal
International export control regimes
Nuclear Suppliers Group – nuclear manufacturing states
Missile Technology CR – most BM producers, not China
Wassenar: military / dual use - NATO/Warsaw pact
Australia Group (CBW) – NATO/Warsaw pact

“Non-discriminatory”

Sanctions
“To deny a target access to an economic resource… “ ?
Unilateral – imposed by one or more likeminded countries
Multilateral – imposed by the UNSC on target country for specific reason

Full economic embargo – high impact, high effectiveness?

Iraq

Targeted sanctions
Focus on decision makers – travel bans, asset freezes
or
Aimed at proliferation-related activities:
Proliferation financing
Proliferation procurement

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 dynamic
3: Implementation varies: National authority > private sector
4. 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: Proliferation
In 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

Assuming insufficient indigenous capability…
Proliferation through trade:
Declared end use / end user of concern
Declared end use false
Declared end user + end use false


Relevance of Supply-side Controls
• The manufacturing base has spread
• CAD/CAM design/manufacture Challenges

• 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


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?)
Identify
Description Sensitivity Controllability Example concerns
from…

“Specifically
Complete Technology /
designed for High High
centrifuge country
…”

Centrifuge
“Dual use sized high-
Medium Medium
goods” strength

“Non-listed
Low Low
aluminum tube

Motor winding
?
goods” machine


Illicit trade
Proliferant Country 1 Country 2 Supplier
Licensing authority
Goods

Licence
application

Middle Middle
men men
False end Middle
user Agent
men
certificate Manufacturer
Middle
men

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 Why
States 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 2
Challenges to the State-centric Model
National authorities take proliferation risk from private sector &
P/S externalise proliferation risk
But 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


Prerequisites to Anti-proliferation
Proliferation-resistant compliance systems
Proliferation awareness:
Control status of goods
Proliferation risks with technology
Diversion / proliferation risks with countries
Entity diligence:
Red flag indicators
Suppliers / Distributors due diligence


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 Approach
Focus on highest risk technologies (chokepoints)
Carbon Fibre
High-strength alloys
Corrosion-resistant metals
Metal powders
Main markets:
Materials resistant to UF6
Defence,
Vacuum equipment
Nuclear,
Glove boxes
Aerospace
Precursor chemicals
Casting / machine tools
Invertor’s
Control systems*


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 receptive
Preventive: - make it less desirable to have no compliance
Cognitive: - demonstrate costs / benefits
Punitive: - 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
Entities can present three types of risk:

Risk Mitigation Assessor

Diversion risk Export Compliance Certification Private sector, national authority

Noncompliance risk Export Compliance Certification Private sector, national authority

Undesirable end Certified end user program Private sector, national authority
use

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


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