Defense Exports
Foreign Military Sales Program Needs Better Controls for Exported Items and Information for Oversight Gao ID: GAO-09-454 May 20, 2009In fiscal year 2008, the Foreign Military Sales (FMS) program sold over $36 billion dollars in defense articles and services to foreign governments. The Departments of State, Defense (DOD), and Homeland Security (DHS) all have a role in the FMS program. In 2003, GAO identified significant weaknesses in FMS control mechanisms for safeguarding defense articles transferred to foreign governments. In 2007, GAO designated the protection of technologies critical to U.S. national security a high-risk area. GAO was asked to (1) evaluate program changes State, DOD, and DHS have made since 2003 to ensure that unclassified defense articles transferred to foreign governments are authorized for shipment and monitored as required, and (2) determine what information DOD has to administer and oversee the FMS program. GAO conducted 16 case studies; analyzed U.S. port data and FMS agreements; reviewed program performance metrics; and interviewed cognizant officials.
Agencies involved in the FMS program have made some changes in the program but have not corrected the weaknesses GAO previously identified in the FMS program's shipment verification process, and the expanded monitoring program lacks written guidance to select countries to visit to ensure compliance with requirements. State--which is responsible for the program and approving FMS sales--has not finalized proposed regulatory revisions to establish DOD's role in the FMS shipment verification process, although the FMS agencies reached agreement on the proposed revisions about a year ago. DHS port officials, responsible for export enforcement, also continue to lack information needed to verify that FMS shipments are properly authorized. GAO found six FMS agreements that had unauthorized shipments, including missile components. In one case, 21 shipments were made after the agreement was closed. At the same time, DOD, which administers the FMS program and FMS agreements, lacks mechanisms to fully ensure that foreign governments receive their correct FMS shipments--in part because DOD does not track most FMS shipments once they leave its supply centers and continues to rely on FMS customers to notify the department when a shipment has not been received. With regard to monitoring defense articles once in country, DOD does not have written guidance to prioritize selecting countries for compliance visits using a risk management approach and has not yet visited several countries with a high number of uninventoried defense articles. DOD lacks information needed to effectively administer and oversee the FMS program. For example, within the last 10 years DOD has twice adjusted the surcharge rate--the rate charged to FMS customers to cover program administration costs--but it does not have information on program costs to determine the balance necessary to support the program in the future. Also, while DOD has a goal to release 80 percent of FMS agreements to a foreign government within 120 days of receiving its request to purchase defense articles, DOD officials stated they do not have the information needed to determine if the goal is reasonable. In addition, DOD lacks information to oversee the program, in large part due to the fact that FMS data reside in 13 different accounting, financial, and case implementation systems. DOD is in the process of defining its requirements for FMS program information before it moves forward with improving its data systems. In the meantime, DOD is relying on systems that do not provide it with sufficient, comparable data to oversee the program's performance.
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-09-454, Defense Exports: Foreign Military Sales Program Needs Better Controls for Exported Items and Information for Oversight
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Report to the Committee on Foreign Affairs, House of Representatives:
United States Government Accountability Office:
GAO:
Defense Exports:
Foreign Military Sales Program Needs Better Controls for Exported Items
and Information for Oversight:
GAO-09-454:
GAO Highlights:
Highlights of GAO-09-454, a report to the Committee on Foreign Affairs,
House of Representatives.
Why GAO Did This Study:
In fiscal year 2008, the Foreign Military Sales (FMS) program sold over
$36 billion dollars in defense articles and services to foreign
governments. The Departments of State, Defense (DOD), and Homeland
Security (DHS) all have a role in the FMS program. In 2003, GAO
identified significant weaknesses in FMS control mechanisms for
safeguarding defense articles transferred to foreign governments. In
2007, GAO designated the protection of technologies critical to U.S.
national security a high-risk area.
GAO was asked to (1) evaluate program changes State, DOD, and DHS have
made since 2003 to ensure that unclassified defense articles
transferred to foreign governments are authorized for shipment and
monitored as required, and (2) determine what information DOD has to
administer and oversee the FMS program. GAO conducted 16 case studies;
analyzed U.S. port data and FMS agreements; reviewed program
performance metrics; and interviewed cognizant officials.
What GAO Found:
Agencies involved in the FMS program have made some changes in the
program but have not corrected the weaknesses GAO previously identified
in the FMS program‘s shipment verification process, and the expanded
monitoring program lacks written guidance to select countries to visit
to ensure compliance with requirements. State”which is responsible for
the program and approving FMS sales”has not finalized proposed
regulatory revisions to establish DOD‘s role in the FMS shipment
verification process, although the FMS agencies reached agreement on
the proposed revisions about a year ago. DHS port officials,
responsible for export enforcement, also continue to lack information
needed to verify that FMS shipments are properly authorized. GAO found
six FMS agreements that had unauthorized shipments, including missile
components. In one case, 21 shipments were made after the agreement was
closed. At the same time, DOD, which administers the FMS program and
FMS agreements, lacks mechanisms to fully ensure that foreign
governments receive their correct FMS shipments”in part because DOD
does not track most FMS shipments once they leave its supply centers
and continues to rely on FMS customers to notify the department when a
shipment has not been received. With regard to monitoring defense
articles once in country, DOD does not have written guidance to
prioritize selecting countries for compliance visits using a risk
management approach and has not yet visited several countries with a
high number of uninventoried defense articles.
DOD lacks information needed to effectively administer and oversee the
FMS program. For example, within the last 10 years DOD has twice
adjusted the surcharge rate”the rate charged to FMS customers to cover
program administration costs”but it does not have information on
program costs to determine the balance necessary to support the program
in the future. Also, while DOD has a goal to release 80 percent of FMS
agreements to a foreign government within 120 days of receiving its
request to purchase defense articles, DOD officials stated they do not
have the information needed to determine if the goal is reasonable. In
addition, DOD lacks information to oversee the program, in large part
due to the fact that FMS data reside in 13 different accounting,
financial, and case implementation systems. DOD is in the process of
defining its requirements for FMS program information before it moves
forward with improving its data systems. In the meantime, DOD is
relying on systems that do not provide it with sufficient, comparable
data to oversee the program‘s performance.
What GAO Recommends:
GAO is making recommendations to State, DOD, and DHS to improve the
procedures, processes and information critical for shipment
verification, monitoring, and administering the FMS program. State and
DHS concurred; DOD concurred with two recommendations and partially
concurred with three. GAO believes all recommendations remain valid.
View [hyperlink, http://www.gao.gov/products/GAO-09-454] or key
components. For more information, contact Anne-Marie Lasowski at (202)
512-4841 or lasowskia@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Weaknesses in Shipment Verification Process Continue, and Expanded
Monitoring Program Lacks Guidance for Country Visits:
DOD Lacks Information Needed to Effectively Administer and Oversee the
FMS Program:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of State:
Appendix III: Comments from the Department of Homeland Security:
Appendix IV: Comments from the Department of Defense:
Tables:
Table 1: Prior GAO Findings on FMS Program Weaknesses:
Table 2: FMS Export Documentation:
Abbreviations:
CBP: Customs and Border Protection:
DHS: Department of Homeland Security:
DLA: Defense Logistics Agency:
DOD: Department of Defense:
DSCA: Defense Security Cooperation Agency:
DSP-94: State Department form authorizing export of defense
articles and services under the FMS program:
FMS: Foreign Military Sales:
ITAR: International Traffic in Arms Regulations:
NATO: North Atlantic Treaty Organization:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 20, 2009:
The Honorable Howard Berman:
Chairman:
The Honorable Ileana Ros-Lehtinen:
Ranking Republican Member:
Committee on Foreign Affairs:
House of Representatives:
Each year, the U.S. government sells billions of dollars of defense
articles and services to foreign governments through the Foreign
Military Sales (FMS) program. The FMS program is an integral and
growing component of U.S. national security and foreign policy; in
fiscal year 2008, the program sold over $36 billion dollars in defense
articles and services to foreign governments,[Footnote 1] which
represented a 56 percent increase over fiscal year 2007 sales. The
Departments of State (State), Defense (DOD), and Homeland Security
(DHS) all have a role in the FMS program. State has overall
responsibility for the program and approving FMS sales. DOD administers
the program, and DHS ensures that FMS shipments are transferred in
accordance with export control laws and regulations.
In 2003, we identified significant weaknesses in the control mechanisms
the FMS program uses to safeguard defense articles transferred to
foreign governments.[Footnote 2] Specifically, we found that in some
cases FMS shipments were not properly authorized and that actions were
still needed to implement statutory end-use monitoring requirements to
ensure that foreign governments adequately protect U.S.-provided
defense articles. These findings along with others prompted us to
designate a new high-risk area in 2007: ensuring the effective
protection of technologies critical to U.S. national security
interests.[Footnote 3] Subsequently, in March 2008, DOD disclosed that
it had mistakenly transferred intercontinental ballistic missile parts
to Taiwan through the FMS program, raising questions about whether
previously identified weaknesses have been resolved.
Based on your interest in how agencies have addressed weaknesses in the
FMS program and how well the program is being managed, you asked us to
provide an update on the FMS program. Specifically, we (1) evaluated
the FMS program changes State, DOD, and DHS have made since 2003 to
ensure that unclassified defense articles transferred to foreign
governments are authorized for shipment and monitored as required, and
(2) determined what information DOD has to administer and oversee the
FMS program.
To conduct our work, we reviewed laws, regulations, and guidelines
related to the FMS process. We obtained data from two of the top ten
U.S. ports in terms of the dollar value of FMS shipments they process
to determine if previously identified gaps in shipment process controls
still exist[Footnote 4] and conducted 16 case studies to assess steps
in the FMS process. The cases were selected to provide variation in
military service, foreign customer, type of defense article sold, and
transportation method to the end destination. We also analyzed FMS
sales agreement data from fiscal years 2003 to 2008. In addition, we
interviewed representatives from State; the Defense Security
Cooperation Agency (DSCA), the Army, Navy, Air Force, and other DOD
components; and DHS‘s Customs and Border Protection (CBP). Appendix I
includes additional details about our scope and methodology. We
conducted this performance audit from May 2008 through April 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Results in Brief:
State, DOD, and DHS have made some changes in the program but have not
corrected weaknesses we previously identified in the FMS program‘s
shipment verification process, and DOD‘s expanded monitoring lacks
written guidance for selecting countries for compliance visits. First,
State has not finalized its regulations to establish DOD‘s role in the
FMS shipment verification process, and CBP port officials lack
information needed to verify that FMS shipments are properly
authorized. As a result, of the port data we reviewed, we found six FMS
sales agreements where CBP permitted shipments of defense articles to
the foreign country even though DOD records showed that shipments were
no longer authorized under the agreements. CBP officials stated that a
planned centralized data system could provide the needed information to
port officials so they can verify FMS shipments, but the planned system
does not currently have funding to include such export information.
Second, DOD lacks mechanisms to fully ensure the correct FMS shipments
reach the right foreign customers”in part because DOD does not track
most FMS shipments once they leave DOD supply centers and continues to
rely on the foreign governments to notify the department when a
shipment has not been received. Finally, since 2003, DSCA personnel
have led teams to visit 19 out of 76 countries that have purchased
sensitive defense articles, such as Stinger missiles, under the FMS
program. However, DOD does not have written guidance to prioritize
compliance monitoring visits using a risk management approach, and DSCA
has not yet conducted such visits in countries with a high number of
uninventoried defense articles.
DOD also lacks the information needed to effectively administer and
oversee the FMS program. For example, within the last 10 years DOD has
twice adjusted the administrative surcharge rate to cover FMS program
administration costs without knowing if the rates reflect the true cost
to administer the program. Without this information, DOD may not have
sufficient resources to pay for needed current and future
administrative activities. While DOD modified its guidance to clarify
when DOD can be reimbursed for additional costs associated with an
individual sales agreement, it may be difficult to apply this general
guidance to specific FMS agreements, potentially resulting in customers
being charged for activities that should be covered by the standard
administrative surcharges. DOD also lacks the information needed to
develop improved metrics to assess the performance of a key part of the
program. While DOD has a goal to release 80 percent of FMS agreements
to a foreign government within 120 days of receiving its request to
purchase defense articles, DOD officials determined they do not have
the information needed to adjust this goal and are reviewing it to
determine if it is reasonable. Finally, DOD‘s ability to obtain
comparable information to oversee the program is limited due in large
part to its reliance on 13 different accounting, financial, and case
implementation systems. DOD is in the process of identifying solutions
to improve the data it collects, but is currently relying on systems
that do not provide it with sufficient, comparable data to oversee the
program‘s performance.
In addition to reiterating a recommendation to State from our 2003
report, we are making recommendations to State, DOD, and DHS aimed at
improving the procedures, processes, and information critical to verify
FMS shipments, monitor FMS defense articles, and administer and oversee
the FMS program. State and DHS concurred with our recommendations and
outlined actions they will take to implement them. DOD concurred with
our recommendations to improve procedures for verifying and tracking
FMS shipments. DOD partially concurred with our recommendations on
providing information to port officials, monitoring FMS defense
articles, and improving the information it has to administer and
oversee the FMS program. In its response, DOD agreed to provide
information to port officials for new FMS agreements but wanted to
assess the resources needed to do so for existing agreements before
fully implementing the recommendation. DOD also stated that while it
was possible to have written guidance for country monitoring visits,
any such guidance must be flexible. DOD has reported that it uses a
risk-based approach for its monitoring program and as such should
establish written guidance for country compliance visits that is
consistent with this approach. In addition, DOD said it has sufficient
information for program administration. However, DOD‘s current
information is limited for assessing the cost to administer the program
and to develop improved metrics. We therefore believe our
recommendations remain valid. DHS and DOD also provided technical
comments, which we incorporated into the draft report as appropriate.
Background:
The Arms Export Control Act authorizes the sale of defense articles and
services to eligible foreign customers under the FMS program. Under the
program, the purchased items must be used and secured properly by the
customer and cannot be sold to third parties. Also, the FMS program
must be administered at no cost to the U.S. government. To recover
administration costs, DOD applies a surcharge to each FMS agreement
that is a percentage of the value of each sale. Multiple organizations
have a role in the FMS program, including DSCA and the military
services,[Footnote 5] State, and CBP. DOD‘s responsibilities, which are
described in the Security Assistance Management Manual, largely focus
on the overall administration of the program and FMS agreements.
[Footnote 6] DSCA carries out key functions, such as managing the FMS
administrative surcharge account and supervising end use monitoring of
FMS items, and the military services carry out the day-to-day
implementation of FMS agreements. State regulates the export of defense
articles, including the implementation of the FMS program, through its
International Traffic in Arms Regulations (ITAR),[Footnote 7] and CBP
enforces export control laws and regulations at U.S. ports and monitors
the dollar value and quantity of defense articles exported under each
FMS agreement.
Typically, the FMS process begins when a foreign government submits a
letter of request to State or DOD to purchase defense articles under
the FMS program. The request is then forwarded to the military service
responsible for the particular defense article, which then develops a
letter of offer and acceptance, or a sales agreement between the United
States and the foreign government. State and DOD officials approve the
sale, and Congress is notified if the proposed sale meets certain
dollar thresholds and other requirements.[Footnote 8] The military
service sends the agreement to the foreign government for its
acceptance. After the foreign government accepts the agreement, case
managers within the military services can begin carrying out agreement
actions such as contracting to procure defense articles, issuing
requisition orders, providing program management, transporting defense
articles if required, and administering financial transactions.
A single FMS sales agreement may result in hundreds or thousands of
individual shipments to a foreign government. In most cases, the
military service provides the defense article to the foreign country‘s
freight forwarder, the authorized agent for the foreign customer.
However, some countries use DOD‘s defense transportation system to ship
defense articles.[Footnote 9] The ITAR requires that freight forwarders
register with State, which must receive a letter from the foreign
government designating the registered freight forwarder as its
authorized agent. CBP port officials rely on a list provided by State
to confirm that the freight forwarder for a shipment is the registered
freight forwarder for the foreign government. CBP port officials also
verify export documentation and subtract the value of each shipment
from the total value of exportable goods for each FMS agreement. If the
items shipped are incorrect or damaged upon receipt, the foreign
government submits a supply discrepancy report to the military service.
Every FMS sales agreement has certain security requirements, including
end-use monitoring requirements.[Footnote 10] To provide reasonable
assurance that the foreign customer complies with these requirements,
DSCA established the Golden Sentry end-use monitoring program in 2001.
As part of this program, security assistance officers stationed in a
foreign country monitor the use and security of defense articles
purchased through the FMS program, and the officers conduct additional
checks on certain sensitive defense articles such as Stinger missiles.
DSCA officials conduct regional forums and familiarization visits where
the foreign country and DOD representatives work together to mutually
develop effective end-use monitoring compliance plans. In addition,
DSCA officials conduct country visits to review and assess compliance
with the requirements of the FMS agreement and perform investigative
visits when possible end-use violations occur.[Footnote 11]
We have previously reported on weaknesses in the FMS program, including
lack of accountability for shipments to some foreign countries, lack of
information on end use monitoring, and insufficient information on the
costs to administer the program.[Footnote 12] Table 1 outlines our
previous findings.
Table 1: Prior GAO Findings on FMS Program Weaknesses:
Program area: FMS shipments;
Finding:
* Weaknesses in shipment control mechanisms identified; the U.S.
government agencies could not ensure that FMS shipments were properly
authorized or received by the appropriate foreign government.
* DOD did not track FMS shipments to verify receipt.
Program area: End use monitoring;
Finding:
* DOD lacked sufficient information to determine the resources required
to implement end-use monitoring requirements and comply with reporting
requirements.
Program area: FMS administration;
Finding:
* DOD lacked sufficient information to determine the administrative
costs of the program.
* Changes to the administrative surcharge were made without sufficient
analysis to determine the need for or impact of a change.
Source: Previous GAO reports.
[End of table]
Weaknesses in Shipment Verification Process Continue, and Expanded
Monitoring Program Lacks Guidance for Country Visits:
Agencies responsible for the FMS program have not taken the actions
needed to correct previously identified weaknesses in the FMS shipment
verification process, and DOD‘s expanded end-use monitoring program
lacks written guidance for selecting countries for compliance visits
using a risk-based approach. First, agencies are not properly verifying
FMS shipment documentation, in part because State has not finalized
revisions to the ITAR to establish DOD‘s role in the verification
process. Second, DOD lacks mechanisms to fully ensure foreign
governments receive their FMS shipments”in part because DOD does not
track most FMS shipments and continues to rely on FMS customers to
notify the department when a shipment has not been received. Finally,
while DOD has visited an average of four countries each year since 2003
to assess compliance with FMS agreement requirements, it does not have
written guidance using a risk-based approach to prioritize the
countries it visits to monitor compliance and has not yet visited
several countries with a high number of uninventoried defense articles.
Agencies Lack Adequate Export Information to Verify FMS Shipments:
To control the export of FMS defense articles, freight forwarders are
required to provide the following information before CBP allows an FMS
shipment to leave a U.S. port: the FMS sales agreement, State‘s export
authorization form (DSP-94), and evidence that shipment data was
entered in the government‘s Automated Export System (see table 2).
[Footnote 13] CBP port officials review this information to confirm
that the items are authorized under the FMS agreement and that the
agreement has an exportable value remaining. The officials also
subtract the shipment‘s value from the total value of the defense
articles permitted under the FMS agreement.
Table 2: FMS Export Documentation:
Document: FMS agreement;
Description:
* Describes the items sold under the agreement in general terms.
* States the total value of the exportable defense items in the
agreement.
* Lists administrative and other charges.
Document: Export authorization form for FMS sales, form DSP-94;
Description:
* States the dollar amount available for export on a particular FMS
agreement.
* Identifies the exported defense item‘s U.S. Munitions List category.
* Bears the authorizing signature of an official of the foreign
government or its designated freight forwarder.
Document: Automated Export System information;
Description:
* Identifies the FMS agreement by case identification number.
* Provides information about the items contained in the shipment.
Source: GAO analysis of State regulations and CBP guidance.
[End of table]
Although we recommended in 2003 that State revise the ITAR to clearly
establish control and responsibility for all FMS shipments, it has yet
to do so. Shortly after our report, representatives from State, DSCA,
and CBP met to draft proposed ITAR revisions that would require DOD to
verify that the correct value and type of defense article is listed on
the export documentation. According to agency officials involved in the
process, agency representatives went through multiple iterations of the
draft ITAR revisions over a period of several years. However, these
revisions have been in State‘s final clearance stages since May 2008.
In the meantime, weaknesses we previously identified in the
verification process continue to go unaddressed. Anticipating the ITAR
updates, in 2004 DOD issued guidance in its Security Assistance
Management Manual instructing the military services to verify that the
sales value listed on the DSP-94 by the freight forwarders includes
only the value of the exportable defense articles listed in the FMS
agreement.[Footnote 14] However, because the guidance only applies to
DOD and not the freight forwarders, we found cases where freight
forwarders did not submit DSP-94 forms for DOD review. For example, in
10 of our 16 case studies, freight forwarders”who are not bound by DOD‘
s guidance”did not submit DSP-94s to the military services for
verification. In addition, in the six cases that were verified by the
military services, one listed the full FMS agreement value on the DSP-
94, including administration charges, rather than only the value of the
exportable defense articles, as DOD policy requires. Further, officials
from one military service were uncertain who within their security
assistance command was supposed to verify the documents and how they
were supposed to be verified.
CBP port officials lack key information in export documentation that is
needed to properly record the value of defense articles shipped under
an FMS sales agreement and ensure the value of the shipments made are
not more than the exportable value of the agreement. According to CBP
guidance, each FMS agreement should have one port that records the
value of the exports made against an agreement.[Footnote 15] However,
freight forwarders are not required to identify the primary port on the
DSP-94 they provide to CBP at the time of the shipment. For example,
freight forwarders listed multiple ports on this form for several of
the agreements we reviewed. In one case, the DSP-94 listed seven ports.
While information from the Automated Export System is required to
accompany all FMS shipments, we found that this system only lists the
port of export”not the primary port. CBP port officials have told us
that they have no way of knowing if an FMS agreement or a DSP-94 is
filed at more than one port because CBP does not have a method to
prevent these documents from being filed at multiple ports. Without
accurate and complete information on the primary port, officials at
other ports cannot notify the primary port regarding shipments that are
made through their ports so that the value of these exports can be
properly recorded. In some cases, port officials were reducing the
exportable value of FMS agreements at ports that were not the primary
port. For example, two ports contained duplicate entries for 67 FMS
agreements, and, for many of these agreements, both ports were
independently recording the value of shipments made against the
agreement. In one case, the records for one port showed that the
agreement value was exhausted, while the records for the second port
still showed an exportable value of $2.9 million.
Although CBP agreed to develop guidelines for FMS shipment verification
and reduction of allowable export value after a shipment in response to
our 2003 report recommendations, the U.S. Customs Control Handbook for
Department of State Licenses has not been updated since 2002, and it
does not provide instructions to CBP port officials on tracking
shipment and agreement values. CBP issued a policy memorandum in 2004
directing port personnel on how to record shipment values for FMS sales
agreements and coordinate with other ports to designate one primary
port to track and record shipments against each FMS agreement, but CBP
port officials we met with in July 2008 did not have the memorandum,
and it was not posted on CBP‘s intranet, a resource that CBP began to
use after 2004 to distribute policy information among the ports.
CBP also lacks adequate information to ensure shipments are not made
against closed FMS sales agreements”agreements against which shipments
are no longer authorized.[Footnote 16] In response to a recommendation
we made in 2003, DSCA sent quarterly lists of closed cases to CBP in
late 2003 and 2004, but rarely did so in subsequent years. Without this
information, CBP port officials did not know when an agreement was
closed by DOD and only considered the agreement to be closed when the
locally recorded exportable value was determined to be exhausted.
[Footnote 17] We compared data from two ports to DOD information on
over 2,600 closed FMS agreements[Footnote 18] and identified 22 FMS
agreements that had DSP-94s filed up to 10 years after the closure date
of the agreement. CPB port records incorrectly showed that these
agreements still had exportable value remaining, which is one of the
indicators port officials use to determine if shipments are authorized.
We determined that multiple shipments were made against six of these
agreements, including agreements for the sale of technical defense
publications, avionics components, and missile components. According to
DOD officials, one of these agreements was closed before any orders
were placed against it; however, we found that 21 shipments were made
against this agreement by a freight forwarder. In October 2008, DSCA
officials provided a list of recently closed FMS agreements to CBP, and
they plan to meet with officials to discuss how to use the information.
However, this list only covers agreements that were closed in fiscal
year 2008, which could allow shipments to continue to be made against
agreements that were closed prior to that time.
In 2003, we recommended that CBP improve its shipment verification
process to ensure that it has adequate information to determine when
FMS shipments are authorized. However, CBP continues to rely on
individual port records and has no method of sharing FMS shipment
information among ports. According to CBP officials, only 3 of the more
than 100 ports that process FMS shipments maintain an electronic
database for recording FMS shipments, but these are not linked to any
other system and do not exchange information. Ports without a local
database maintain paper copies of FMS documentation and record
handwritten notes on the back of DSP-94s to subtract the shipment value
from the total case value. CBP officials noted that the Automated
Export System allows them to verify that the freight forwarder, defense
article, and shipment value match the export documentation, but this
system does not allow officials to see the potentially hundreds or
thousands of shipments made against an FMS agreement or track the
existing exportable value of an agreement. WCBP is in the process of
implementing the International Trade Data System, which could
automatically subtract the value of individual shipments from the total
exportable value of FMS agreements as shipments are made, the system is
not scheduled to be completed befo2011 at the earliest. Moreover, at
the time of this report, CBP has only received funding to include
import information in the system and has not yet received funding for
including export information. Although an export component was
initially planned, a review of the program may eliminate plans to
develop the export component, a step that would prevent the system from
improving the FMS process.
DOD Lacks Mechanisms to Fully Ensure That the Correct FMS Shipments
Reach the Right Foreign Customers:
According to DOD guidance, DOD considers its responsibility for the
shipment of FMS articles complete when the title transfers from DOD to
the foreign government, which typically occurs when the item is picked
up by the freight forwarder at a DOD supply center or other point of
origin. DOD does not usually notify the foreign customer when a defense
article has been shipped.[Footnote 19] If a foreign customer has not
received an FMS shipment or it is damaged upon receipt, problems that
may not be identified until months after the article was shipped, the
customer files a supply discrepancy report.[Footnote 20] Each FMS sales
agreement may have thousands of shipments associated with it, and
discrepancy reports could be filed against each shipment. For example,
in our 16 case studies, 188 supply discrepancy reports were filed.
Thirty-one of these reports were filed because an incorrect item was
received. In such cases, DOD officials may tell the foreign government
to dispose of the item and give the foreign government a credit against
their account. However, if the report is not submitted within one year,
DOD is not required to take action on the discrepancy. If a country
chooses not to submit a report, DOD has no procedures in place to
identify a lost or diverted FMS shipment as it does not generally track
such shipments once they leave the DOD supply center. According to DOD
officials, DOD investigates the whereabouts of defense articles that
foreign governments claim they did not receive, or received but never
ordered, when the foreign customer notifies DOD. Without notification
from the customer, DOD may not know when defense articles are
mistakenly transferred to a foreign customer. This occurred in 2006
when DOD mistakenly transferred forward section assemblies for the
Minuteman III intercontinental ballistic missile to Taiwan instead of
the helicopter batteries the country had requested through the FMS
program. DOD only became aware of an error in 2007, when Taiwanese
officials notified U.S. officials that they did not receive the
requested batteries. At the time, DOD did not fully investigate the
discrepancy and also did not realize that it had sent missile
components to Taiwan until 2008”more than one year after being notified
of the error.
In 2008, the Defense Logistics Agency (DLA) ”which manages the
inventory for weapon system spare parts and other consumable items in
the DOD supply system”took action to ensure that defense articles for
shipment are properly labeled in an effort to minimize the risk that an
incorrect article is provided to a foreign customer. According to a DLA
headquarters official, DLA found it had a high inaccuracy rate for its
supply center shipments. DLA inspectors found, for example, that if a
shipping label got caught in the printer, the rest of the shipments on
the line may have incorrect shipping labels because the personnel on
the line may unknowingly skip the jammed label and affix subsequent
labels on the wrong packages. DLA‘s two largest FMS supply depots have
recently put in place a double inspection process in which inspectors
at the depots ensure that the shipping documentation matches the items
in the package. A DLA official stated that this new process should
address the problem of improperly labeled defense articles leaving the
supply depot”the first part of the shipment process. However, Navy
officials responsible for FMS shipments noted that DLA needs to
determine the source of the problems to ensure that its solutions are
correct. It is too early to know whether DLA‘s new process will reduce
the inaccuracy rate for supply center shipments.
According to DSCA officials, while DOD currently does not track all
shipments under FMS sales agreements, it has mechanisms intended to
improve visibility over shipments in limited circumstances. For
example, DOD established the Enhanced Freight Tracking System, which is
intended to allow DOD personnel, freight forwarders, and foreign
customers to track shipments from their point of origin to their final
destination. Currently, participation by FMS customers is voluntary.
DSCA and military service officials stated that the system was designed
for customers to track their shipments, and the officials do not plan
to use the system to track all FMS shipments. DOD also faces challenges
in successfully implementing the new system. First, the system is in
the first phase of implementation, which focuses on tracking defense
articles from the initial location in the military depot to the freight
forwarder, and subsequent phases will allow for shipment tracking to
the final destination in the foreign country. Second, in some cases the
transportation control numbers that are used to track shipments have
been incomplete or changed when shipments were consolidated and
therefore are not a reliable method to track shipments. According to
DOD officials, while the freight tracking system has multiple
searchable fields, for some FMS shipments the transportation control
number is the only searchable field. In addition, DOD officials
identified another mechanism for tracking FMS shipments that is being
used for countries within the U.S. Central Command area of
responsibility, in particular Iraq and Afghanistan. All such shipments
are required to have radio frequency identification tags that allow for
electronic tracking of shipments through the Enhanced Freight Tracking
System to their destination. DSCA officials noted that DOD developed
this requirement to address the unique security situation in those
countries, and DOD does not have plans to expand it to include
shipments to other countries.
DSCA Does Not Have Guidance for Prioritizing Selection of Countries for
Compliance Monitoring Visits:
In 2003, we found that DSCA lacked the information needed to implement
and report on its Golden Sentry end-use monitoring program. Since then,
DSCA expanded this program and has been reporting annually on its
resources. According to DSCA‘s fiscal year 2009 monitoring report to
Congress, the purpose of the program is to scrutinize the foreign
purchaser‘s use of U.S. defense articles to ensure compliance with U.S.
security requirements. The report further notes that to conduct end-use
monitoring with available resources, DSCA uses a risk-based approach.
Countries are to secure all defense articles purchased through the FMS
program. They are also required to maintain a detailed inventory of
every item received by serial number for 16 defense articles DOD
designated as sensitive. These sensitive defense articles have been
purchased by 76 countries and include night vision devices,
communication security equipment, and certain types of missiles, such
as Stingers.
To ensure that foreign governments and security assistance officers are
complying with monitoring requirements, DSCA headquarters officials
lead in-country compliance visits, which DSCA has identified as an
important part of the Golden Sentry program. Specifically, the visit
objectives are to:
* assess in-country security assistance officers‘ overall compliance
with the end-use monitoring program;
* assess the foreign government‘s compliance with specific physical
security and accountability agreements through facility visits, records
reviews, and reviews of local security policies and procedures;
* conduct routine or special inventories of U.S.-origin defense
articles; and;
* appraise possible violations of the U.S. laws, international
agreements, or FMS agreements.
To conduct these compliance visits, DSCA assigned three officials to
particular regions of the world. These DSCA personnel periodically lead
teams made up of several military service and overseas DOD personnel
with expertise on sensitive weapon systems or the country visited. DSCA
budgeted $1.4 million for such visits in each of the fiscal years 2006
through 2008.
Since DSCA began conducting compliance visits in 2003, it has visited
19 countries”or 25 percent”of the 76 countries that have purchased
sensitive defense articles, averaging about four visits per year.
According to DSCA policy, DSCA compliance visits should focus on the
countries that have purchased sensitive defense articles, with a
particular emphasis on visiting those with Stinger missiles. DSCA
officials stated that they determine compliance visits based in part on
foreign policy considerations, such as the need to coordinate visits
with foreign governments to respect their sovereignty. While no written
guidance exists, officials stated they consider a variety of risk-based
factors in determining countries to visit, including considering
whether the country is in a stable region of the world or if the
officials have information indicating sensitive defense articles may
not be properly protected or inventoried. Yet, out of the 19 countries
they visited, about 50 percent were in a stable region of the world. In
addition, DSCA has not yet conducted compliance visits in three
countries that have a high number of uninventoried defense articles,
including Stinger missiles and related components and night vision
devices, as identified by DSCA‘s data system. According to a DSCA
official responsible for the compliance visits, these three countries
are now scheduled for visits in 2009. DSCA also noted that one of these
countries needed assistance to help it meet standards before it could
have a successful compliance visit. However, as DSCA has not created
written guidance for selecting countries for compliance visits, it is
unclear how it applied a risk-based approach in prioritizing its
country selections to date.
DOD Lacks Information Needed to Effectively Administer and Oversee the
FMS Program:
While DOD has implemented initiatives aimed at improving the overall
administration of the FMS program, it lacks the information needed to
effectively administer and oversee the program. First, DOD does not
have information on the actual cost of administering FMS sales
agreements and, as a result, is not able to link the administrative
surcharge DOD charges foreign customers with actual costs. Second, DOD
lacks information for determining an improved metric to measure the
timeliness with which FMS agreements are developed. Finally, DOD does
not have consistent data from each of the military services on
administering FMS agreements.
DSCA Lacks Sufficient Information to Determine Administrative Surcharge
Rate:
Over the past decade, DSCA has implemented several initiatives aimed at
improving the balance between FMS expenditures and income.
Specifically, DSCA has twice adjusted the surcharge rate”the rate
charged to FMS customers to cover program administration costs.
However, DSCA does not have sufficient information to determine the
balance necessary to support the program in the future. In 1999, DSCA
decreased the surcharge rate from 3 to 2.5 percent because the
administrative surcharge account had a surplus. Prior to this change,
we recommended that DSCA not lower the rate until it determined the
cost of implementing the FMS program. However, DSCA disagreed with this
recommendation and lowered the rate despite declining income that the
program experienced between 1995 and 2000. According to DSCA officials,
by 2005 the program experienced a decrease in income that raised
concerns about DSCA‘s ability to pay FMS program expenses if sales
continued at the existing rate. Following a year-long internal study to
determine a sustainable rate, DSCA increased the surcharge rate from
2.5 to 3.8 percent in August 2006 and clarified what services are
included in the administrative surcharge and what services require
additional charges.[Footnote 21] Since then, the administrative
surcharge account balance has grown”a result of both the increased rate
and higher than anticipated sales. In fiscal year 2008 alone, FMS
program sales totaled $36 billion”almost triple the amount DSCA had
previously projected.
Once the customer signs the agreement and pays the required deposit,
DSCA collects 100 percent of the administrative surcharge from
agreements in support of the Global War on Terrorism and other
agreements with different funding sources[Footnote 22] and 50 percent
of the administrative surcharge for all other agreements.[Footnote 23]
Expenditures from these sales agreements continue throughout the entire
life of the agreement, which on average last 12 years. However, DSCA
knows only historical costs associated with the overall program, not
the costs to implement each FMS agreement. Identifying the costs of
administering the FMS program is a good business practice identified in
federal financial accounting standards.[Footnote 24] DSCA plans to
reassess the optimal rate based on the level of sales and estimated
expenses, but without data on actual agreement costs, the surcharge
rates DSCA establishes may not be sufficient to pay for needed
administrative activities. According to a senior DSCA official, while
the fund is not currently in danger of becoming insolvent, it is
unclear how the current economic situation may affect future sales
levels and, therefore, the administrative account balance.
DSCA‘s selection of its current surcharge rate has also raised issues
with FMS customers and the military services regarding which
administrative services require additional charges beyond what is
included in the standard administrative surcharge. The standard level
of service includes services such as the preparation and processing of
requisitions. A country that wants services in addition to the standard
level of service, such as additional reviews or contractor oversight,
is charged separately for those services. DSCA has provided guidance
and training to help the Army, Navy, and Air Force apply the revised
standard level of service to new cases. However, according to Navy
officials, measuring one standard level of service is unrealistic
because every case is unique and may require varying levels of service.
Several FMS customer representatives to the Foreign Procurement Group
[Footnote 25] also raised questions about administrative surcharge
billing and the consistency with which the standard level of service
was applied across the services. A briefing prepared by the Foreign
Procurement Group in July 2008 noted improvement in the application of
the standard level of service but identified the need for additional
transparency in DOD‘s charges for the standard level of service for FMS
agreements. For example, the group cited incidences of charging
customers for services that should be covered under the standard level
of service.
DSCA Lacks Sufficient Information to Improve Metric Regarding FMS
Agreement Development Time Frame:
In an effort to ensure FMS sales agreements are developed and presented
to customers in a timely manner, DSCA established a goal of developing
and presenting 80 percent of agreements to its customers within 120
days of receiving a request to purchase a defense article through the
FMS program. DSCA‘s 120-day time period begins with the initial receipt
of the purchase request and includes the time required to receive
pricing information for defense articles from contractors, to allow the
services to write the actual FMS agreement, and for all of the relevant
agencies to review and approve the sale of the defense articles. In
2008, DSCA began a study to determine if the 120-day goal was
reasonable or if it needed to be revised. However, DSCA officials
stated they did not have sufficient information to make such a
determination. As a result, DSCA directed each military service to
study its FMS process to assess internal FMS processes and the time
frames associated with those processes. According to DSCA officials,
they anticipate receiving the results of the studies in early summer
2009.
A variety of factors may affect the military services‘ ability to meet
the 120-day time frame for developing an FMS agreement. For all
agreements implemented from January 2003 to September 2008, DSCA
developed 72 percent of FMS agreements within its stated 120-day goal.
While it takes an average of 122 days after the initial receipt of a
request to develop an FMS agreement, the number of days that it took to
develop an FMS agreement ranged from less than one to 1,622 days.
[Footnote 26] While DSCA officials noted that the creation of a central
agreement writing division in 2007 has helped improve the consistency
of agreements, there are other factors affecting the time it takes to
develop an agreement. Officials responsible for developing the FMS
agreements stated that while it is possible to meet the 120-day goal on
routine agreements, such as blanket order agreements,[Footnote 27] it
is difficult to meet the goal for complex agreements, such as
agreements for weapons systems. Agreements over certain dollar
thresholds could require more time if they have to go through the
congressional notification process. Similarly, for example, non-NATO
cases may require more time for the U.S. Embassy in the customer
country to conduct an evaluation of the proposed sale. Prioritization
of certain agreements, such as Iraq FMS agreements, can also delay the
development of other FMS agreements. Other factors that can extend FMS
agreement development times include slow customer response to follow-up
questions about requests to purchase defense articles, workload
challenges within the military services, and slow contractor response
times for pricing information about the defense article the foreign
government wants to purchase.
Disparate Data Systems Limit Available Information for DSCA Oversight
of FMS Program:
FMS implementation, management, and financial data”which DOD uses to
track, oversee, and execute FMS sales agreements”are currently
dispersed among 13 electronic systems across the military services and
other DOD components. As a result, DSCA‘s ability to obtain FMS program
information and to manage the efficiency of the FMS process is limited.
For example, one DSCA official responsible for collecting program
information noted that DSCA cannot effectively measure cost, schedule,
and performance on FMS agreements because current systems only provide
three consistent indicators that are comparable across the military
services. According to the official, while the service specific systems
may provide information for analyzing the performance of FMS agreements
within that service, the information is not comparable with data
produced by other services, thus reducing its value to DSCA for overall
oversight of the program. DSCA compiles the limited available data from
the military services for quarterly meetings that review the FMS
program in an effort to determine potential problems. In addition, as
DOD does not have a centralized system, the services have independently
developed tools to enhance the capabilities of their existing systems,
one of which has been in place since 1976.[Footnote 28] For example,
the Air Force independently developed a web-based system for processing
supply discrepancy reports, but DSCA has yet to fully fund this system
to be used by the other services.
In an effort to develop more comparable, detailed, and complete data on
agreement implementation, DSCA is working to develop the Security
Cooperation Enterprise Solution. DSCA is currently defining the
requirements for this potential system and has yet to determine how it
will relate to other data systems. According to DSCA officials, recent
increases in FMS sales and the administrative surcharge rate will
provide sufficient funds to begin the development of a new data system.
DSCA also uses the Security Cooperation Information Portal”a web-based
tool designed to provide a point of access for DOD‘s multiple FMS
information systems, such as the services‘ requisition systems, the
system used to write agreements, and the financial systems. The portal
retrieves information from existing DOD systems and is intended to
provide consolidated information to DOD and foreign customers. However,
as the portal is based on information from 13 different systems, the
data have the same limitations in providing DSCA with comparable data
to oversee the FMS program.
Conclusions:
The FMS program, as a part of a broader safety net of export controls
designed to protect technologies critical to national security as well
as an important foreign policy tool to advance U.S. interests, presents
a set of unique challenges to the agencies involved in the program.
Previously identified weaknesses in the FMS shipment verification
process remain unaddressed and require the immediate and collective
attention of leadership within State, DOD, and Homeland Security. While
these departments each have a distinct role to play in the FMS program,
they have failed to work collectively to ensure that FMS articles are
not vulnerable to loss, diversion, or misuse. This failure has clear
national security implications because defense articles will be at risk
of falling into the wrong hands. Consistent with our 2003 report, we
still believe that State should revise the ITAR to establish procedures
for DOD verification of FMS shipments to address weaknesses in the
shipment verification process. Also, DOD may not be maximizing its
resources by fully applying a risk-based approach to ensure that
sensitive defense articles are protected as required. In addition, DOD
has made changes to its FMS program administration without sufficient
information on which to base these changes, and it lacks information to
assess how well the program is working. Without this information, DOD‘s
ability to know if the program is achieving intended results is
limited.
Recommendations for Executive Action:
To improve controls for exported items as well as administration and
oversight of the FMS program, we are reiterating a recommendation to
State from our 2003 report and making the following five
recommendations.
To establish procedures for DOD verification of FMS shipments, we
recommend that the Secretary of Defense direct the Under Secretary of
Defense for Policy to provide additional guidance to the military
services on how to verify FMS shipment documentation.
To ensure CBP port officials have the information needed to verify FMS
shipments are authorized, we recommend that the Secretary of State
direct the Assistant Secretary for Political-Military Affairs, that the
Secretary of Defense direct the Under Secretary of Defense for Policy,
and that the Secretary of Homeland Security direct the Commissioner of
Homeland Security‘s U.S. Customs and Border Protection to coordinate on
establishing a process for:
* ensuring the value of individual shipments does not exceed the total
value of the FMS agreement;
* designating a primary port for each new and existing FMS agreement;
* developing a centralized listing of these primary ports for use by
CBP port officials; and;
* providing CBP officials with information on FMS agreements that were
closed prior to fiscal year 2008.
To ensure that correct FMS shipments reach the right foreign customers,
we recommend that the Secretary of Defense direct the Under Secretary
of Defense for Policy to examine its existing mechanisms and determine
if they can be used to improve tracking of FMS shipments.
To ensure that FMS defense articles are monitored as required, we
recommend that the Secretary of Defense direct the Under Secretary of
Defense for Policy to create written guidance for selecting in-country
visits that consider a risk-based approach.
To improve the administration and oversight of the FMS program, we
recommend that the Secretary of Defense direct the Under Secretary of
Defense for Policy to better determine the administrative costs of
implementing the FMS program and develop metrics that allow DSCA to
comprehensively assess the performance of the FMS program.
Agency Comments and Our Evaluation:
State, DHS, and DOD provided written comments on a draft of this
report, which are reprinted in appendices II through IV. DHS and DOD
also provided technical comments, which we incorporated as appropriate.
In written comments, State and DHS concurred with our recommendations
and outlined plans to implement them. DOD concurred with two of our
recommendations and partially concurred with the other three. In its
technical comments, DOD also noted that it disagreed with our
characterization of the information it uses to administer the FMS
program.
In concurring with the recommendation that State should revise the
ITAR, which we reiterated from our 2003 report, State noted that the
Political-Military Bureau is processing the recommended changes to the
ITAR and will publish them in the Federal Register as soon as all
requirements for doing so are met.
DOD concurred with our recommendation to provide additional guidance on
verifying FMS shipment documentation and agreed to work with the
military services to review the current guidance and revise as
necessary. DOD also concurred with our recommendation that it examine
its existing mechanisms for tracking FMS shipments and will work with
agency representatives to improve end-to-end visibility.
In response to our recommendation that State, DHS and DOD coordinate to
ensure CBP port officials have the information needed to verify that
FMS shipments are authorized, DHS and DOD agreed to work together to
provide this information. DHS identified several specific actions that
it plans to take, including reconvening an interagency working group to
address FMS-related issues, obtaining a complete list of closed FMS
agreements from DOD, and establishing a list of all primary ports for
existing and new FMS agreements. DOD also agreed to provide CBP with a
list of closed FMS agreements. While DOD agreed to work with State and
CBP to establish a process for designating a primary port for each new
FMS agreement, it noted that it will have to examine the resource
impact of designating a primary port for existing FMS agreements before
taking further action. Once DOD has made this assessment it will be
important for the agencies to determine the appropriate course of
action for existing agreements.
DOD partially concurred with our recommendation to create written
guidance for in-country visits and said that such guidelines could be
included in the Security Assistance Management Manual. DOD noted that
these guidelines would take risk into account, but would have to be
broad enough to consider other factors, such as the experience of
personnel, when scheduling in-country visits. DOD has reported to
Congress that it uses a risk based approach to conduct end-use
monitoring with available resources. While our report notes that a
variety of factors play a role in the selection of countries for
compliance visits, we also found that the current system, which lacks
written guidance, may not ensure that DOD is distributing its resources
in a risk-based manner. As DOD has identified these visits as an
important part of its monitoring program, we continue to believe that
DOD needs written guidance”whether in published guidance or internal
policy memos”that applies a risk-based approach to ensure that
sensitive defense articles are protected as required.
DOD also partially concurred with our recommendation that it improve
the administration and oversight of the FMS program. DOD agreed that
rigorous data analysis and well-defined, targeted metrics are vital for
FMS program administration. It noted that it conducted a year-long
study prior to changing the current administrative surcharge rate in
August 2006 and that it hosts a quarterly forum at which security
cooperation leadership review metrics related to the FMS program. In
its technical comments, DOD also stated that it has sufficient
information and that it is not required to gather information on actual
costs to administer the FMS program. As we state in our report, DOD‘s
August 2006 study relies on future sales estimates and historical
budget data for program administration to develop its surcharge rate,
which does not provide it with the actual costs to implement existing
FMS agreements. We also note that identifying the costs of
administering the FMS program is a good business practice recognized in
federal financial accounting standards. In addition, while we
acknowledge that DOD officials meet at quarterly forums to review
existing metrics, they have limited consistent indicators that are
comparable across the military services. As such, we continue to
believe that DOD should obtain additional information regarding the
cost of implementing FMS agreements and to develop metrics to
administer and oversee the program.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 30
days from the date of this report. We will then send copies to the
Secretaries of State, Defense, and Homeland Security. In addition, we
will make the report available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov].
Please contact me at (202) 512-4841 or lasowskia@gao.gov, if you or
your staff have any questions about this report. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report were Ann
Calvaresi-Barr, Director; John Neumann, Assistant Director; Heather
Miller; Jean Lee; Sarah Jones; Ann Rivlin; Noah Bleicher; John Krump;
Karen Sloan; Art James; and Rebecca Rygg.
Signed by:
Anne-Marie Lasowski, Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Scope and Methodology:
To examine the changes that State, DOD, and DHS have made to the FMS
program since 2003, we reviewed the regulatory framework governing the
FMS process, including the Arms Export Control Act, the International
Traffic in Arms Regulations (ITAR), and a draft of potential revisions
to the ITAR. We also reviewed the U.S. Customs Control Handbook for
Department of State Licenses, the Defense Department‘s Security
Assistance Management Manual, and other guidance from Customs and
Border Protection (CBP), the Defense Department, and the military
services. We used case studies to assess the steps in the FMS process.
Using data available to the military services and FMS officials through
the Defense Security Assistance Management System, we selected 16 FMS
agreements based on the following attributes: the military service
responsible for administering the FMS agreement, the type of defense
item sold, whether the item required enhanced end-use monitoring, the
customer country, and agreements that used both the Defense
Transportation Service and freight forwarders to transport defense
articles to their end destination. We selected similar defense articles
to compare across the military services. We obtained data from DOD
systems used to manage the FMS program. We verified that the agreements
we selected contained the traits for which they were selected. Based
upon this verification, we confirmed that the data we used were
sufficiently reliable for our purposes. We also obtained data from two
major ports, one airport and one seaport. These ports are 2 of the top
10 U.S. ports in terms of the dollar value of FMS shipments they
process. We used these data to determine if FMS agreements were being
lodged at multiple ports and to determine if exports were occurring
against FMS agreements for which exports were no longer authorized. We
reviewed copies of licenses and shipment logs to identify when actual
shipments were made against FMS agreements that were no longer
authorized to have shipments. Our analysis of these data allowed us to
determine whether gaps in controls exist, but did not allow us to
assess the state of controls at all ports. In addition, we interviewed
officials and obtained documentation at the State Department, the
Defense Security Cooperation Agency (DSCA), the Air Force Security
Assistance Center, the United States Army Security Assistance Command,
the Navy International Programs Office, the Naval Inventory Control
Point, the Defense Logistics Agency, CBP headquarters and port
personnel at two ports, and U.S. security assistance officers stationed
in one NATO and one non-NATO country.
To determine the information DOD uses to administer and oversee the FMS
program, we reviewed the Defense Department‘s Security Assistance
Management Manual and other guidance from the Defense Department and
the military services. We also reviewed the Office of Management and
Budget's Managerial Cost Accounting Concepts and Standards for the
Federal Government - Statement of Federal Financial Accounting
Standards Number 4. We analyzed data the military services use to
manage FMS agreements implemented from fiscal years 2003 to 2008. We
conducted interviews with officials at DSCA and the military services.
We also met with the Foreign Procurement Group, a group composed of FMS
customer countries, to ask them about their experiences with the FMS
program and reviewed the group‘s 2008 briefing for the program.
We conducted this performance audit from May 2008 to April 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on audit objectives. We believe that the
evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Department of State:
United States Department of State:
Washington, D.C. 20520:
May 6, 2009:
Ms. Jacquelyn Williams-Bridgers:
Managing Director:
International Affairs and Trade:
Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548-0001:
Dear Ms. Williams-Bridgers:
We appreciate the opportunity to review your draft report, "Defense
Exports: Foreign Military Sales Program Needs Better Controls for
Exported Items and Information for Oversight," GAO Job Code 120738.
The enclosed Department of State comments are provided for
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact
Andrew Lim, Foreign Affairs Officer, Bureau of Political-Military
Affairs at (202) 647-8155.
Sincerely,
Signed by:
James L. Millette:
cc: GAO - John Neumann:
PM- Kevin O'Keefe:
State/OIG - Mark Duda:
[End of letter]
Department of State Comments on GAO Draft Report:
Defense Exports: Foreign Military Sales Program Needs Better Controls
for Exported Items and Information for Oversight (GAO-09-454; GAO Code
120738):
Thank you for allowing the Department of State the opportunity to
comment on the draft report "Defense Exports: Foreign Military Sales
Program Needs Better Controls for Exported Items and Information for
Oversight."
The report recommends making certain revisions to the international
Trafficking in Arms Regulations (TIARA). The State Department's
Political Military Bureau continues to process the recommended changes
to the TIARA and will publish them in the Federal Register as snort as
all requirements for doing so are met.
[End of section]
Appendix III: Comments from the Department of Homeland Security:
U.S. Department of Homeland Security:
Washington, DC 20528:
May 8, 2009:
Ms. Anne Marie Lasowski:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Lasowski:
Thank you for providing us with a copy of the draft report entitled
"Defense Export: Foreign Military Sales Program Needs Better Controls
for Exported Items and Information for Oversight" (GAO-09-454). In
2003, GAO identified significant weaknesses in foreign military sales
(FMS) control mechanisms to safeguarding defense articles transferred
to foreign governments. These and other findings prompted GAO to
designate the protection of technologies critical to U.S. national
security a new high-risk area in 2007. Below is the response to the one
recommendation directed to the Department of Homeland Security.
Recommendation 3: To ensure Customs and Border Protection (CBP) port
officials have the information needed to verify FMS shipments are
authorized, we recommend the Secretary of State direct the Assistant
Secretary for Political-Military Affairs, the Secretary of Defense
direct the Under Secretary of Defense for Policy, and the Secretary of
Homeland Security direct the Commissioner of Customs and Border
Protection to coordinate on establishing a process for:
a. Ensuring the value of individual shipments does not exceed the total
value of the FMS agreement;
b. Designating a primary port for each new and existing DMS agreement;
c. Developing a centralized listing of these primary ports for use by
CBP port officials; and;
d. Providing CBP officials with information on FMS agreements that were
closed prior to fiscal year 2008.
Response:
Concur. CBP will re-issue the guidance on decrementation of the FMS
cases and obtain a complete list of all FMS closed cases from DSCA.
In addition, CBP will publish guidance specifically on processing FMS
shipments and the handling of the cases. CBP will establish a complete
list of where all the existing and new FMS cases are lodged and post
such list to the CBP Intranet web site.
Moreover, CBP will post information to the CBP Intranet web site about
closed cases, port locations for active FMS cases, and procedural
guidance on processing FMS cases and shipments.
CBP has requested the re-establishment of the FMS Interagency Working
Group to complete the 2003 GAO recommendation. Scheduling for the first
meeting is being reviewed by all the participating agencies.
Thank you for the opportunity to provide comments to the draft report.
Sincerely,
Signed by:
Jerald E. Levine:
Director:
Departmental GAO/OIG Liaison Office:
[End of section]
Appendix IV: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
Policy:
2000 Defense Pentagon:
Washington, DC 20301-2000:
May 15, 2009:
Ms. Ann Marie Lasowski:
Director:
Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Ms. Lasowski:
This is the Department of Defense (DoD) response to the GAO Draft
Report, GAO-09-454, "Defense Exports: Foreign Military Sales Program
Needs Better Controls for Exported Items and Information for
Oversight," dated April 10, 2008 (GAO Code 120738).
We have conducted a thorough review of the report. Detailed comments on
the recommendations are attached at Tab I. While we concur or partially
concur with all of the recommendations made by the draft report, we
have identified several corrections that should he made to improve the
overall accuracy of the report. These technical comments are provided
at Tab 2. We hope this information is useful to you in finalizing your
report.
My point of contact on this matter is Mrs. Beth Baker. She may be
contacted by e-mail: beth.baker@dsca.mil or by telephone at (703) 601-
3839.
Sincerely,
Signed by:
Peter F. Verga:
Attachments As stated:
[End of letter]
GAO Draft Report Dated April 10, 2009:
GAO-09-454 (GAO Codes 120738):
"Defense Exports: Foreign Military Sales Program Needs Better Controls
For Exported Items And Information For Oversight"
Department Of Defense Comments To The GAO Recommendations:
Recommendation 1: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Policy to provide additional
guidance to the military services on how to verify Foreign Military
Sales (FMS) shipment documentation. (p. 20/GAO Draft Report)
DOD Response: Concur. The Defense Security Cooperation Agency (DSCA)
will work with the military services to review the current guidance on
verifying FMS shipment documents and revise and/or provide additional
guidance as required.
Recommendation 2: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Policy to coordinate on
establishing a process for ensuring the value of individual shipments
does not exceed the total value of the FMS agreement. (p. 20/GAO Draft
Report)
DOD Response: Concur. DSCA will work with Customs and Border Protection
(CBP) and the Department of State to develop a process to ensure that
the value of all individual shipments made do not exceed the total
exportable value authorized by the FMS agreement.
Recommendation 3: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Policy to coordinate on
establishing a process for designating a primary port for each new and
existing FMS agreement. (p. 20/GAO Draft Report)
DOD Response: Partially Concur. DSCA will work with CBP and the
Department of State to develop a process for designating a primary port
for each new FMS agreement. DSCA would have to examine the resource
impact of making such changes to existing FMS agreements before
committing to a change that impacts agreements that have already been
implemented.
Recommendation 4: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Policy to coordinate on
establishing a process for developing a centralized listing of these
primary ports for use by CBP port officials. (p. 21 /GAO Draft Report)
DOD Response: Concur. DSCA will work this issue with CBP and the
Department of State.
Recommendation 5: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Policy to coordinate on
establishing a process for providing CBP officials with information on
FMS agreements that were closed prior to fiscal year 2008. (p. 21/GAO
Draft Report)
DOD Response: Concur. DSCA is providing a historical list of closed FMS
agreements and will continue to provide regular updates to this list.
Recommendation 6: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Policy to examine its
existing mechanisms and determine if they can be used to improve
tracking of EMS shipments. (p. 21/GAO Draft Report)
DOD Response: Concur. Through the Enhanced Freight Tracking System
(EFTS) development process, existing transportation data systems are
being used to extract relevant FMS transportation data. By mapping to
various external systems. EFTS intends to improve tracking of FMS
shipments for all methods of conveyance. Where there is a shortfall in
Information Technology and/or a need to track materiel (e.g., Customs,
FMS Customer's freight forwarder), DSCA is working with the agency
representatives to bridge the requirement for end-to-end visibility of
the distribution pipeline.
Recommendation 7: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Policy create written
guidance for selecting in-country visits that consider a risk-based
approach. (p. 21/GAO Draft Report)
DOD RESPONSE: Partially concur. It is correct that there currently is
no written guidance for prioritizing Compliance Assessment Visits
(CAVs). We agree that written guidelines for selection of countries to
receive CAVs could he included in the Security Assistance Management
Manual (SAMM) with the understanding that such guidelines will have to
be broad enough to take many subjective factors into consideration. The
CAV schedule is created with numerous considerations taken into
account. Risk is one factor - but even risk is not objective and must
consider many subjective elements including (1) The inventory of
enhanced items (both in size and make-up), (2) The history of the
Golden Sentry program within the host nation, (3) The region of the
world in question, and (4) Current or previous reports of concerns
relative to the country's protection of U.S. articles. Any written
guidance will be largely as subjective as the current process of
determination through internal consultations. Beyond these risk-based
factors, elements of maximizing a trip (adding a small program to an
existing major program trip), experience of personnel, and other
factors can appropriately affect the scheduling of CAVs.
Recommendation 8: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Policy to better determine
the administrative costs of implementing the FMS program and develop
metrics that allow DSCA to comprehensively assess the performance of
the FMS program. (p. 21/GAO Draft Report)
DOD Response: Partially concur. We agree that rigorous data analysis is
vital to determining proper assessment of administrative costs needed
to implement the FMS program. The Arms Export Control Act (AECA),
Section 21(3)(1)(A) requires that we recover the full estimated costs
of administration of sales using "an average percentage basis." The
current administrative surcharge rate assessed against FMS cases, in
compliance with the AECA, is 3.8%. This percentage was effective in
August 2006 and was derived only after an intensive year-long study was
conducted to review costs, sales projections, workload impacts, etc.
DSCA recognizes that fluctuations in customer financial health,
regional and world stability conditions, etc. influence FMS programs
and impact the surcharge rates needed to ensure these programs can
continue to operate at no cost to the U.S. Government. In 2006, DSCA
self-imposed a requirement to review the health of the administrative
surcharge account annually to determine if the rate is fair and
adequate or whether it should be changed to more accurately reflect
anticipated costs. DSCA agrees that well-defined, targeted metrics are
vital to assessing EMS programs and processes. We host a quarterly
forum for leadership in the security cooperation community to review
and refine metrics related to EMS and other related programs. Data from
these reviews are used to recommend, study, and implement process
improvements across our community.
[End of section]
Footnotes:
[1] Fiscal year 2008 sales include $29.2 billion in defense articles
and services purchased by foreign governments through the FMS program,
as well as $7.2 billion in articles purchased with U.S. government
funds and transferred to foreign governments, such as Iraq and
Afghanistan, through the FMS program.
[2] GAO, Foreign Military Sales: Actions Needed to Provide Better
Controls over Exported Defense Articles, [hyperlink,
http://www.gao.gov/products/GAO-03-599] (Washington, D.C.: June 5,
2003).
[3] GAO, High Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-07-310] (Washington, D.C.: January
2007).
[4] These data do not allow us to determine the extent of gaps in
controls at all ports.
[5] In addition to the military services, other agencies, such as the
National Security Agency and the Defense Logistics Agency, can
implement FMS agreements.
[6] In addition to the Security Assistance Management Manual, DOD
5105.38-M, DOD security cooperation responsibilities are included in
directives such as DOD Directives 5105.65 and 5132.03.
[7] 22 C.F.R. §§ 120-130.
[8] Congress must be notified about FMS sales of major defense
equipment that total $14 million or more, other defense articles or
services that total $50 million or more, or design and construction
services that total $200 million or more. For FMS sales to NATO
countries, Japan, Australia, the Republic of Korea, and New Zealand,
these dollar values increase to $25 million, $100 million, and $300
million. The proposed sale can only proceed if Congress does not enact
a joint resolution prohibiting the agreement within specific time
frames. Major defense equipment is equipment that is identified on the
U.S. Munitions List as requiring special export controls and for which
the U.S. government incurred more than $50 million in non-recurring
research and development costs or more than $200 million in total
production costs.
[9] According to the Security Assistance Management Manual, once the
title passes to the customer, the customer is generally responsible for
the physical movement beyond the initial point of shipment. The Defense
Transportation System can be used for all shipments, but generally is
used when the customer does not have the resources to perform their own
transportation arrangement, hire their own freight forwarders, or when
the categories of material are not eligible for transportation through
commercial channels.
[10] All defense articles and services purchased through the FMS
program must be provided the same degree of security protection as
provided by the U.S. government. In addition, each FMS agreement may
list individual security requirements for specific defense articles
sold under the agreement, such as inventory and physical security
requirements.
[11] Possible end-use violations include unauthorized third-party
transfers, inappropriate use, or tampering.
[12] See [hyperlink, http://www.gao.gov/products/GAO-03-599] and GAO,
Foreign Military Sales: Efforts to Improve Administration Hampered by
Insufficient Information, [hyperlink,
http://www.gao.gov/products/GAO/NSIAD-00-37] (Washington, D.C.: Nov.
22, 1999).
[13] The Automated Export System is an interagency export information
database managed by the Department of Commerce.
[14] Defense services and administrative charges should be excluded
from the value listed on the DSP-94 to ensure that port officials only
allow shipments against an FMS agreement equal to the value for
exportable defense articles.
[15] According to the U.S. Customs Control Handbook for Department of
State Licenses, one port should hold the documentation for an FMS sales
agreement. This port is supposed to record the value of shipments made
against the FMS agreement. In this report, we refer to this port as the
primary port for the FMS agreement.
[16] FMS agreements are closed when all ordered articles have been
physically delivered, ordered services have been performed, or the FMS
purchaser has confirmed that no orders are forthcoming.
[17] When an FMS sales agreement is determined to be closed by port
officials, they send the FMS agreement documentation, including the
authorization form, to the State Department, which archives expired FMS
agreements.
[18] The list of closed agreements included 467 cases that were
identified as closed for the 2003 GAO report and 2212 agreements that
were closed from October 2007 to September 2008.
[19] In certain circumstances, such as when a shipment is oversized or
contains hazardous material, DOD will notify the customer or the
freight forwarder by sending a notice of availability.
[20] The customer is responsible for reporting shipping problems by
filing a supply discrepancy report within one year of the shipment
date. A discrepancy report may be filed for quality deficiency,
contractual noncompliance, design deficiency, damaged shipment,
shortage-quantity received less than quantity on receipt document,
incomplete, unacceptable substitute received, and nonreceipt.
[21] Other initiatives stemming from the study include instituting a
minimum surcharge for low dollar value agreements and the elimination
of the logistics support charge as a separate charge.
[22] These agreements are known as ’pseudo“ FMS.
[23] The remaining 50 percent of the administrative surcharge for non-
Global War on Terrorism cases is received through a payment schedule
outlined in the sales agreement.
[24] Federal financial accounting standards state that reliable
information on the costs of federal programs and activities is crucial
for effective management of government operations. See Managerial Cost
Accounting Concepts and Standards for the Federal Government, Statement
4 (July 31, 1995).
[25] The Foreign Procurement Group is made up of Washington, D.C.-based
foreign government representatives who meet periodically to discuss
their experiences with U.S. security assistance programs, including
FMS.
[26] In some cases, the FMS agreement is written the same day that the
request to purchase defense articles is received.
[27] A blanket order agreement is an agreement between a foreign
customer and the U.S. government for a specific category of items or
services (including training) with no definitive listing of items or
quantities. The case specifies a dollar ceiling against which orders
may be placed.
[28] DSCA issued a memorandum in 1998 requesting that major
enhancements to the service specific systems be coordinated through
DSCA until it developed a centralized data system.
[End of section]
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