Export Controls
Post-Shipment Verification Provides Limited Assurance That Dual-Use Items Are Being Properly Used Gao ID: GAO-04-357 January 12, 2004The United States controls certain dual-use technologies that could be used to enhance the military capabilities of countries of concern. The Department of Commerce (Commerce) conducts post-shipment verification (PSV) checks to ensure that these technologies arrive at their intended destination and are used for the purposes stated in the export license. GAO was asked to (1) assess the number of dual-use export licenses approved and subject to postshipment verification and (2) evaluate how the PSV process ensures that sensitive exports are used as intended.
The Department of Commerce approved 26,340 licenses for the export of dual-use items during fiscal years 2000 to 2002. Twenty-eight percent of these licenses involved dual-use exports to countries of concern such as China, India, and Russia. However, Commerce conducted PVC checks on few of these licenses. We found that, during fiscal years 2000 to 2002, Commerce completed PSV checks on 428, or about 6 percent, of the dual-use licenses it approved for countries of concern. Commerce and other departments attached conditions to nearly all (99 percent) of the licenses for countries of concern to alleviate concerns about potential diversion or misuse. We identified three key weaknesses in the PSV process that reduce the effectiveness of this important activity. First, PSVs do not confirm compliance with license conditions because U.S. officials frequently do not check license conditions, they often lack the technical training to assess compliance, and end users may not be aware of the license conditions by which they are to abide. Second, some countries of concern, most notably China, limit the U.S. government's access to facilities where dual-use items are shipped, making it difficult to conduct a PSV. Third, PSV results have only a limited impact on future licensing decisions. Companies receiving an unfavorable PSV may receive greater scrutiny in future license applications, but they can still receive an export license. In addition, according to Commerce officials, past PSV results play only a minor role in future Enforcement actions.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-357, Export Controls: Post-Shipment Verification Provides Limited Assurance That Dual-Use Items Are Being Properly Used
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Report to Senator Jon Kyl, U.S. Senate:
January 2004:
EXPORT CONTROLS:
Post-Shipment Verification Provides Limited Assurance That Dual-Use
Items Are Being Properly Used:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-357]:
GAO Highlights:
Highlights of GAO-04-357, a report to Senator Jon Kyl
Why GAO Did This Study:
The United States controls certain dual-use technologies that could be
used to enhance the military capabilities of countries of concern. The
Department of Commerce (Commerce) conducts post-shipment verification
(PSV) checks to ensure that these technologies arrive at their
intended destination and are used for the purposes stated in the
export license.
GAO was asked to (1) assess the number of dual-use export licenses
approved and subject to post-shipment verification and (2) evaluate
how the PSV process ensures that sensitive exports are used as
intended.
What GAO Found:
The Department of Commerce approved 26,340 licenses for the export of
dual-use items during fiscal years 2000 to 2002. Twenty-eight percent
of these licenses involved dual-use exports to countries of concern
such as China, India, and Russia. However, Commerce conducted PVC
checks on few of these licenses. We found that, during fiscal years
2000 to 2002, Commerce completed PSV checks on 428, or about 6
percent, of the dual-use licenses it approved for countries of
concern. Commerce and other departments attached conditions to nearly
all (99 percent) of the licenses for countries of concern to alleviate
concerns about potential diversion or misuse.
We identified three key weaknesses in the PSV process that reduce the
effectiveness of this important activity. First, PSVs do not confirm
compliance with license conditions because U.S. officials frequently
do not check license conditions, they often lack the technical
training to assess compliance, and end users may not be aware of the
license conditions by which they are to abide. Second, some countries
of concern, most notably China, limit the U.S. government‘s access to
facilities where dual-use items are shipped, making it difficult to
conduct a PSV. Third, PSV results have only a limited impact on future
licensing decisions. Companies receiving an unfavorable PSV may
receive greater scrutiny in future license applications, but they can
still receive an export license. In addition, according to Commerce
officials, past PSV results play only a minor role in future
enforcement actions.
What GAO Recommends:
We recommend that the Department of Commerce
* improve technical training for enforcement personnel conducting PSV
checks,
* ensure that personnel conducting PSV checks assess compliance with
license conditions, and
* require that the exporter inform the end user in writing of the
license conditions.
The Department of Commerce generally agreed with our recommendations
and indicated it had taken steps to strengthen the PSV process.
www.gao.gov/cgi-bin/getrpt?GAO-04-357.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Joseph A. Christoff
at (202) 512-8979 or christoffj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Few Dual-Use Exports to Countries of Concern Are Subject to PSV
Checks:
PSVs Provide Limited Assurance That Dual-Use Items Are Not Diverted or
Misused:
Conclusion:
Recommendations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Department of Commerce's Statutory Framework and
Enforcement Activities:
Appendix III: Comments from the Department of Commerce:
GAO Comments:
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Staff Acknowledgments:
Tables:
Table 1: Export Licenses to Countries of Concern, Fiscal Years 2000 to
2002:
Table 2: Maximum Penalties under EAA and IEEPA:
Figures:
Figure 1: Department of Commerce Approved Dual-Use Export Licenses and
PSVs, Fiscal Years 2000-2002:
Figure 2: Results of PSV Checks in Countries of Concern, Fiscal Years
2000-2002:
Abbreviations:
EAA: Export Administration Act:
ECASS: Export Control Automated Support System:
FCS: U.S. Foreign Commercial Service:
FOUO: For Official Use Only:
HPC: High Performance Computer:
IEEPA: International Emergency Economic Powers Act:
PSV: Post Shipment Verification:
Letter January 12, 2004:
The Honorable Jon Kyl:
United States Senate:
Dear Senator Kyl:
The U.S. government seeks to control the export of dual-use
technologies[Footnote 1] to prevent countries of concern[Footnote 2]
and terrorists from using them to bolster their military capabilities.
The Department of Commerce (Commerce) is responsible for licensing
dual-use exports and relies on post-shipment verification (PSV) checks
to confirm that exported items are not misused or diverted. To conduct
a PSV check, Commerce personnel visit foreign companies to verify the
use and location of the item. According to Commerce, a PSV check
strengthens assurances that exporters, importers, and end users comply
with the terms of export licenses and licensing conditions.
Because of your concerns about the current PSV process in countries of
concern such as China and India, you asked that we (1) assess the
number of dual-use export licenses approved and subject to PSV and (2)
evaluate how the PSV process ensures that sensitive exports are used as
intended.
To address these objectives, we reviewed laws and procedures governing
export licensing, analyzed export licensing data, and reviewed the
enforcement outcomes of Commerce's PSV activities, including the
penalties levied and their deterrent value. We also interviewed
Commerce officials in Washington, D.C., surveyed export enforcement
personnel in Commerce's field offices, met with Commerce export
enforcement attachés in Russia and China, and observed a Commerce-led
team conducting PSV checks in Russia. In addition, we met with
officials from the Department of State (State); Department of Homeland
Security; Department of Defense (Defense), including the Defense
Security and Threat Agency and Defense Intelligence Agency; Department
of Justice; Central Intelligence Agency; National Ground Intelligence
Center; and private firms in Hong Kong, India, and Russia that were the
subject of Commerce's PSV checks. Finally, we interviewed officials
from the governments of China, Hong Kong, and India about their views
on the PSV process. For more on our scope and methodology, see appendix
I.
Results in Brief:
During 2000 to 2002, Commerce approved 70 percent of the licenses it
received for exporting dual-use items to countries of concern. The vast
majority of these approved licenses--99 percent--had conditions
attached during the interagency process to alleviate concerns about
potential diversion or misuse. However, few dual-use export licenses
were subject to PSV checks, Commerce's primary mechanism for checking
that dual-use items arrive at their proper location and are used in
compliance with the conditions of the export license. Our analysis of
Commerce's export licensing data found that during fiscal years 2000 to
2002, Commerce completed PSV checks on 428 (6 percent) of the 7680
dual-use licenses it approved for countries of concern.
We found three key challenges to the PSV process that reduce the
effectiveness of this important activity. First, the process of
conducting the checks has several weaknesses. U.S. officials do not
always verify compliance with license conditions. As a result, 36
percent of the companies we visited or company representatives we spoke
with in China, Hong Kong, India, and Russia reported that U.S.
officials did not ask them about compliance or attempt to verify
compliance with license conditions. In addition, in response to our
survey, three-fourths of the U.S. officials who conducted checks
between 2000 to 2002 reported that they lacked technical training in
key technologies such as electronics, telecommunications, and
information security systems. These technologies accounted for 89
percent of the checks conducted in countries of concern during fiscal
years 2000 through 2002. Furthermore, end users of dual-use technology
may not be aware of the license conditions they are supposed to abide
by because Commerce does not require exporters to inform end users in
writing of the license conditions. Only 5 of the 25 companies we
visited had a copy of the license conditions. Second, some countries of
concern, most notably China, limit the U.S. government's access to
facilities where dual-use items are shipped, making it difficult to
verify whether exported items are being used as intended. Third, PSV
results have only a limited impact on future licensing decisions.
Companies receiving an unfavorable PSV will be scrutinized more
carefully in the future, but they can still obtain an export license.
In addition, past PSV results play only a minor role in future
enforcement actions.
We are recommending that the Secretary of Commerce (1) improve
technical training for enforcement personnel conducting PSV checks, (2)
ensure that personnel conducting PSV checks assess compliance with
license conditions, and (3) require that the exporter inform the end
user in writing of the license conditions. In commenting on our report,
the Department of Commerce generally agreed with our recommendations
and stated that it has already taken significant steps to strengthen
the PSV process along the lines we recommended.
Background:
Commerce's authority to conduct PSV checks is established in the Export
Administration Act of 1979, which provides the legal and administrative
basis for U.S. controls on dual-use exports and is supplemented by the
Export Administration Regulations. Commerce's Control List, which is
included in the regulations, specifies the items and technologies to be
controlled.[Footnote 3] The United States uses export controls to
prevent sensitive items from reaching persons, entities, or countries
involved in terrorism or the proliferation of weapons of mass
destruction and the vehicles to deliver them.
Commerce seeks to ensure that exports from the United States and
reexports of U.S.-origin items to other countries are consistent with
U.S. national security and foreign policy objectives. At the same time,
Commerce works to avoid impeding the flow of legitimate trade. PSV
checks are Commerce's primary method to detect and prevent illegal
transfer of controlled U.S.-origin goods and technology already shipped
overseas. Commerce may conduct a PSV check on any controlled item it
licenses that is exported from the United States. According to
Commerce, PSV checks strengthen assurances that exporters, shippers,
importers, and end users comply with the terms of export license and
licensing conditions.
U.S. exporters submit license applications to Commerce. The
applications include information on (1) the importer who takes delivery
of the item, (2) the end user who will use the item, and (3) the item's
intended use. The importer and end user may or may not be the same
company. An importer may use, sell, or distribute the item to other
companies for their use. For example, a U.S. company could export
thermal imaging cameras to an Indian company. The Indian company, also
known as the importer, might then sell the cameras to other Indian
companies, the end users.
Several agencies review license applications for the national security,
domestic, or foreign policy implications of exporting dual-use items.
After the U.S. exporter submits a license application to Commerce, an
interagency team comprised of officials from Commerce, Defense, State,
and the Department of Energy determines whether the application should
be approved for a license, denied, or returned without action.[Footnote
4] If potential concerns are raised about the end user or the end use,
a prelicense check may be conducted to verify the legitimacy of the
importing company that seeks to purchase U.S. items or technology. If
concerns about the end user or end use persist, conditions may be added
to the license application before approval. Once approved, Commerce
issues the license, including conditions, to the U.S. exporter.
Commerce conducts PSV checks to confirm that the dual-use item arrived
at its destination and is being used as intended. Commerce special
agents or other U.S. government personnel visit companies overseas to
meet with importers or end users in an attempt to verify the use and
location of these items. These checks are usually conducted by Commerce
special agents, Commerce export control attaché posted at select U.S.
embassies overseas,[Footnote 5] or by Foreign Commercial Service (FCS)
or State officials in country. The majority of PSVs are conducted by
Commerce's special agents; these U.S.-based officials conduct
investigations of potential violations of export controls. Special
agents have traditional police powers, including the authority to make
arrests and execute warrants domestically. Agents may also issue
administrative subpoenas and detain and seize goods to be illegally
exported. They cannot, however, conduct investigations while performing
PSVs overseas.
Commerce guidelines for conducting PSV checks state that an on-site
visit to the company is mandatory. These guidelines also indicate that
the agents' most important responsibility is physically inspecting the
goods or the records that detail their disposition. The guidelines also
require Commerce officials conducting the PSV to determine if (1) the
goods are located at the facility, (2) the entire shipment can be
accounted for, (3) the equipment is being used as stated in the
license, (4) indications of impropriety exist, and (5) the company's
answers are evasive.
Few Dual-Use Exports to Countries of Concern Are Subject to PSV Checks:
Commerce approves the majority of all export license applications.
During fiscal years 2000 to 2002, Commerce approved 70 percent of the
license applications it received for exports of dual-use items to
countries of concern. The vast majority--99 percent--of approved
licenses had conditions attached during the interagency license review
to deter misuse or diversion. However, only 6 percent of licenses to
countries of concern were subject to PSV checks. During fiscal years
2000 to 2002, Commerce conducted 428 PSVs on the 7,680 dual-use export
licenses it approved for countries of concern.
Commerce Approves Most Dual-Use Export Licenses to Countries of
Concern:
Between 2000 and 2002, Commerce approved 70 percent of dual-use export
licenses to countries of concern--a total of 7,680 licenses for exports
to China, India, Israel, Russia, and others. As table 1 shows, China
and India received more dual-use licenses than all other countries of
concern. These two countries accounted for almost 62 percent of dual-
use licenses approved to countries of concern during fiscal years 2000
to 2002.
Table 1: Export Licenses to Countries of Concern, Fiscal Years 2000 to
2002:
Country: People's Republic of China; Licenses approved: 2,644.
Country: India; Licenses approved: 2,110.
Country: Israel; Licenses approved: 1,456.
Country: Russia; Licenses approved: 824.
Country: Syria; Licenses approved: 311.
Country: Egypt; Licenses approved: 111.
Country: Ukraine; Licenses approved: 58.
Country: Pakistan; Licenses approved: 52.
Country: Iran; Licenses approved: 51.
Country: North Korea; Licenses approved: 26.
Country: Kazakhstan; Licenses approved: 21.
Country: Belarus; Licenses approved: 10.
Country: Azerbaijan; Licenses approved: 5.
Country: Iraq; Licenses approved: 1.
Country: Total; Licenses approved: 7,680.
Source: GAO analysis of Commerce data.
[End of table]
Most U.S. exports of dual-use items go to countries other than
countries of concern. Our analysis of Commerce data found that Commerce
was less likely to approve exports of dual-use items to countries of
concern than to other countries. Whereas the approval rate for
countries of concern was 70 percent, the approval rate for other
countries was 86 percent.
Commerce Attaches Conditions to Most Licenses:
Between fiscal years 2000 and 2002, 99 percent of all approved dual-use
export licenses to countries of concern contained conditions requiring
the exporter to provide certain documentation and reports, such as a
shipper's export declaration or encryption licensing information, and
to restrict the item's use. Commerce, Defense, and State develop
conditions during an interagency licensing approval process to
alleviate concerns that the items might be misused or might contribute
to proliferation activities. According to the Undersecretary for
Commerce, in a speech at the annual Update 2002 Export Control and
Policy Conference, these conditions alleviate agency concerns that
might otherwise result in a denial of the export. Once a license is
issued, the departments rely on Commerce to ensure compliance with the
conditions.
Commerce has 54 standard conditions that establish requirements
exporters and end users must follow, including how an item may be used
and who may have access to it. Conditions are placed on a license
according to the particular item's intended use and final destination.
A standard condition might state that no wide-area network connectivity
is allowed without specific U.S. government authorization or that
military end users or end uses are prohibited. In addition to the 54
standard conditions, Commerce sometimes uses customized conditions to
restrict specific end uses and/or end users of an item. For example, a
license for semiconductor manufacturing equipment might contain a
condition stipulating the characteristics, such as the feature size of
the integrated circuits, that could be produced using the equipment. A
license for a chemical might have a condition specifically written for
that item stating that the item could only be used in the manufacture
of pharmaceutical products.
Few Licenses Are Subject to PSV:
Although 99 percent of licenses worldwide have conditions placed on
them, few dual-use export licenses issued to countries of concern are
subjected to PSV checks. Between fiscal years 2000 and 2002, Commerce
approved 26,340 dual-use export licenses worldwide, including 7,680
licenses to countries of concern. However, during this same time
period, Commerce conducted PSVs on approximately 6 percent (428) of
approved licenses to countries of concern (see fig. 1).
Figure 1: Department of Commerce Approved Dual-Use Export Licenses and
PSVs, Fiscal Years 2000-2002:
[See PDF for image]
[End of figure]
Commerce officials stated that it would be impossible to conduct checks
on every exported item because of the vast number of licenses. Because
of this, Commerce developed guidance for selecting the licenses on
which to conduct PSVs. These selection criteria are based on the
destination, item, end use, and parties to the transaction. Commerce
primarily targets PSVs on items it refers to as "choke-point"
technologies. These are items and technologies that would significantly
advance the development of sought-after weapons systems or are on the
"shopping lists" of terrorists or countries seeking to develop weapons
of mass destruction. Commerce also targets PSVs on items destined for
countries it has identified as having the potential to divert or misuse
dual-use items. Commerce also stated that it has revised its priorities
for future PSVs to focus on several countries including Hong Kong,
Russia, India, Israel, and the United Arab Emirates. Commerce is also
posting new export control attachés in Moscow, New Delhi, and Hong Kong
(in addition to the ones in Beijing and Dubai) to conduct end-use
verification visits and educate local industry on U.S. export controls.
We reviewed 428 Commerce reports on PSV checks for countries of concern
that were completed between fiscal years 2000 and 2002. Of these PSV
checks, 72 percent checks included items identified as choke-point
technologies. Commerce targeted the remaining 27 percent on other items
and technologies controlled for export but that are not seen to be as
critical to proliferation activities as are choke-point technologies.
Commerce conducted some of these PSV checks on items exported with no
license required or without an export control classification number.
These checks allow Commerce to determine if exporters are appropriately
classifying items on export licenses and if the items are being used
properly.
Between fiscal years 2000 and 2002, most PSV checks in countries of
concern that we reviewed were favorable. We examined trip reports and
cables of 428 PSV checks completed during this period in eight
countries of concern, including China, Egypt, India, Israel, Pakistan,
Syria, Russia, and Ukraine.[Footnote 6] Eighty-two percent of PSV
checks in countries of concern were rated favorable by the U.S.
officials conducting the PSV (see fig. 2).
Figure 2: Results of PSV Checks in Countries of Concern, Fiscal Years
2000-2002:
[See PDF for image]
[End of figure]
According to Commerce's program guidance, a favorable PSV check
indicates that U.S. officials found (1) no discrepancies between the
actual and stated end use of the item and (2) that the item was at the
location indicated on the license. An unfavorable PSV result indicates
that U.S. officials found discrepancies between the actual and stated
end use. In one case, special agents conducting a PSV found no business
location for the end user at the address on the license. According to
Commerce officials, an inconclusive check indicates that U.S. officials
were unable to complete the check. For example, the serial number
obtained from a manufacturer might not match the end-user's item, the
agents may have been denied access to a facility, or the importer might
not have responded to the agents' request to meet while they were in
the country. According to Commerce officials, a limited check indicates
that U.S. officials were unable to account for the entire shipment. In
India, for example, a computer shipped to a company in one city had
been sent to the company's office in a different city. The agents were
thus unable to inspect the entire shipment.
PSVs Provide Limited Assurance That Dual-Use Items Are Not Diverted or
Misused:
The PSV process has several weaknesses that call into question
Commerce's ability to ensure dual-use items are not diverted or
misused. First, PSVs do not confirm compliance with license conditions
because U.S. officials frequently do not check license conditions; they
often lack the technical training to assess compliance; and end users
may not be aware of the license conditions by which they are to abide.
Second, some countries of concern, most notably China, limit the U.S.
government's access to facilities where dual-use items are shipped,
making it difficult to verify whether exported items are being used as
intended. Third, PSV results have only a limited impact on future
licensing decisions. Companies receiving an unfavorable PSV will be
subject to greater scrutiny in the future but can still obtain an
export license. Additionally, according to Commerce officials, past PSV
results play only a minor role in future enforcement actions.
PSVs Do Not Always Confirm Compliance with License Conditions:
The PSV process has several weaknesses. U.S. officials frequently do
not check compliance with license conditions. In addition, officials
conducting PSV checks often lack the technical training necessary to
verify compliance with some license conditions. Furthermore, foreign
end users are often unaware of the license conditions with which they
are to comply.
U.S. Officials Frequently Do Not Check Compliance with Export License
Conditions or Inspect Dual-Use Items:
According to Commerce guidance, the objective of PSV checks is to
ensure that dual-use items reach the intended user and are being used
properly. Commerce's guidelines require officials to visit the end
user, and they strongly recommend that officials physically inspect the
exported items. These guidelines help ensure that the sensitive
technology is being used as intended under the terms of the license and
that the conditions of the license are being followed. However, U.S.
officials frequently do not check compliance with license conditions.
Based on our review of PSV trip reports and our observations and
discussions with companies where PSVs were conducted, we found that
special agents frequently only asked end users if they complied with
license conditions rather than physically verifying their compliance
with them. In some instances, officials did not attempt to ask about
license conditions. For example, 36 percent of the companies (9 of 25)
we visited or company representatives we spoke with in China, Hong
Kong, India, and Russia reported that U.S. officials did not ask them
about compliance or attempt to verify compliance with license
conditions.
U.S. officials also frequently do not physically inspect the dual-use
item subject to the PSV because they conduct the PSV at the company
that imported the item rather than the company using the item. For
example, an Indian company imported thermal cameras and sold them to
other Indian companies. Since Commerce conducted its PSV at the
importing company's headquarters, it had to rely on the statements of
the company representatives that the end users were using the cameras
in compliance with license conditions. Our review of PSV trip reports
and cables, between fiscal years 2000 and 2002, found that 104 of 428
(24 percent) PSV checks were performed at the importer's rather than
the end user's office. The agents rated 57 (55 percent) of these checks
favorable; that is, the item had arrived at its intended destination
and was being used for the purposes stated in the license, although the
agents did not visit the end user.
Also, on several occasions, officials rated PSVs as favorable without
physically inspecting the item or observing its use. Of the 428 PSV
checks we reviewed, Commerce special agents rated 62 PSV checks
favorable, although the item was not inspected or seen by an agent.
Based on PSV trip reports, agents may not have seen an item because (1)
the item was at a location other than the one stated on the license,
(2) the item had been integrated into another product or was a
consumable item, or (3) the item was portable. For example, in January
2003, special agents visited a company in Russia that imported thermal
imaging cameras.[Footnote 7] The company purchased the cameras for
sales promotion and demonstration purposes across Russia. Consequently,
during the PSV check, all but one of the cameras were in the field.
Agents were unable to physically inspect the cameras or determine if
they were being used in compliance with the license conditions. The
agents had to rely on the company's word rather than personally
verifying adherence to the condition. The agents gave the PSV a
favorable rating based on discussions with company officials.
Commerce's Special Agents Lack the Training to Help Assess Compliance
with License Conditions:
Commerce agents frequently do not have the training needed to assess an
end-user's compliance with license conditions on a wide range of
sensitive technologies. We surveyed all 35 special agents who
participated in PSV checks between fiscal years 2000 and 2002. Our
survey focused on the training and guidance that agents had received to
conduct PSVs and the ease or difficulty of assessing compliance with
license conditions on certain dual-use items. We received replies from
26 agents (74 percent).
According to the agents who conduct PSVs, the license conditions of
some items are easier to assess than others. About two-thirds of the
agents surveyed reported that it was very easy or generally easy for
them to assess compliance with license conditions in digital computers,
general-purpose electrical equipment, and machine tools. However, about
three-fourths of the agents reported that it was difficult or as easy
as difficult for them to assess compliance with conditions related to
toxic chemicals, information systems (including software), and
biological pathogens.
The agents conducting the PSVs have limited training in many
technologies that are subject to PSVs. Although most agents responding
to our survey stated that they received Commerce training in key
technologies--namely biological, chemical, and nuclear weapons--over
three-fourths reported that they had not received any training in
electronics, telecommunications systems, information security systems,
sensors and lasers, marine systems, or propulsion systems for space
vehicles. These technologies accounted for 89 percent of the PSVs
conducted in countries of concern during fiscal years 2000 through
2002. Our survey also found that training in these technologies would
be helpful. Twenty-two of the 26 agents (85 percent) reported that more
training on key technologies such as computers, telecommunications
systems, and electronics would improve their ability to conduct PSV
checks.
Commerce officials recognize that special agents do not always have the
skills and training necessary to verify compliance with some license
conditions. For example, to verify compliance with a license for
semiconductor manufacturing tools, Commerce brought together a team of
DOD and Commerce engineers for training on these tools. In February
2003, the engineers spent a day learning about the items on the license
and ways to determine if the exported equipment was being used in
compliance with the license conditions. The engineers then examined the
exported item in China and determined that the company had complied
with the license conditions.
In October 2003, Commerce released new guidelines to improve technical
training for special agents. This 1-day training is designed to provide
agents with additional technical expertise about the dual-use items
they are to check during upcoming PSVs. Commerce expects that this
training will allow agents to ensure that the items they check are the
actual items in question and that they are being used in compliance
with license conditions. Commerce officials stated that they planned to
initiate this training in November 2003.
End Users May Not Be Aware of License Conditions:
End users of dual-use technology may not be aware of the license
conditions by which they are to abide. Only 5 of the 25 companies we
visited had a copy of the license conditions. According to Commerce, it
is the U.S. exporter's responsibility to ensure that end users are
aware of the terms of the license, including the conditions that apply
to them. However, Commerce does not require exporters to provide a copy
of the export license containing the conditions either to importers
taking delivery of an item or end users that use the item. Although
Commerce requires the exporter to convey license conditions to its
"customer" or other parties to whom the license conditions apply, the
department does not specify whether the conditions should be conveyed
verbally or in writing. Unless there is a condition in the license that
requires the exporter to inform the end user of the conditions placed
on the license, there is no guarantee that the exporter will convey the
conditions to the end user. In 24 percent of the PSVs we reviewed, the
checks were conducted at the site of the importer rather than the end
user; therefore, the end user may not have been aware of the license
conditions.
During our visits to China, Hong Kong, India, and Russia, we found that
only 5 (20 percent) of the 25 companies we visited had a copy of the
license, which included the conditions. Representatives from 13 other
companies stated that they were aware of the conditions but did not
have a copy of the license or any document outlining the conditions. At
nine companies we found that the agents conducting the PSV did not
raise the topic of conditions. In at least one case in Russia, a
company had signed a document indicating that it was aware of the
conditions but did not have a copy of the license or any other
documentation describing the conditions; it was unclear how the
conditions were conveyed to the company. In India when we requested
that a company produce a copy of the license conditions that the
exporter was required to provide, the company produced a copy of the
sales contract describing the terms and financial conditions of the
sale. The company representative believed that the sales contract
listed the license conditions. Indian companies we visited were
frequently confused about the term "conditions," associating it with
the sale of the item as opposed to the conditions imposed by Commerce
on the item's use.
Some Countries of Concern Limit the U.S.'s Ability to Conduct PSV
Checks:
To successfully conduct a PSV, Commerce needs the cooperation of host
governments and the companies it must visit. In some countries,
Commerce can conduct PSVs without notifying the host government.
However, in other countries, Commerce's ability to conduct PSVs is more
limited. China, India, Russia, and Hong Kong[Footnote 8] offer the
United States varying levels of access. A discussion of the four
countries follows.
* The Chinese government requires that Commerce follow a set of
protocols for arranging and conducting PSVs. Commerce officials stated
that the Chinese government limits the number of checks each year. A
Chinese Ministry of Commerce official we met with in September 2003
stated that the scope of items that can be subject to PSVs will be
expanded under the terms of an end-use arrangement currently under
negotiation with the United States.
* India restricts Commerce from conducting PSVs to a limited extent.
According to our review of trip reports from India, India denied
Commerce access to some facilities and items for PSV checks through
2003; however, U.S. access to Indian facilities improved during 2003.
In May 2003, the Indian government allowed PSVs and gave Commerce's
special agents access to all the facilities they requested.
* The Russian government does not require the United States to notify
it of plans to conduct PSVs or limit the types of items on which the
United States may conduct checks. Based on our review of trip reports
and documentation from Russian companies, Commerce was always allowed
access to conduct PSVs, although government entities sometimes required
advanced clearance.
* Hong Kong authorities allow U.S. enforcement personnel to conduct
PSVs on whatever items are of interest to the United States. Based on a
review of safeguard trip reports and a meeting with Hong Kong officials
in September 2003, we found that Hong Kong does not require Commerce to
inform it about pending PSV checks.
Additional discussion of U.S. access to conduct PSVs in these four
countries is contained in an "Official Use Only" version of this
report.[Footnote 9]
PSVs Have Limited Role in Future Licensing Decisions and Enforcement
Actions:
Commerce places all companies that receive unfavorable PSVs on its
Watch List. Commerce placed 53 companies on its Watch List in response
to 81 unfavorable PSV checks worldwide, between fiscal years 2000 and
2002.[Footnote 10] However, the list is not public, and end users and
potential U.S. exporters would not know if a company had been placed on
the list. To help ensure that companies that get unfavorable PSVs
receive greater scrutiny in the future, Commerce screens new license
applications against the Watch List. Licensing officers at Commerce use
this information when making subsequent licensing decisions.
According to Commerce officials, however, the results of PSVs play a
less important role in approving a license than do other sources of
information. Commerce considers other information sources when making
licensing decisions, including industry leads, self-disclosure, visa
referrals, and information sharing from other agencies. PSV results
play a minor role relative to these other sources. According to a
senior Commerce official, an unfavorable PSV check is the opinion of
two individuals and does not represent a vetted and approved
interagency position, which a licensing decision does.
In addition, unfavorable PSV checks cannot be linked to enforcement
actions. Commerce views an unfavorable PSV as one of many leads in a
potential criminal case, but an unfavorable alone does not provide
sufficient evidence to take enforcement action against an end user. An
unfavorable PSV check is only an initial step in the investigation and
enforcement process. Before taking action against a criminal activity,
Commerce must review leads, open an investigation, and collect
evidence. If Commerce believes that it has enough evidence for a
criminal case, it must convince the Department of Justice to prosecute.
If the criminal court finds the defendant guilty, it can levy penalties
(see app. II for additional information on Commerce's enforcement
activities). If Commerce lacks sufficient evidence to prosecute the
case in a criminal court, it may seek administrative penalties.
Commerce cannot identify enforcement cases generated as the result of
an unfavorable PSV check because its database does not identify the
source of an investigation. Commerce officials stated that they would
have to conduct a manual search of the files to determine whether an
enforcement action started with a PSV. However, Commerce officials also
stated that no closed enforcement cases began as PSV leads. Commerce
officials recognized that their database had limitations and stated
that they have instituted the Investigative Management System, which
will track the total number of leads, their sources (such as a PSV),
and the significant actions resulting from them.
Conclusion:
Commerce currently lacks an effective way to ensure that dual-use items
are being used as required under the terms of export licenses. PSV
checks are Commerce's primary means to verify the end use of an item
after it has been exported. The fact that Commerce conducts PSVs may
have some deterrent value. However, during fiscal years 2000 to 2002,
Commerce only checked 6 percent of dual-use licenses for countries of
concern. In addition, deficiencies in Commerce's implementation of this
important process limit its overall effectiveness in ensuring that
dual-use items are not misused or diverted. Most significantly,
although 99 percent of dual-use exports to countries of concern have
license conditions, the U.S. officials who carry out PSVs do not always
verify that these conditions are met. Even if agents wanted to check
license compliance, they may lack the necessary technical expertise to
determine whether a license condition is being met. In addition, the
foreign end users of the dual-item may not be aware of the license
conditions they are to comply with. Finally, some countries limit
Commerce's access to conduct PSVs. As a result, Commerce cannot ensure
that dual-use items exported to countries of concern are not misused or
diverted.
Recommendations:
To improve the PSV process, we recommend that the Secretary of
Commerce:
* improve technical training for enforcement personnel conducting PSV
checks to ensure they are able to verify compliance with license
conditions,
* ensure that personnel conducting PSV checks assess compliance with
license conditions, and:
* require that the exporter inform the end user in writing of the
license conditions.
Agency Comments and Our Evaluation:
The Department of Commerce provided written comments on a draft of this
report, which are reproduced in appendix III. Commerce generally agreed
with our recommendations. However, Commerce disagreed with our
conclusion that PSVs provide limited assurances that dual-use items are
being used as intended. Commerce stated that we assumed PSVs play a
greater role in ensuring compliance with the terms and conditions of
export licenses than they actually play. However, Commerce's June 2000
program guidance on how to conduct PSVs states that PSVs are the first
line of defense in preventing illegal technology transfer after dual-
use items have been exported. Commerce documents show that PSVs are
Commerce's primary mechanism to verify that dual-use items are used as
intended after they have been exported. Commerce also stated that we
underestimated the value of PSVs for informing future licensing
decisions. However, during the course of our review, Commerce officials
stated that PSVs played a less important role in future licensing
decisions than other sources of information, such as industry leads and
information from other agencies, that were more highly valued.
Accordingly, we have not modified our conclusions or recommendations.
As arranged with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
after the date of this letter. At that time we will send copies of this
report to appropriate congressional committees and to the Secretary of
Commerce. Copies will be made available to others upon request. In
addition, this report will be available at no charge on the GAO Web
site at [Hyperlink, http://gao.gov].
Please contact me at (202) 512-8979 if you or your staff has any
questions concerning this report. A GAO contact and staff
acknowledgments are listed in appendix IV.
Sincerely yours,
Signed by:
Joseph A. Christoff, Director:
International Affairs and Trade:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
We were asked to (1) assess the number of dual-use export licenses
approved and subject to post-shipment verification (PSV), and (2)
evaluate how the PSV process ensures that sensitive exports are used as
intended. To address these objectives, we reviewed laws and regulations
governing export licensing, analyzed export licensing data, and
reviewed the activities and outcomes of the Department of Commerce's
(Commerce) Export Enforcement Office. We also interviewed Commerce
officials in Washington, D.C.; surveyed Commerce's special agents who
conduct PSV reviews; met with Commerce enforcement attachés in Russia
and China; and observed a Commerce-led team conducting PSV checks in
Russia. In addition, we met with officials from the Department of
State; Department of Homeland Security; Department of Defense,
including the Defense Technology Security Administration and Defense
Intelligence Agency; Department of Justice; Central Intelligence
Agency; National Ground Intelligence Center; and private firms in Hong
Kong, India, and Russia that were the subject of Commerce's PSV
reviews. Finally, we interviewed government officials from China, Hong
Kong, and India about their views on U.S. export controls.
To assess the number of dual-use export licenses approved and subject
to PSV, we reviewed Commerce documentation on how the licensing process
works and how it determines which items will be subject to PSV checks.
We interviewed knowledgeable Commerce officials about the licensing
process and the role of PSV checks in that process. Additionally, we
obtained statistical data from Commerce, including portions the Export
Control Automated Support System (ECASS), to analyze data on licenses
selected for PSVs. We assessed the reliability of the ECASS data by
performing electronic testing of required data elements and by
interviewing agency officials knowledgeable about the data. We
determined that the data were sufficiently reliable for the statistical
purposes of this report. We also obtained PSV trip reports and cables
for fiscal years 2000 through 2002 for countries of concern where PSVs
were conducted.
To evaluate how the PSV process ensures that sensitive exports are used
as intended, we reviewed Commerce's Special Agent Manual, guidance on
conducting PSV checks, trip reports, and cables for countries of
concern. We identified key countries of concern by performing a content
analysis of 12 lists used by U.S. government agencies to designate
countries they believe may support terrorism or contribute to
proliferation of weapons of mass destruction. Any country that appeared
on 5 or more of the 12 lists was selected as a country of concern for
the purposes of this report. The resulting list includes Azerbaijan,
Belarus, China, Egypt, India, Iran, Iraq, Israel, Kazakhstan, North
Korea, Pakistan, Russia, Syria, and Ukraine.
As part of our audit work, we traveled to Russia and observed a team
conduct a PSV check. We also traveled to China, Hong Kong, and India to
determine the host governments' requirements for conducting PSV checks
and to conduct follow-up meetings with companies and persons subject to
previous PSV checks. We surveyed special agents at Commerce field
offices who had participated in PSV trips during 2000, 2001, and 2002,
and from January to April in 2003. We identified 35 active agents who
conducted PSV trips during this time frame, based on reports Commerce
provided to us. We did not survey six agents who had conducted PSVs and
had left the department or had been temporarily reassigned. We
developed and pretested a questionnaire that we administered by e-mail
and fax. We received responses from 26 officers, or 74 percent of the
active agents. Finally, we interviewed Commerce officials and asked
Commerce to provide us with data to determine how the results of PSVs
are used in future licensing and enforcement actions. We initially
planned to use the ECASS data to determine if companies that had
received an unfavorable PSV obtained a subsequent license. Due to
limitations in Commerce's database, however, this could not be done. We
therefore relied on Commerce officials' testimony about how unfavorable
PSVs are used in the licensing process.
We conducted our review from October 2002 through October 2003 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Department of Commerce's Statutory Framework and
Enforcement Activities:
Commerce undertakes a number of enforcement activities to deter
violations of export control laws and regulations, including
prosecuting both civil-administrative and criminal cases. If U.S.
exporters or foreign importers are not following U.S. export law and
regulations, they may face penalties including fines, denial of export
privileges, or imprisonment. In accordance with the governing
authority, when Commerce identifies a potential dual-use violation, it
may seek criminal or civil administrative action, or both, against the
U.S. company that exported the product, employees at the U.S. exporting
company, or foreign companies and persons involved in importing the
product.
When Commerce obtains an unfavorable PSV or other indication that a
dual-use export control violation may have occurred, Commerce may
engage in an investigation.[Footnote 11] After an investigation, if
Commerce determines the violator acted with full knowledge and willful
intent of breaking the law, Commerce develops a criminal case and seeks
an attorney in the Department of Justice (Justice) to prosecute the
violation. If Justice accepts the case, they assign an assistant U.S.
attorney for criminal prosecution. If the criminal court finds a
defendant guilty of dual-use violations, then sanctions for criminal
conduct are imposed; companies may be fined while individuals may be
fined and or imprisoned. In addition to or in lieu of criminal
penalties, Commerce may pursue civil administrative action. Civil-
administrative penalties are issued directly by Commerce. Attorneys
working at Commerce handle these cases, which are heard by an
administrative law judge. Civil-administrative penalties may be issued
to either an individual or to companies and may include:
* Denial of export privileges - This denies the violator the right to
export or to participate in the export of goods from the United States.
* Civil-administrative fines - Commerce charges the violator(s)
monetary penalties.
In addition to civil-administrative penalties, Commerce may use the
following as preventative measures in response to export control law
violations:
* Warning letter - A warning letter is an informal notification
Commerce issues to a company or person who may have violated the law.
It describes the alleged violations and possible sanctions, but does
not impose fines or restrictions on export privileges due to a lack of
evidence. Commerce considers any future violations in light of the
warning.
* Placement of an entity or individual on the Watch List - The Watch
List lists individuals and companies that Commerce has determined
warrant increased scrutiny for export licensing purposes.
In fiscal year 2001 and 2002, Commerce closed 9 cases yielding criminal
convictions and issued 340 warning letters. During that same time
period, Commerce approved 17,500 licenses for dual-use exports.
Commerce's authority to enforce dual-use export controls was originally
authorized by the Export Administration Act (EAA) of 1979. Since August
20, 1994, when the EAA first expired, temporary statutory extensions
and executive orders continued the application of this act. Most
recently, the application of the act has been extended under an
executive order issued pursuant to the International Emergency Economic
Powers Act (IEEPA).[Footnote 12]
While the executive order gives Commerce authority to enforce dual-use
export controls, IEEPA provides for maximum penalties that are
significantly lower than those permitted under the EAA, both for
criminal and civil administrative fines. For example, criminal
penalties for companies that willfully violate dual-use export control
laws under IEEPA are limited to a $50,000-per-violation fine. Under the
EAA, offenders were subject to a fine of either $1 million per
violation or five times the value of the exports, whichever was
greater. A violation is constituted as the intentional export of a good
in violation of export control law. For a comparison of fines under the
EAA and IEEPA, see table 3.[Footnote 13]:
Table 2: Maximum Penalties under EAA and IEEPA:
Criminal Penalties[A]: Individual fine;
EAA[B]: Not to exceed $250,000 per violation;
IEEPA[B]: Not to exceed $50,000 per violation.
Criminal Penalties[A]: Corporate fine;
EAA[B]: Not to exceed $1,000,000 per violation, or five times the
value of the exports, whichever is greater;
IEEPA[B]: Not to exceed $50,000 per violation.
Criminal Penalties[A]: Individual imprisonment;
EAA[B]: Not to exceed 10 years per violation;
IEEPA[B]: Not to exceed 10 years per violation.
Criminal Penalties[A]: Individual and corporate;
EAA[B]: Not to exceed $11,000 per violation, ($120,000 per violation
may be imposed for each violation involving national security
controls);
IEEPA[B]: Not to exceed $11,000 per violation.
Sources: Export Administration Act: 50 U.S.C. app. 2410; International
Emergency Economic Powers Act, 50 U.S.C. 1705.
Note: The goods involved in any violation may be subject to seizure.
[A] The penalties listed for violations of the EAA are for willful
violations of the act with knowledge that the exports involved will be
used for the benefit of, or that the destination of the goods or
technology involved is, any country to which exports are controlled for
national security or foreign policy purposes. Other violations of the
act are subject to lesser penalties.
[B] The EAA has lapsed several times since it was originally enacted,
with the first lapse occurring before 1990. Between August 1993 and
November 2000, the President continued the regulations in effect under
the authority of IEEPA. In November 2000, Congress reauthorized the
IEEPA, and it remained in effect through August 2001. Executive Order
13222, which has been extended by several Presidential Notices,
continues the regulations in effect.
[End of table]
[End of section]
Appendix III: Comments from the Department of Commerce:
December 3, 2003:
UNITED STATES DEPARTMENT OF COMMERCE
The Assistant Secretary for Export Enforcement
Washington, D.C. 20230:
Mr. Joseph A. Christoff:
Director, International Affairs and Trade
General Accounting Office
Washington, D.C. 20548:
Dear Mr. Christoff:
I am writing in response to your November 17, 2003 letter to Secretary
Evans forwarding the GAO's proposed report entitled Export Controls:
Post-Shipment Verification Provides Little Assurance That Dual-Use
Items Are Being Properly Used (GAO-04-199).
This letter sets out our comments on the report's assumptions and
discusses actions that BIS has taken with regard to its Safeguards
program, which consists of both post-shipment verifications (PSVs) and
pre-license checks (PLCs).
I. The Report's Conclusions Regarding PSVs Are Based on Incorrect
Assumptions:
We share the GAO's views on the importance of the end-use verification
process. However, we disagree with the draft conclusion that PSVs
provide little assurance that exported dual-use items are being
properly used. We believe that the preliminary conclusion is based on
certain incorrect assumptions regarding the purposes of PSVs.
For example, the draft states that the report's purpose is to "evaluate
how the PSV process ensures that sensitive exports are used as
intended." (page 23) The subsequent analysis overemphasizes the use of
PSVs as a method for ensuring license compliance and underestimates
their value for informing future licensing decisions. In fact, PSVs, by
their very nature, have a narrow focus. They provide an effective way
to verify delivery of a U.S.-origin item to a stated end-user for a
stated end-use, but should not be expected to present a comprehensive
solution to policing licensed transactions or license conditions. Nor
can a PSV ensure that an item is not used improperly after the check is
completed. A PSV is valid for the location and use of an item at one
point in time, and will not provide a lifetime guarantee of compliance
over the course of the license.
It appears that the analysis in the draft is based on the assumption
that the only goal of PSVs is to provide such comprehensive assurance,
and that, to the extent that PSVs may fall short of this goal, they are
ineffective. This is incorrect. There are other significant
contributions of the PSV program, such as the proper evaluation of
future transactions. For example, PSVs can uncover serious concerns
about an end-user's interest in complying with U.S. export controls
that go beyond the particular transaction giving rise to the PSV.
Information from such PSVs then
informs the review of license applications involving such end-users.
[NOTE 1] In other circumstances, PSVs may uncover that a particular
end-user is devoted solely to military projects, so that licensing
officials who review commodities restricted for military end-use will
not approve licenses to that end-user.
Moreover, failure to allow a PSV may result in the end-user being
published on the Unverified List that is maintained by the Bureau of
Industry and Security (BIS). The inclusion of a party on this list
informs exporters that a transaction involving the entity raises a red
flag and requires the exporter to exercise heightened vigilance before
going forward with the transaction.
In addition, we believe that the effectiveness of PSVs cannot be
assessed in isolation from other enforcement and compliance efforts of
BIS. No single enforcement tool can provide a comprehensive means of
ensuring compliance with license conditions or preventing diversion to
unauthorized end-uses. Accordingly, BIS uses a number of tools to
ensure compliance with license conditions and guard against diversion,
of which PSVs are only one. Other parts of the larger compliance and
enforcement effort include dialogue with industry during the licensing
process, vetting of transactions through law enforcement networks,
examination of the prior licensing history of the exporter and end-
user, the deterrent effect of prosecuting criminal and administrative
enforcement cases, and the contributions of our export control attaches
placed in certain countries. Thus, while resource constraints permit
BIS to conduct PSVs only for a selected number of transactions, PSVs
are not the only means by which BIS responds to the risks of diversion
and non-compliance with license conditions.
II. BIS Has Already Implemented Significant Changes to the PSV Program:
In the draft report, the GAO made three general recommendations: (1)
improve technical training for the Safeguards agents; (2) ensure that
end-use verifications include checking whether license conditions are
being followed; and (3) require exporters to inform the end-user in
writing regarding the conditions. [NOTE 2]BIS generally agrees with
these recommendations and has already taken significant steps to
strengthen the PSV process along these lines.
Significantly, during the Office of Export Enforcement management
conference in 2002, BIS discussed the need to improve the process for
PSVs. As a result, BIS has implemented a new protocol for all
Safeguards trips that will assist us in conducting effective end-use
checks. This protocol has been in place since June 2003.
The new Safeguards protocol requires training for all Safeguards team
members, prior to their departure, on commodity recognition/
identification and end-use check procedures. This training is
specifically designed to ensure that (1) the team is sufficiently
familiar with the relevant commodities to confirm that the items
observed are the items that were actually exported, and (2) the
commodities are being used in compliance with applicable export license
conditions. BIS has also developed a specific checklist of items that
must be brought with the team for both PLCs and PSVs.
After a trip, the Safeguards team is required to report any unfavorable
checks that warrant investigative action to the Office of Export
Enforcement's Safeguards coordinator.[NOTE 3] The coordinator is
responsible not only for entering these leads in our Investigative
Management System (IMS) and getting them to the proper field office
for action, but also for monitoring the status of all such Safeguards
leads. BIS believes that this new protocol will assist us in
conducting more effective end-use checks.
With respect to the draft report's second suggestion regarding license
conditions, the Safeguards team, as part of the new protocol, is
required to bring with it a copy of the license conditions for each
PSV. In addition, BIS is undertaking an effort to standardize
conditions placed on export licenses and to review the enforceability
of these conditions.
As to GAO's third recommendation, that exporters should be required to
inform end-users of applicable license conditions in writing, BIS
agrees that an "in writing" requirement could add value to many license
conditions and improve end-use checks. Currently, the majority of
licenses that BIS approves are issued with the condition that the
"applicant must inform the consignee of all license conditions," and
BIS has permitted the applicant to choose the most effective means of
communicating the license conditions depending on all of the
circumstances of the transaction. However, BIS is planning to
strengthen this condition by adding an "in writing" requirement to the
conditions language on licenses. In addition to this new requirement,
BIS's licensing and enforcement officials are working together to
conduct a series of outreach seminars to educate exporters on the
importance of communicating license conditions.
III. BIS is Committed to Increasing the Number of Checks on Licenses in
Certain Countries:
The draft report notes the limited percentage of checks in what the GAO
has labeled as "countries of concern." In light of the need to target
our scarce resources, BIS has revised the priorities of the
destinations targeted for Safeguards visits to focus on several
countries, including Hong Kong, Russia, India, Israel, and the United
Arab Emirates. For example, in the last six months, BIS has launched
two Safeguards visits to India and one to Hong Kong. On each trip,
approximately 40 end-use verifications were conducted. Pursuant to our
analysis of unfavorable checks, several leads have been referred for
investigations, several new companies have been recommended for
inclusion on the Unverified List, and several checks have identified
broader regulatory issues.
With respect to China, BIS has ongoing bilateral discussions aimed at
increasing the number of checks the U.S. government is able to conduct.
BIS is also posting new export control attaches in Moscow, New Delhi,
and Hong Kong this year (in addition to the ones in Beijing and Dubai)
to conduct end-use verification visits and educate local industry on
U.S. export controls. The expertise of these attaches in local
companies and methods of doing business will provide valuable insight
into licensable export transactions.
We appreciate the opportunity to provide our views on the report.
Sincerely,
Signed by:
Julie L. Myers:
NOTES:
[1] For example, BIS recently denied a license application based on an
unfavorable PSV regarding the end-user. The PSV was classified as
unfavorable because the end-user was illegally diverting crime control
items to China.
[2] With regard to the second recommendation and the examples included
on pages 12-13 of the draft report, we agree that the results of these
specific PSV checks should not have been characterized as favorable.
However, it is important to note that, under our recently implemented
protocol, such checks would not be deemed favorable because the new
guidance would place these PSVs in the "limited," "unfavorable," or
"not conclusive" category, depending upon the details of the check.
[3] Although the vast majority of unfavorable checks are referred for
investigative action, in certain instances, there may be extenuating
circumstances that would not warrant such action.
GAO Comments:
The following are GAO's comments on the Department of Commerce letter,
dated December 3, 2003.
1. Commerce states that we overemphasized the use of PSVs as a method
for ensuring license compliance and underestimated their value for
informing future licensing decisions. We disagree. Commerce's June 2000
guidance on how to conduct PSVs states that PSVs are the first line of
defense in preventing illegal technology transfer after dual-use items
have been exported. We also found that PSVs play a less important role
in future licensing decisions than other sources of information. As
noted in the report, Commerce officials stated that industry leads,
information from other agencies, self-disclosures, and visa referrals
are more highly valued in licensing decisions than information gathered
during a PSV.
2. Commerce stated that the effectiveness of PSVs cannot be assessed in
isolation from other enforcement and compliance efforts of Commerce. We
agree. Our report includes discussions of several of these mechanisms,
including prelicense checks (p. 4), screening against its Watch List
(p. 15), and using information on export transactions from industry and
other agencies (p. 16). We also discuss the deterrent effect of
prosecuting criminal and administrative enforcement cases (pp. 21-23,
app. II).
3. Commerce notes that its new safeguards protocol requires training
for all safeguards trip team members prior to their departure. However,
as of December 2003, two agents had received this training.
4. Commerce noted that it had undertaken to revise the priority of
license checks in countries of concern, by focusing on Hong Kong,
Russia, India, Israel, and the United Arab Emirates. We have added
information in the report to reflect the new efforts.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
David Maurer (202) 512-9627:
Staff Acknowledgments:
In addition, Julie Hirshen, Eugene Beye, Joseph Brown, Lynn Cothern,
Jeanine Lavender, Steve Lord, and Minette Richardson made significant
contributions to this report.
(320242):
FOOTNOTES
[1] "Dual-use" items are those that have both commercial and military
uses and can be used in the development or production of advanced
conventional weapons or weapons of mass destruction.
[2] For the purposes of this report, we use "countries of concern" to
describe those countries the United States believes may support
terrorism or contribute to the proliferation of weapons of mass
destruction. Our list includes Azerbaijan, Belarus, China, Egypt,
India, Iran, Iraq, Israel, Kazakhstan, North Korea, Pakistan, Russia,
Syria, and Ukraine. We developed this list by selecting those countries
that appeared on at least 5 of 12 different U.S. government lists of
countries of concern.
[3] The Commerce Control List includes certain nuclear materials,
facilities, and equipment; chemicals, microorganisms, and toxins;
materials processing; electronics; computers; telecommunications and
information security; lasers and sensors; navigation and avionics;
marine systems; and propulsion systems and space vehicles.
[4] An application is generally returned without action when there is
insufficient information to make a licensing decision.
[5] Commerce's Office of Export Enforcement assigns special agents to
selected U.S. embassies overseas as export enforcement attachés.
Currently, attachés are posted in China and the United Arab Emirates.
Commerce plans to place attaches in Hong Kong, India, and Russia in
fiscal year 2004.
[6] This figure represents both PSVs conducted by Commerce enforcement
personnel and PSVs conducted in country by State Department staff or an
export enforcement attaché.
[7] A thermal imaging camera can be used to check transmission lines at
civilian power plants or it may be used for surveillance or
reconnaissance of enemy troop movements.
[8] Hong Kong is not a country of concern; however, it is a
transshipment point and has been a conduit for illegal reexports of
U.S. controlled technology.
[9] See Export Controls: Post-Shipment Verification Provides Limited
Assurance That Dual-Use Items Are Being Properly Used, GAO-04-199
(Washington D.C.: December 22, 2003).
[10] We asked Commerce to determine if any of the companies that had
received unfavorable PSV checks had received licenses in the past or
been granted licenses after the check. Commerce was unable to provide
us this information.
[11] Commerce lacks authority to lead overseas investigations but may
request Customs' assistance to conduct investigatory activity for
Commerce leads.
[12] Executive Order 13222, August 7, 2003 (66 Reg. 47833).
[13] IEEPA violations constitute a felony. Higher fines may therefore
be imposed under the authority of 18 U.S.C. 3571, a criminal code
provision that establishes a maximum criminal fine for a felony that is
the greatest of (1) the amount provided by the statute that was
violated; (2) an amount not more than $250,000 for an individual or not
more than $500,000 for an organization; or (3) an amount based on a
dollar value of the offense. The maximum fine amounts are subject to
inflation adjustments made pursuant to the Federal Civil Penalties
Inflation Adjustment Act of 1990 (Pub. L 101-410 as amended, codified
as a note to 28 U.S.C. 2461).
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