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Project on Proliferation Procurement    and Anti-Proliferation in the Private                   Sector                    ...
Research Overview / ContextRole and effectiveness of supply-side controls at preventingproliferation• Evaluating effective...
Engaging the Private Sector: Overview          Section 1: Supply-side controls overview          Section 2: Challenges to ...
WMD?Terrible phrase, but:• Nuclear, Chemical, Biological weapons• Delivery systems• Unsafeguarded nuclear fuel cycle activ...
Section 1Current Supply Side Measures:Export Controls and Sanctions   Engaging the Private Sector: Ian J. Stewart
Overview of Export ControlsExport Controls: interpretation of NPT-like norms and commitments.Three core elements of a expo...
Export Controls CoverageUNSCR 1540• “Decides” all states will have export controls• Passed in response to the Khan network...
Sanctions       “To deny a target access to an economic resource… “ ?Unilateral – imposed by one or more likeminded countr...
Targeted Sanctions in Practice•   UN or national authority produce list:     – Designate entities     – List technologies•...
State-centric framework• Focus on compliance  – National authorities legislate / enforce int. commitments     • State acco...
Summary of section 1Export controls:  • Lists and criteria vary from country to country  • Commonality achieved in likemin...
Section 2Challenges to the State-centric Model      Engaging the Private Sector: Ian J. Stewart
ProliferationThe NPT recognizes the right of every state to havepeaceful nuclear energy, but with rights comeresponsibilit...
Definition: ProliferationIn the defiance of UN resolutions/ internationalcommitments:• The acquisition of WMD by states th...
EUU
Relevance of Supply-side Controls• The manufacturing base has spread• CAD/CAM design/manufacture                          ...
Illicit Procurement? “Acquiring technology for something other than the declared end use”International norms prohibit stat...
Technologies of concern              (Is it the nuclear industry?)                                                        ...
Illicit tradeProliferant    Country 1       Country 2                   Supplier                                          ...
Effectiveness of Supply-side ControlsPrerequisite to effectiveness: legislation and implementation in   all appropriate co...
Stinnett et al: Complying by Denying: Explaining Why                    States Develop Nonproliferation Export ControlsImp...
Dynamic Challenges• Globalized manufacturing base   – Outsourcing   – Spread of information   – Redistribution of equipmen...
Summary to Section 2 Challenges to the State-centric ModelNational authorities take proliferation risk from private sector...
Section 3               Concept:Anti-proliferation in the Supply Chain      Engaging the Private Sector: Ian J. Stewart
Private Sector: The ImplementerCompanies possess:• Greatest understanding of:    – Supply chains and market    – Products ...
Anti-proliferation in the Private Sector• Implement proliferation-resistant compliance:  – Increase vigilance in response ...
Illicit tradeProliferant    Country 1       Country 2                   Supplier                                          ...
Prerequisites to Anti-proliferation Proliferation-resistant compliance systems   Proliferation awareness:     Control stat...
Engaging the Private Sector• Not Defence, Nuclear, Aerospace (DNA) firms  that pose the proliferation risk, but their  sup...
Technology-based ApproachFocus on highest risk technologies (chokepoints)Carbon FibreHigh-strength alloysCorrosion-resista...
Mitigating Supply-chain Risk• Suppliers and distributors present a  compliance risk:  – Reliance on suppliers to classify ...
Why Should Companies Care?• Proliferation is a risk.   – Legal implications (controlled goods or know /     suspect)   – R...
Dissemination of Anti-proliferationPersuading Private Sector: Strategies:Normative: - relevant businesses are receptivePre...
BEST PRACTICE GUIDELINES ON CORPORATE STANDRDS SUPPORTING THE        EFFORTS OF THE INTERNATIONAL COMMUNITY TO COUNTER-   ...
Certification Schemes   Entities can present three types of risk:Risk                Mitigation                           ...
Overall findings• Private sector has a role to play• Compliance with law not sufficient to mitigate proliferation  risks• ...
Recommendations: System Architecture• That national authorities should work with professional organizations for export com...
Recommendations: Awareness•   That national authorities support the development of web-based tools that articulate to both...
To Summarise• Proliferation risk currently taken by national  authorities whereas risk is actually shared with P/S• Antipr...
Resources      (www.antiproliferation.com)• Code of Conduct (NSG)Proliferation Briefs• Technology Briefs• Export complianc...
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  1. 1. 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 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
  2. 2. Research Overview / ContextRole and effectiveness of supply-side controls at preventingproliferation• 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: Ian J. Stewart
  3. 3. 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 Engaging the Private Sector: Ian J. Stewart
  4. 4. 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
  5. 5. Section 1Current Supply Side Measures:Export Controls and Sanctions Engaging the Private Sector: Ian J. Stewart
  6. 6. Overview of Export ControlsExport 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, deterAdditional desirable elements: consistent/transparent decisionmaking, catchall controls, transshipment/re-export, brokering. Engaging the Private Sector: Ian J. Stewart
  7. 7. 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 states Missile Technology CR – most BM producers, not China Wassenar: military / dual use - NATO/Warsaw pact Australia Group (CBW) – NATO/Warsaw pact “Non-discriminatory” Engaging the Private Sector: Ian J. Stewart
  8. 8. 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? Iraq Targeted sanctions Focus on decision makers – travel bans, asset freezes or Aimed at proliferation-related activities: Proliferation financing Proliferation procurement Engaging the Private Sector: Ian J. Stewart
  9. 9. 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 technologiesIssues: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
  10. 10. 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
  11. 11. Summary of section 1Export controls: • Lists and criteria vary from country to country • Commonality achieved in likeminded states* • Private Sector externalise riskSanctions: • Focus on countries of concern • List designated entities, activities and technologiesImplementation: • UNSC mandates implementation at the national level • Private sector’s role: be compliant Engaging the Private Sector: Ian J. Stewart
  12. 12. Section 2Challenges to the State-centric Model Engaging the Private Sector: Ian J. Stewart
  13. 13. ProliferationThe NPT recognizes the right of every state to havepeaceful nuclear energy, but with rights comeresponsibilities: • Safeguards • Declaration of Nuclear Fuel Cycle activities • Transparency / honesty Engaging the Private Sector: Ian J. Stewart
  14. 14. Definition: ProliferationIn the defiance of UN resolutions/ internationalcommitments:• 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 Engaging the Private Sector: Ian J. Stewart
  15. 15. EUU
  16. 16. Relevance of Supply-side Controls• The manufacturing base has spread• CAD/CAM design/manufacture Challenges• Information difficult to controlBut… 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 Engaging the Private Sector: Ian J. Stewart
  17. 17. 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
  18. 18. Technologies of concern (Is it the nuclear industry?) IdentifyDescription 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 Engaging the Private Sector: Ian J. Stewart
  19. 19. Illicit tradeProliferant 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 Engaging the Private Sector: Ian J. Stewart
  20. 20. Effectiveness of Supply-side ControlsPrerequisite 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
  21. 21. Stinnett et al: Complying by Denying: Explaining Why States Develop Nonproliferation Export ControlsImplementation assessed on ‘indictors’ rather than measures of ‘effectiveness’ Engaging the Private Sector: Ian J. Stewart
  22. 22. 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
  23. 23. Summary to Section 2 Challenges to the State-centric ModelNational 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
  24. 24. Section 3 Concept:Anti-proliferation in the Supply Chain Engaging the Private Sector: Ian J. Stewart
  25. 25. Private Sector: The ImplementerCompanies 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
  26. 26. 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
  27. 27. Illicit tradeProliferant 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 Engaging the Private Sector: Ian J. Stewart
  28. 28. 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: Ian J. Stewart
  29. 29. 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
  30. 30. Technology-based ApproachFocus on highest risk technologies (chokepoints)Carbon FibreHigh-strength alloysCorrosion-resistant metalsMetal powders Main markets:Materials resistant to UF6 Defence,Vacuum equipment Nuclear,Glove boxes AerospacePrecursor chemicalsCasting / machine toolsInvertor’sControl systems* Engaging the Private Sector: Ian J. Stewart
  31. 31. 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 haveconfidence in suppliers and distributors exportcompliance system? Engaging the Private Sector: Ian J. Stewart
  32. 32. 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
  33. 33. Dissemination of Anti-proliferationPersuading Private Sector: Strategies:Normative: - relevant businesses are receptivePreventive: - make it less desirable to have no complianceCognitive: - 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
  34. 34. BEST PRACTICE GUIDELINES ON CORPORATE STANDRDS SUPPORTING THE EFFORTS OF THE INTERNATIONAL COMMUNITY TO COUNTER- PROLIFERATION OF WMD1. 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
  35. 35. Certification Schemes Entities can present three types of risk:Risk Mitigation AssessorDiversion risk Export Compliance Certification Private sector, national authorityNoncompliance risk Export Compliance Certification Private sector, national authorityUndesirable end Certified end user program Private sector, national authorityuse Emergence: companies naturally seek out others which embed antiprolieration. Engaging the Private Sector: Ian J. Stewart
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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 chainsOverall - it is in the interest of both the private sector and national authorities to get this right Engaging the Private Sector: Ian J. Stewart
  40. 40. Resources (www.antiproliferation.com)• Code of Conduct (NSG)Proliferation Briefs• Technology Briefs• Export compliance guidance• Due diligence / red flag guidance• Country profiles Engaging the Private Sector: Ian J. Stewart

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