Chapter 3
Treaty between the Government of Australia and the Government of the United
States of America concerning Defense Trade Cooperation
3.1
The Treaty between the Government of Australia and the Government of
the United States of America concerning Defense Trade Cooperation (the treaty)
was signed by the former Prime Minister John Howard on 5 September 2007 at the
time of the 19th APEC Ministerial Meeting in Sydney.[1]
The Implementing Arrangement was signed on 14 March 2008. The Implementing
Arrangement details the way in which the treaty will be implemented in both
countries.[2]
Part 3 of the bill implements the treaty.
3.2
The purpose of the treaty is to remove selected export restrictions on
defence trade between Australia and the US. Implementation of the treaty is
intended to create a simpler, more cost effective system.[3]
Defence noted in evidence that:
The Treaty framework is intended to remove the administrative
delays associated with existing Australian and US export-licensing systems. It
is expected to reduce delivery times for new projects and improve program
schedules...It is intended to increase opportunities for Australian companies to bid
on eligible US contracts...and to reduce obstacles for improved cooperation
between US and Australian companies, which will benefit Australia's defence
capability.[4]
3.3
The current US defence export control system, the International Trade in
Arms Regulations (ITAR), requires that licences are sought for each separate trade
transfer. Under the treaty, the US and Australia will create a framework which
allows licence-free trade within an Approved Community.[5]
3.4
The treaty was considered by the Joint Standing Committee on Treaties
(joint committee) which, after noting the concerns of some submitters in
regards to the cost of implementing the treaty, recommended that binding action
be taken in regards to the treaty.[6]
3.5
The majority of submissions received by the Senate Foreign Affairs,
Defence and Trade Legislation Committee in regards to the bill expressed
support for the aims of the treaty and the opportunities outlined by Defence.
Obligations under the treaty
3.6
The Defence Trade Controls Bill 2011 and the draft Defence Trade Controls
Regulations 2012 address the domestic ratification requirements of the treaty.
In the US, reforms to ITAR are being completed as part of ratification
requirements. The treaty will come into force when Australia's and the United
States' domestic requirements are complete.
3.7
Part 3 of the bill implements the treaty and comprises, amongst other
things, the criteria for membership of the Australian Approved Community. Parts
4 and 5 of the bill detail the monitoring powers given to the Defence to ensure
compliance in relation to the Australian Approved Community. Part 6 lists
record keeping requirements for members of the Australian Approved Community.
Approved Community under the treaty
3.8
The treaty removes the requirement for a license or permit to be
obtained for each transaction conducted by members of the Approved Community,
and instead imposes obligations in relation to Australian and US Defence
Articles traded or transferred under the treaty.[7]
'Under articles 4 and 5 respectively, Australia and the US agree to establish,
maintain and monitor an Approved Community of government facilities and
non-government companies'.[8]
Defence has stated in relation to the Approved Community that:
Applying for membership in the Approved Community will be a
voluntary commercial decision. Those entities that choose not to join the
Treaty will continue to operate within existing Australian and US defence
export controls...Entry into the Australian Approved Community will be a
commercial cost-benefit decision for individual companies, based on the level
of businesses a company is likely to undertake with the US Government or with
US defence companies.[9]
3.9
In its report on the treaty, the joint committee noted that:
...it is clear from the evidence that those companies who are
not a part of the Approved Community will be at a competitive disadvantage.[10]
3.10
Under article 14 of the treaty, an Implementing Arrangement has been
signed by both Australia and the US. The Implementing Arrangement 'supplements
the provisions of the treaty by prescribing detailed procedures and standards
to be adopted by the Parties'.[11]
Included in the Implementing Arrangement are, amongst other things,
arrangements for inclusion of an Australian entity in the Australian Approved
Community and exemption of certain Defence Articles from the scope of the
treaty.[12]
Approved Community–provisions in
the bill
3.11
The bill lists three groups who make up the Australian Approved
Community:
-
A person who is a body corporate
and holds a clause 27 approval;
-
Employees or persons engaged
under a contract for services by a body corporate approved under clause 27 can
also be a Australian Community member if they meet the requirements to be
specified in the requirement to be specified in the regulation under the bill;
and
-
Federal, State and Territory
Government employees with the required minimum security clearance and a 'need
to access' US Defence Articles.[13]
3.12
Clause 27 of the bill allows a person who is a body corporate to apply
to the Minister for Defence for approval to be a member of the Australian
Approved Community. In assessing the application, the Minister must have regard
to the criteria set out in subclause 27(3).
3.13
Subclause 28(4) creates an offence for an Australian Approved Community
member who holds an approval under clause 27 but does not comply with a
condition specified in the regulations. The maximum penalty for this offence is
up to 600 penalty units. A strict liability offence in relation to failure to
comply with a condition of approval is created by subclause 28(5) and this
offence attracts a maximum penalty of up to 300 penalty units.
Approved Community–concerns raised
by submissions
3.14
In general, submitters saw the implementation of the treaty and the
removal of the obligation to have a permit under the ITAR process to be
positive for Australian industry. However, a key source of concern was that the
process for becoming a member of the Approved Community would be onerous, both
in terms of cost and of time. The Defence Teaming Centre noted the 'significant
investment' needed to introduce an ITAR control regime into a company and that:
Companies who must operate in multiple export environments
will not be able to take advantage of the treaty, as the conflict between ITAR
guidelines and the access needed by dual—or third country—nationals to the
materiel is too great. The conflict between ITAR rules and access provisions
for other control regimes will impact companies across the entire industry,
including Prime contractors, Small and Medium Enterprises and ancillary service
providers such as freight forwarders.[14]
3.15
Saab emphasised that the Australian export control regime should operate
without 'adding cost to either government or industry' and to 'minimise
competitive hurdles for Australian Defence exports whilst retaining appropriate
controls'.[15]
3.16
Submitters such as Boeing were of the view that the penalties imposed
under the Approved Community structure may deter potential participants. One
corporation's confidential submission also noted that US Government approval is
required for membership of the Australian Approved Community, whereas
membership of the US Approved Community is based on registration with the US Directorate
of Defense Trade Controls.
3.17
Defence has acknowledged that it is difficult to quantify the direct impact
on industry of enforcing compliance given that the costs will vary depending on
a range of factors such as the 'size of the business, the extent of their
existing exports of controlled goods, services and technology and/or the
maturity of their business practices, including record management'.[16]
Such costs are separate to any additional costs associated with record-keeping
as required under the legislation, staff training and any additional costs
associated with determining whether a permit is required under the legislation.
There may also be investment costs associated with denial of a permit or
limitations imposed thereafter.[17]
Other costs to industry which have been identified in the explanatory memorandum
relate to the following:
-
ensuring and maintaining
facilities to meet the requirements to hold, store and protect treaty articles;
-
ensuring and maintaining
information technology infrastructure to satisfy the requirements to store or
transmit treaty-related information electronically;
-
the time required by company
employees to complete application forms and undertake training provided by the
government to meet all membership requirements;
-
meeting membership conditions
including costs involved in the:
a) development
or amendment of existing policies and procedures to ensure authorised access to
treaty articles;
b) facilitation
of internal audits to assure compliance with treaty membership obligations;
c) assurance
process and assistance to Authorised Offices in this regard;
d) establishment
and retention of records of prescribed activities;
e) reporting
to government of business conducted under the treaty framework including treaty
article transfer and results of internal compliance processes.[18]
Re-export under the treaty
3.18
Under Articles 8 and 6, Australia and the US agree that members of the
Approved Community may export and transfer Defence Articles without licences. Under
Article 9, re-transfers and re-exports of Defence Articles require the approval
of both the Australian and US Governments, although the treaty allows for some
mutually determined exceptions. In Article 1 're-transfer' and 're-export' are
defined as:
"Re-export" means the movement of previously
Exported Defense Articles by a member of the Australian Community from the
Approved Community to a location outside the territory of Australia;
"Re-transfer" means the movement of previously
Exported Defense Articles by a member of the Australian Community from the
Approved Community to a location within the Territory of Australia.
Re-export—provisions in the bill
3.19
Clause 28 under Part 3 of the bill lists the approval conditions which
must be met for organisations wishing to become a member of the Approved
Community. The explanatory memorandum notes that the approval conditions stipulate
that 'the re-transfer or re-export as defined in the treaty of a US Defence
Article cannot occur without prior approvals of the US and Australian
Governments'.[19]
Re-export—concerns raised by
submissions
3.20
Submitters raised concerns with regards to the prohibitions on re-export
under the bill: that articles exported under the treaty must not be re-transferred
or re-exported outside the Approved Community. The Defence Teaming Centre noted
that:
Several companies also questioned the lack of ability to re-export
goods. As many companies are performing integration work as part of a supply
chain, Defence articles from the US occasionally need to be re-exported to a
third country. The treaty provisions do nothing to simplify this process, and
with the expansion of the control regime to cover more articles this will lead
to increased overheads for supply-chain focussed companies.[20]
3.21
Mr Michael Kenneally from NewSat also raised concerns regarding
re-export by contrasting the framework under the treaty with the current
situation:
We do not have the skills base in Australia to do a lot of
what we are doing in terms of the design of a satellite, and so we have engaged
a network of specialist advisers to help us on the Jabiru satellite program,
most of them based out of the US. However, under the rules of ITAR, if we have
a technical assistance agreement where US companies export to us, if we
communicate that data to anyone else, that is a re-export of the technology and
has to be listed on the TAA. We believe that this is one of the areas of
complication for the bill as it is going forward, because re-export is not
covered in the arrangements that we have seen.[21]
3.22
Defence responded to these concerns by noting that:
The provisions of the Bill relevant to the Treaty reflect the
intent of the Treaty itself, and are designed to enable simpler trade in
defence goods between Australia and the US. Trade within the Treaty framework
is confined to mutually agreed scope lists on which the included activities
contain elements of eligible bilateral trade...As a bilateral Treaty, there was
no intention to provide exemptions from existing controls for re-exports to
other countries. Exports to countries other than the US will still require the
authorisations they currently require under existing controls. As a result, the
Bill does not change arrangements for re-exports to third countries—this type
of activity will remain subject to export controls.[22]
3.23
The committee understands the background and purpose for the treaty, but
notes that companies that need to pass goods through a non-Australian/non-US
location as part of a supply chain would need to work under the current
framework to obtain permits for that location. For some companies, this would
make becoming a member of the Approved Community less attractive.
Recordkeeping under the treaty
3.24
Article 12 of the treaty stipulates that each Party require entities
within the Approved Community to 'maintain detailed records of all [Exporting,
Transferring, Re-transferring, Re-exporting or receiving Defense Articles]
movements'.[23]
3.25
Article 12 also requires that the records maintained by entities in the
Approved Community be available on request to the other Party, in accordance
with procedures under the Implementing Arrangements.
Recordkeeping–provisions in the bill
3.26
Part 6 of the bill outlines the requirements for the making and
retaining of records as part of the Approved Community. Subclauses 58(1) to (5)
provides that separate records must be kept; the time in which they must be
made; and the retention of the record. Subclause 58(4) notes that the form of
record may be prescribed in the regulations. Subclause 58 (6) creates an
offence in relation to failure to create and retain the required records.
3.27
Clauses 59 to 62 deal with the production and inspection of records and
create an offence for failure to comply with a notice to produce records (subclause
59(4)). Further information regarding record keeping requirements is also
detailed in the regulations at regulation 31.
Recordkeeping–concerns raised by
submissions
3.28
In its submission, Boeing argued that clarification was needed regarding
the practicalities of record-keeping requirements and in particular the scope
of the requirements. Boeing noted:
For example, Section 51, subsection 1 requires the creation
of 'a separate record of each activity that the person does under a permit.'
For services and intangible transfers in particular, individualized
record-keeping is very difficult to achieve, and could amount to many thousands
of entries. As drafted, the current language does not explain whether a record
is required for each controlled defence service, or if every individual email,
telephone call, or fax constitutes a separate, recordable export of intangibles
subject to export controls. Although some of these questions may be addressed
in the more detailed implementing regulations, it is important to include
clarifying language in the Bill itself, taking into consideration the practical
aspects of each recordkeeping requirement.[24]
3.29
In Saab's view, companies will have an added compliance burden with
regards to record-keeping, and the differences between requirements for the
Approved Community and those for the strengthened export controls:
There is a lot more required at the back end—for instance, on
the record-keeping side because we suddenly have to keep track of a whole lot
of stuff in a way that we did not have to before. We need to make a distinction
between this bill's implementation of the treaty and the other two aspects of
this bill, which are intangible and brokering controls, which are purely
Australian.
3.30
Defence noted that Saab was correct in that the record-keeping
requirements for the strengthened export controls and those for the movements
of defence articles under the treaty are different:
While Defence is able to vary the record-keeping requirements
for strengthened export controls, the record keeping requirements in the Bill
and the Regulations for Treaty activities have some flexibility but need to
reflect Australia's commitments under the Treaty. As the Regulations are
currently drafted, the record-keeping requirements for the strengthened export
controls and those implementing the Treaty provisions have a high level of
consistency. Any changes to the record-keeping requirements for strengthened
export controls and Treaty activities may be different for each area and may
introduce inconsistency between the Treaty and the strengthened export control
record-keeping requirements.[25]
3.31
Given submitters' concerns regarding the definition of a record and the
practical considerations of making and retaining records, the committee asked
Defence if it would consider providing examples in the legislation or the explanatory
memorandum. The committee is encouraged by Defence's response that 'the Government
is considering options to amend the record-keeping requirements in the
Regulations to include a minimum of information'.[26]
Recommendation 5
3.32
The committee recommends that Defence undertake consultation with
industry in order to eliminate unnecessary record-keeping.
Security procedures under the treaty
3.33
Articles 6, 8 and 11 of the treaty 'require each Party to establish
procedures to ensure that all Defence Articles are clearly marked or identified
as being traded pursuant to the treaty at various points of their movement'.[27]
3.34
Security procedures, including marking and identification of Defence
Articles, are detailed in the regulations at Part 3.
Security procedures—issues raised
by submissions
3.35
In its evidence to the committee, Ms Stephanie Reuer from The Boeing
Company raised concerns that the marking of goods and technology may cause
concern for companies. She noted:
...the significant effort associated with the required
marking and re-marking of items and data. This requirement may create an
environment in which companies elect to forgo some of the advantages of the
treaty. We recommend that the marking be accomplished through the marking of
associated commercial documents normally provided with shipments.
...
With the way the treaty is written, items would have to be
physically marked in some manner, unless it was impracticable to do so. The
examples given are aerosols and chemicals. But in the aerospace and defence
business, marking components or subassemblies is a very, very difficult thing
to do and a very costly thing to do. We also have to be concerned in this
business about foreign object debris. So having to mark those parts is, I
think, a considerable request. Once items come into the community they have to
be marked. If you need to send them back to somebody outside the community for
whatever reason, maybe the supplier is not part of the community, they have to
be unmarked. Then if they come back in, they have to be re-marked. So you can
see that that constant marking and re-marking can be very dissuasive to treaty
use.[28]
3.36
Defence noted that similar concerns had been raised in regard to the
regulations, and advised:
Marking requirements to Treaty articles were seen to be
onerous and unclear—Defence has raised this issue with the US and the common understanding
is that marking of items is only required where it is practicable to do so—more
specific implementation guidance will be developed.[29]
3.37
The committee notes that marking and handling of Defence Articles is a
condition placed on members of the Approved Community. Under clause 28 of the
bill, members of the Approved Community commit an offence if they fail to
comply with any of the conditions of membership. In order to encourage industry
to become members of the Approved Community, it is important that the sector is
provided with clear practical guidance on matters such as marking requirements.
Transitioning provisions in the bill
3.38
Under Division 5 of the bill, clause 35 details procedures for
transitioning Defence Articles from a previous licence to the framework
established under the treaty. Under subclauses 35(1) and (2), a person must
make an application to the Minister in regards to transitioning the Defence
Article.
3.39
Subclause 35(5) provides that, should the Minister refuse the
transition, then the Minister must inform the person of the refusal and the
reasons for the refusal.
3.40
Saab made some comments in relation to the transitioning provisions,
raising concerns regarding the 'practical implications of the different
requirements of the proposed US and Australian implementations of the treaty
with regard to the transition from existing ITAR export licences to the treaty
exemption to ITAR of US-controlled items already in Australia'.[30]
Mr Giulinn advised the committee, in relation to this concern, that Saab had
discussed the issues with Defence. As a result:
The department have indicated it has been proposed to the US
that all transitions to the treaty instigated by Australian companies are done
through the department, providing a single interface with the US Department of
State on such matters. The two reasons for that being suggested are (1) it
would make it easier for the Australian companies because we do not have to
know who to talk to at the US Department of State and follow US processes that
we are not familiar with and (2) the Australian department would know which
items are being moved from the existing arrangements through to the treaty
arrangements.[31]
3.41
Clearly, a number of the problems identified with Division 5 of the bill
could be resolved by close consultation with industry.
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