[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



                 TRANSSHIPMENT AND DIVERSION: ARE U.S.
                     TRADING PARTNERS DOING ENOUGH
                   TO PREVENT THE SPREAD OF DANGEROUS
                             TECHNOLOGIES?

=======================================================================

                                HEARING

                               BEFORE THE

         SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION AND TRADE

                                 OF THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 22, 2010

                               __________

                           Serial No. 111-122

                               __________

        Printed for the use of the Committee on Foreign Affairs


 Available via the World Wide Web: http://www.foreignaffairs.house.gov/

                                 ______


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                      COMMITTEE ON FOREIGN AFFAIRS

                 HOWARD L. BERMAN, California, Chairman
GARY L. ACKERMAN, New York           ILEANA ROS-LEHTINEN, Florida
ENI F.H. FALEOMAVAEGA, American      CHRISTOPHER H. SMITH, New Jersey
    Samoa                            DAN BURTON, Indiana
DONALD M. PAYNE, New Jersey          ELTON GALLEGLY, California
BRAD SHERMAN, California             DANA ROHRABACHER, California
ELIOT L. ENGEL, New York             DONALD A. MANZULLO, Illinois
BILL DELAHUNT, Massachusetts         EDWARD R. ROYCE, California
GREGORY W. MEEKS, New York           RON PAUL, Texas
DIANE E. WATSON, California          JEFF FLAKE, Arizona
RUSS CARNAHAN, Missouri              MIKE PENCE, Indiana
ALBIO SIRES, New Jersey              JOE WILSON, South Carolina
GERALD E. CONNOLLY, Virginia         JOHN BOOZMAN, Arkansas
MICHAEL E. McMAHON, New York         J. GRESHAM BARRETT, South Carolina
THEODORE E. DEUTCH, Florida          CONNIE MACK, Florida
JOHN S. TANNER, Tennessee            JEFF FORTENBERRY, Nebraska
GENE GREEN, Texas                    MICHAEL T. McCAUL, Texas
LYNN WOOLSEY, California             TED POE, Texas
SHEILA JACKSON LEE, Texas            BOB INGLIS, South Carolina
BARBARA LEE, California              GUS BILIRAKIS, Florida
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
MIKE ROSS, Arkansas
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
JIM COSTA, California
KEITH ELLISON, Minnesota
GABRIELLE GIFFORDS, Arizona
RON KLEIN, Florida
                   Richard J. Kessler, Staff Director
                Yleem Poblete, Republican Staff Director
                                 ------                                

         Subcommittee on Terrorism, Nonproliferation and Trade

                   BRAD SHERMAN, California, Chairman
GERALD E. CONNOLLY, Virginia         EDWARD R. ROYCE, California
DAVID SCOTT, Georgia                 TED POE, Texas
DIANE E. WATSON, California          DONALD A. MANZULLO, Illinois
MICHAEL E. McMAHON, New York         JOHN BOOZMAN, Arkansas
SHEILA JACKSON LEE, Texas            J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida











                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

The Honorable Kevin J. Wolf, Assistant Secretary for Export 
  Administration, Bureau of Industry and Security, U.S. 
  Department of Commerce.........................................     7
Mr. Vann H. Van Diepen, Acting Assistant Secretary, Bureau of 
  International Security and Nonproliferation, U.S. Department of 
  State..........................................................    18

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

The Honorable Kevin J. Wolf: Prepared statement..................    10
Mr. Vann H. Van Diepen: Prepared statement.......................    20

                                APPENDIX

Hearing notice...................................................    46
Hearing minutes..................................................    47

 
TRANSSHIPMENT AND DIVERSION: ARE U.S. TRADING PARTNERS DOING ENOUGH TO 
             PREVENT THE SPREAD OF DANGEROUS TECHNOLOGIES?

                              ----------                              


                        THURSDAY, JULY 22, 2010

              House of Representatives,    
                     Subcommittee on Terrorism,    
                            Nonproliferation and Trade,    
                              Committee on Foreign Affairs,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:11 a.m., in 
room 2172, Rayburn House Office Building, Hon. Brad Sherman 
(chairman of the subcommittee) presiding.
    Mr. Sherman. I want to thank our witnesses and ranking 
member for being here. This is the seventh or eighth hearing 
this subcommittee has had this Congress regarding export 
controls. It is long past time that Congress reauthorize the 
EAA. My own philosophy is that we need a taller fence around a 
smaller field, but obviously anything we do in the area of 
export controls can be rendered meaningless by transshipment, 
and that is why we are having this hearing today, to focus on 
transshipment and diversion and review U.S. efforts to keep 
American and other sensitive Western technologies and equipment 
out of the hands of those who can use them to threaten our 
national security.
    Most importantly, this hearing is about preventing lax 
export controls and policies in countries that trade with the 
West from allowing technology and equipment relevant for the 
development of nuclear weapons to reach Iran, Syria, North 
Korea, and similar states.
    In 1998, Pakistan conducted its first nuclear test, having 
developed its weapons far before then. Pakistan had gained that 
capacity through international deception in part, whereby the 
true end user of various equipment was obscured through 
clandestine procurement networks. We now see similar networks 
on behalf of other states that either are trying to develop 
nuclear weapons or have done so illegally. These proliferation 
techniques need countries to be the transshipment hub in the 
supply chain. Technology and equipment in countries with high 
tech manufacturing can go to those hub countries, and then on 
to the prohibited country. These hub countries have weak or 
nonexistent export controls, ineffective custom and law 
enforcement officials, and most importantly, little or no 
political will to do anything about this critical problem.
    In addition, large trade volumes at major transshipment 
ports can help camouflage the illicit shipment of diverted 
goods. In 2004, the U.N. Security Council adopted Resolution 
1540, which obligates member states to enact and enforce 
measures that would prevent proliferation of weapons of mass 
destruction to non-state actors. Efforts under this resolution 
generally include strategic trade controls. And many countries 
are enacting or strengthening such laws to reach compliance 
with that U.N. Security Council resolution.
    I would like to highlight the record of three countries 
that despite having made some strides still serve as 
transshipment and diversion hubs and generally do not 
effectively control exports to Iran and other countries of 
proliferation concern. The first of these is the UAE, one of 
the largest transshipment hubs. For two decades, it was a major 
hub through which traffickers of nuclear technology and dual-
use material have routed their illegal commerce to countries 
including Iran, Iraq, and Libya. Pakistani scientist A.Q. Khan 
operated key parts of his smuggling ring out of the Emirates.
    Nuclear traffickers shipped via the UAE because the UAE 
lacked significant export control laws and made the UAE one of 
the easiest places in the world to mask the real destination of 
cargo. Although the UAE has cracked down on smugglers in recent 
years by acting to interdict suspect shipments and by closing 
down some Iranian front companies, the Emirates still have not 
issued regulations or created an enforcement agency for their 
export control law, which was passed in 2007. So those seeking 
to ballyhoo cooperation with the UAE pointed to the statute. 
Three years later, no enforcement agency, no regulations.
    Another concern is the UAE governing structure, where each 
emirate is semi-independent and retains some national power. 
Well, eventually, their Federal Government will enforce export 
controls. Currently, any enforcement is the purview of each 
emirate. Particularly noteworthy is the emirate known as RAK--
that is Raz Al Khaimah--because of its close proximity to Iran, 
the depth of Iranian investments in that emirate, and its 
remoteness from the center of the emirates.
    Malaysia is the second country I want to highlight. It got 
an inadequate record of preventing the diversion of weapons-
related technology shipments. Malaysia's lack of export 
controls has allowed arms traffickers to ship sensitive 
materials to pariah nations such as Iran and North Korea. 
Shipments have included parts for bombers and items sent to 
firms linked to Iran's nuclear ballistic missile program. 
Reportedly, as a condition for the prime ministerial invite to 
the nuclear security conference here in April, Malaysia enacted 
a strategic trade act this year.
    Prior to the enactment of this legislation, Malaysia didn't 
even have significant export controls on its books. However, as 
we have seen with the Emirates, just having a law on the 
statute books is insufficient. We must make it clear that we 
cannot be faked into acting as if Malaysia has acted 
appropriately by enacting a statute if they fail to move 
forward expeditiously toward regulations, enforcement regimes, 
et cetera.
    Finally we have China. The Chinese legislation regulation 
concerning the control of sensitive technologies is more mature 
than the other countries I have mentioned, but the political 
will to enforce these regulations remains lacking. U.S. 
designation lists are littered with Chinese entities, yet 
Chinese authorities are unwilling to meaningfully control 
strategic trade. In one example in The Washington Post, a North 
Korean businessman used his Beijing office to facilitate the 
transfer of nuclear technology to Syria.
    I should mention Iran at this point. Earlier this month, 
the U.N. Security Council took a step in the right direction by 
imposing another round of sanctions. Just 3 weeks ago, Congress 
further reinforced and went beyond the U.N. sanctions by 
passing the good first, but not sufficient, step, comprehensive 
Iran Sanctions, Accountability and Disinvestment Act, which 
imposes an array of new economic policies aimed at persuading 
Iran to change its behavior. However, as our experience with 
Pakistan's nuclear program demonstrated, export control laws 
will be of little value unless we can properly control the flow 
of global cargo at transshipment hubs. And when I say `we,` I 
mean not only the United States, but those countries 
cooperating with us.
    The United States has offices and law enforcement agencies 
that work to keep sensitive goods out of the hands of weapons 
proliferaters and terrorists. One such office is the Department 
of State's Export Control Cooperation, ECC, which provides 
assistance related to strategic trade control systems and 
prevents illicit transfer of weapons-related technology 
materials. A major component of this office is the Export 
Control and Border Security program, EXBS, which provides 
foreign assistance for the development and implementation of 
trade controls.
    In addition, the Department of Commerce's Bureau of 
Industry and Security's, BIS, transshipment country export 
control initiative is tasked with strengthening trade 
compliance and export control systems with those countries and 
companies that continue to act as transshipment hubs. I think 
it is important that we provide aid to countries that have the 
political will to prevent diversion, and at the same time the 
State Department has to advise Congress and be frank with 
regard to those countries where the lack of political will is a 
reason for us to reevaluate other aspects of our relationship 
with that country.
    Finally, and perhaps most importantly, the Iran sanctions 
legislation I referenced moments ago includes a title I 
introduced here in the House, championed by Senator Dodd in the 
Senate, that would create a new export control category for 
countries that are of transshipment or diversion concern and 
have taken ineffective steps to rein in this problem. A country 
slapped with this designation will be denied critical U.S. 
technology, including technology needed for the development of 
their manufacturing in high tech sectors.
    I know it is early, but I hope at this hearing, we will 
highlight the need for a vigorous implementation of Title III 
of the Iran sanctions bill. And I want to hear how your 
agencies will do just that. I thank my colleagues for their 
indulgence, as I have gone over time. And again, I hope this 
hearing will provide us with a greater understanding of 
transshipment threats and our ability to effectively minimize 
such threats to our national security.
    Now I will recognize the gentleman from California, Mr. 
Royce.
    Mr. Royce. Thank you very much, Mr. Chairman. Thank you for 
this hearing and the work that we have done on this issue. The 
diversion and transshipments of sensitive U.S. technology are 
very significant security threats around the globe, and keeping 
these items out of the wrong hands is an increasing challenge 
as global trade of dual-use items just keeps increasing.
    There is no more determined violator of this--I think you 
and I agree, Chairman--than Iran. Its regime very aggressively, 
cleverly and effectively targets advanced technology for its 
nuclear program and some of its other weapons programs. 
Frequent targets of this are American companies, so checking 
Iran's procurement network has to be a top priority.
    Another critical country on this front is China because its 
manufacturing sector has very weak export controls, which makes 
it a key target. China's notorious record as a WMD proliferater 
demands that it be given very close scrutiny. In the '90s, we 
did work on this committee calling attention to the transfer of 
ring magnets from China to Pakistan and into the hands of A.Q. 
Khan's network. So I am a skeptic on China's commitment to 
export controls given its past behavior, and certainly given 
its nonchalance about nonproliferation in general. Its planned 
sale just announced of two nuclear reactors to Pakistan, and 
its multibillion-dollar investment in Iran's energy sector are 
additional cases in point in terms of the way China behaves in 
this regard. And I think Beijing's pressure on the Obama 
administration to loosen export controls is concerning.
    There are some positive developments, and you hit on 
several of them, Chairman. The UAE has made progress, 
especially in checking shipments to Iran. The UAE recently 
stopped a North Korean vessel carrying arms to the Islamic 
Republic. So they have moved in the right direction. More is 
needed.
    There are reports that transshipment and diversion 
activities may now be shifting elsewhere in the region. 
Malaysia passed an export control law in April, as you 
mentioned. That is a good start. It is only a start, and 
certainly Malaysia was a past hub of activity for A.Q. Khan as 
well. So any steps in Malaysia have to be in the right 
direction since there was no real focus on it prior to this 
law.
    Our export control system certainly needs reform, and we 
agree on this. And I am interested in determining if the 
administration's reform proposals would strengthen our security 
by effectively reducing transshipments and reducing diversion. 
And I think the other point I would make is that this hearing 
is really an opportunity to look at the Obama administration's 
implementation of the Iran sanctions legislation, the 
conference committee of which you and I served on, Mr. 
Chairman, that was signed into law last month. And I would like 
to be clear here.
    I think that legislation was a disappointment, a big one. 
As I said when the conference report passed, good sanctions 
were weakened by delays, half measures, and waiver after 
waiver. And that was at the administration's insistence. That 
is too bad. But on Iran, with the waivers that the 
administration negotiated, the decisions are now in the 
administration's court. Will it actually sanction foreign 
companies doing business with Iran? The fact that the 
administration hasn't imposed a single sanction on an Iranian 
trading partner points to more inaction, just what we can't 
afford toward Iran.
    I hope I am wrong. I suspect I am right, and I yield back, 
Mr. Chairman.
    Mr. Sherman. Thank you. Would you like an opening 
statement? I recognize the gentlemen from Illinois for 5 
minutes.
    Mr. Manzullo. Thank you, Mr. Chairman, for calling this 
very important hearing to examine and discuss the issues of 
diversion and transshipment of sensitive export control 
technology. Our Government must establish an export policy 
based upon clearly defined national security and foreign policy 
priorities that also recognizes the realities of a global 
supply chain and encourages legitimate trade.
    It is clear that overly broad controls are detrimental to 
U.S. national security interests as well as our overall global 
competitiveness, to which the United States has gone 50 years 
ago from a 50-percent market share in machine tools in the 
world, to 18 years ago 13 percent, and now we are at 7 percent. 
And because, in many cases, of our export controls, we are 
losing our technology because the American manufacturers have 
made it very difficult--the government has made it very 
difficult for them in many cases to export their precision 
machinery, and foreign nations have taken that over.
    It makes little sense to impose controls on widely 
available products that detract our enforcement personnel from 
more significant threats to our national security. As part of 
this goal to double the exports by 2015, President Obama 
ordered a broad-based interagency review of U.S. export control 
regulations. The results of that review are now being put into 
motion. Defense Secretary Gates outlined four goals for the 
administration's export control reform initiative back in 
April: An overhaul of the structure of the control lists, 
efficient licensing policies and practices that account for the 
realities of innovation and production, better coordination in 
our enforcement measures, and a unified IT infrastructure.
    I truly believe that if we strive to meet these goals, we 
will produce a more predictable, efficient, and transparent 
system that benefits not only our national security, but our 
global competitiveness. And as we continue to discuss proposals 
to modernize our export control system, it is imperative that 
we remain mindful of diversion and transshipment risks. I have 
long been an advocate for tougher penalties that justly target 
those who flout our export control laws and regulations. The 
Export Control Improvement Act, H.R. 3515, which I introduced 
last year with this subcommittee's chairman, my friend Brad 
Sherman, and another good friend, Adam Smith of Oregon, would 
address several problems with the current system by expanding 
enforcement authorities for BIS and also mandating updates to 
the computerized automated export system, AES.
    The bill would strengthen our current trade controls by 
requiring the Federal Government to modernize the AES, update 
it continually, making the filing process for shipments abroad 
more thorough and significantly reducing unintentional illegal 
exports. The bill also authorizes an accountability system for 
export intermediaries and enhances prosecution of exporters who 
attempt to circumvent electronic blocks.
    I know that the Bureau of Industry and Security regularly 
accesses AES data to verify compliance with the Export 
Administration regulations and to support its investigative 
functions. For example, AES data contributed to a BIS 
investigation that led to the identification of a major 
diverter of U.S.-origin aircraft parts to Iran. I hope our 
proposals, aimed at strengthening the statutory requirements 
for the AES, will be included in any rewrite of the Export 
Administration Act.
    The second half of that bill focuses on enforcement 
measures and addresses transshipment, re-exportation, and 
diversion of controlled items by providing guidelines and 
consequences for designation of a country as a destination of 
diversion concern or of possible diversion concern. Some of 
these changes were incorporated into the Iran sanctions bill 
recently signed into law. Specifically, Title 3 of H.R. 2194 
included much of the language we introduced in H.R. 3515. These 
new mandates should provide another set of tools for our 
Government to combat diversion and transshipment of sensitive 
technologies.
    Chairman, I greatly appreciate the opportunity to share my 
views and concerns. I look forward to continuing to work with 
you and other colleagues on the committee in crafting 
legislation that will improve our national security by 
reforming our export control system. I thank you again for 
having this hearing.
    Mr. Sherman. Thank you, Mr. Manzullo. I will now recognize 
Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman. It is a pleasure to be 
with you. And let me join you in welcoming our distinguished 
witnesses. The topic of today's hearing is one that is 
particularly relevant in light of the recent situation and our 
sanctions on Iran, that this committee, with the leadership of 
Chairman Berman and others, was able to push through this 
legislative chamber, which the President has now signed into 
law.
    The Iran Sanctions Act, the strongest sanctions we have 
placed on the Islamic Republic, have already begun to have 
immediate effect in pressuring and punishing international 
companies who do business with Iran. Now we have got to ensure 
that in conjunction with these economic sanctions that we 
address and prevent the trade of dangerous technologies from 
into the hands of rogue states like Iran and terrorist 
organizations.
    The United States and its trading partners must be ever-
vigilant about the trade and smuggling of dual-use technologies 
into Iran, into China, into North Korea, and others whose 
interests are in direct opposition to the United States and our 
friends and allies. One particular trading partner I would like 
to address is the UAE. Dubai has been working to improve its 
image, for sure. And the reality has a venue for such 
counterproductive trade. They have in fact clamped down on 
financial flows to suspected terrorist organizations following 
the September 11th attacks.
    However, Dubai in 2003 was also known as the base of 
operations for front companies working for the Pakistani 
scientist A.Q. Khan and his nuclear procurement network. Very 
dangerous business. Today, the UAE says that it is taking 
action to maintain nuclear security and counter threats. It has 
closed down 40 international and local firms as part of a 
crackdown on violators of the sanctions that were also passed 
by the United Nations. And this is a good thing.
    Earlier this year, the UAE and the United States signed an 
agreement for the installation of equipment at UAE ports for 
the detection of nuclear materials. This is another good thing. 
These good things, these steps, are steps in the right 
direction, but we must go further.
    In 2007, the UAE enacted a new export control law, which 
included license requirements for the export or re-export of 
sensitive goods. In 2008, the law was amended to toughen its 
implementation. And in 2009, the UAE cabinet formed a committee 
to improve compliance and enforcement.
    So the fundamental question we have got to answer today 
regarding the UAE is this. What is the status of the 
implementation of the UAE export control law, and how is the 
United States involved in its implementation and oversight?
    So again, Mr. Chairman, thank you for giving venue to 
explore how the administration has led in this way and 
continues to do so, and I look forward to the witnesses.
    Mr. Sherman. Thank you for that opening statement. Our 
ranking member does have a good excuse for not being here. He 
is questioning Chairman Bernanke, so I am sure Assistant 
Secretary Wolf and the Acting Assistant Secretary will not be 
offended. And I will ask my questions in the first round after 
other members. That way, if they are not suitably entertained 
here, they can leave after they ask their questions. On the 
other hand, I would hope that they would stay for the grand 
finale, which of course will be my own questioning of the 
witnesses.
    First, I would like to introduce the Honorable Kevin Wolf. 
Mr. Wolf was sworn in to his current post as Assistant 
Secretary of Commerce for Export Administration in February 
2010. Prior to joining the Bureau of Industry and Security in 
the Department of Commerce, he was a partner in the Washington, 
DC, office of Bryan Cave. From 1996 to 1997, Mr. Wolf was the 
Special Assistant Counsel to the House Committee on Standards 
of Official Conduct.
    In any case, welcome back to the House. But before you 
begin your remarks, it is also my pleasure to introduce and 
welcome back Vann Van Diepen. Mr. Van Diepen has been the 
principal Deputy Assistant Secretary of State for International 
Security and Nonproliferation since June 2009, and now is the 
Acting Assistant Secretary. From 2006 to 2009, he was a 
national intelligence officer for Weapons of Mass Destruction 
and Proliferation in the Office of the Director of National 
Intelligence. Prior to that, Mr. Van Diepen directed the State 
Department's Office of Missile Threat Reduction.
    Mr. Wolf, please proceed.

 STATEMENT OF THE HONORABLE KEVIN J. WOLF, ASSISTANT SECRETARY 
  FOR EXPORT ADMINISTRATION, BUREAU OF INDUSTRY AND SECURITY, 
                  U.S. DEPARTMENT OF COMMERCE

    Mr. Wolf. Chairman Sherman, Ranking Member Royce, and 
distinguished members of the committee, thank you for the 
opportunity to testify before the Terrorism, Nonproliferation 
and Trade Subcommittee regarding the work the Department of 
Commerce is doing to prevent the diversion of controlled goods 
through transshipment areas.
    The dual-use export control system is a vital tool on the 
front line to fight the effort to protect national security of 
the United States against a diversion of threats our nation 
faces. The department's Bureau of Industry and Security, or 
BIS, administers and enforces the Export Administration 
regulations, known as the EAR, to further U.S. national 
security, foreign policy, and economic security interests.
    The commodities, software, and technology that are subject 
to the EAR are generally referred to as dual-use items and are 
for supposed civilian use, but also may have a range of 
military applications or are controlled for other foreign 
policy reasons. In administering and enforcing the EAR, BIS 
works closely with a number of other agencies, including the 
Departments of Defense, Energy, Homeland Security, Justice, 
State, Treasury, and the intelligence community. And since 
arriving at BIS, I have placed a particular emphasis on 
interagency cooperation.
    BIS employs a variety of methods to prevent diversion of 
items subject to the EAR to unauthorized destinations and uses. 
These methods include interagency review of export license 
applications, identification of high-risk foreign parties, 
extensive outreach to the business community, end use checks, 
and reviews and analysis of export data from various sources. 
BIS controls the export, re-export, and transfer of all items 
subject to the EAR. Last year, BIS processed approximately 
20,000 export license applications. The value of those 
applications was about $60 billion--with a b--for items subject 
to the EAR.
    The Commerce Department, along with the Departments of 
Defense, Energy, and State, have the opportunity and generally 
do review all aspects of a proposed export to evaluate the risk 
of diversion either in-country or to a third country, or to 
evaluate any other national security or foreign policy risks. 
The entity list is one tool increasingly used to address the 
diversion issue. BIS places on the entity list individuals and 
companies based on specific facts that the entities have been 
involved, are now involved, or pose a significant risk of 
becoming involved in activities contrary to the national 
security or foreign policy interests of the United States. It 
is a fairly broad standard.
    The expanded entity list has proven to be an extremely 
effective tool against diversion and has significant 
consequences for the listed entities that I will be able to 
describe later. BIS also imposes restrictions on exports and 
re-exports through the issuance of temporary denial orders. 
These TDOs deny the export privileges of a company or an 
individual to prevent an imminent export control violation.
    Vigorous enforcement is a critical aspect of addressing 
transshipment concerns. The bureau's Office of Export 
Enforcement conducts end-use checks to confirm the bona fides 
of a foreign entity to ensure that sensitive items are not used 
in ways that threaten national security interests of the United 
States, and for other reasons.
    There is a group of people who work with the Office of 
Export Enforcement, special agents and export compliance 
officers, whose principal mission is to ensure that items on 
the EAR entering the regions and the countries where they work 
are used in accordance with U.S. export control laws and 
regulations.
    The bureau also conducts research and analysis of open 
source, intelligence, financial, statistical, and other 
information, including export data from the automated export 
system, to identify trends in controlled trade, including with 
regard to transshipment, and develop productive end-use checks 
and actionable law enforcement leads.
    BIS maintains a constructive cooperation relationship with 
the U.S. business community on specific diversion threats 
through targeted industry outreach, which focuses on specific 
goods and technologies that illicit proliferation networks 
actively seek to acquire. BIS contacts U.S. manufacturers and 
exporters of these goods and technologies to apprise them of 
acquisition threats and solicit their cooperation in 
identifying and responding to suspicious foreign purchase 
requests.
    We also have significant outreach activities, and as we 
will describe later, we support the Department of State in its 
EXBS program that Vann will describe later, in which we 
participated considerably in the last year. And in general, I 
want to thank you for the opportunity to discuss these issues 
with you and the tools the Department of Commerce has and uses 
to protect the national security of the U.S. against the 
diverse threats our country faces.
    [The prepared statement of Mr. Wolf follows:]
    
    
    
    Mr. Sherman. Mr. Van Diepen.

     STATEMENT OF MR. VANN H. VAN DIEPEN, ACTING ASSISTANT 
        SECRETARY, BUREAU OF INTERNATIONAL SECURITY AND 
           NONPROLIFERATION, U.S. DEPARTMENT OF STATE

    Mr. Van Diepen. Thank you. Mr. Chairman and members of the 
subcommittee, thank you for giving me the opportunity to 
testify on the diversion of sensitive items in transshipment 
and the State Department's efforts to address this challenge. I 
ask that you include my prepared testimony into the record of 
today's hearing.
    As you have noted, Mr. Chairman, major transshipment hubs 
with weak regulatory controls represent an important 
vulnerability in preventing proliferation-related trade. In 
these hubs, brokers, front companies, and middlemen can 
facilitate proliferation-related activities, hiding their 
transactions among large volumes of fast-moving commercial 
goods. In order to stop them, a strong regulatory structure is 
necessary. And through intensive diplomacy, the State 
Department is taking a leading role in building such a 
structure.
    Our efforts are apparent in several U.S. Security Council 
resolutions requiring countries to exercise greater authority 
over transshipment and to prevent proliferation-rated 
transfers. As you noted in 2004, U.N. Security Council 
Resolution 1540 established binding obligations to take and 
enforce effective measures against the proliferation of WMD, 
their means of delivery, and related materials, including 
controlling the transshipment of WMD-related items. 
Additionally, the U.N. has adopted several resolutions on North 
Korea's and Iran's nuclear and missile programs that call upon 
countries to stop proliferation-related transactions. These 
resolutions identified states' authorities to search, seize, 
and dispose of items destined for proscribed programs. The most 
recently adopted resolution on Iran, U.N. Security Council 
Resolution 1929, further expanded these authorities.
    In building international support, State also works 
directly with other countries to detect and halt specific 
proliferation-related transactions. We alert these countries to 
a potentially proliferant transaction and request that they 
investigate and take necessary measures to stop any 
proliferation. These interdiction efforts are greatly 
facilitated by the Proliferation Security Initiative, the PSI, 
a global effort to stop the trafficking of WMD. Many key 
transshipment centers, including the UAE and Singapore, are 
partners in the PSI.
    The department also meets regularly with various countries 
bilaterally to discuss proliferant procurement, export and 
transshipment control, the implementation and enforcement of 
proliferation-related U.N. Security Council resolutions, 
proliferation finance, and other relevant issues. These 
dialogues have proven to be an effective way to improve overall 
cooperation.
    We also work to ensure that the multilateral export control 
regimes address the risk of diversion during transshipment. 
Both the missile technology control regime and the Australia 
Group, which controls chemical and biological items, have taken 
steps in this area. And we are continuing to improve the 
regulation and enforcement of transshipment controls by key 
countries via the export control and related border security 
assistance program, EXBS, the premiere U.S. Government 
initiative in this regard.
    During the past 24 months, EXBS has delivered 98 bilateral 
trainings to 37 countries on transit and transshipment related 
topics. EXBS convenes a global transshipment conference every 
year, providing a forum for supplier countries and 
transshipment hubs to collectively discuss challenges and 
solutions. EXBS succeeds by assisting foreign governments to 
establish and implement effective export control systems that 
meet international standards.
    In conclusion, the department is employing a number of 
tools to help counter the challenge posed by diversion of 
sensitive items in transshipment, and I look forward to 
discussing these issues with the subcommittee. Thank you.
    [The prepared statement of Mr. Van Diepen follows:]
    
    
    
    Mr. Sherman. Mr. Klein, if you want to go first?
    Mr. Klein. No.
    Mr. Sherman. Done? Okay. Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman. The current U.S. 
export policies are negatively impacting our high technology 
industrial base, as I mentioned in my opening statement. We 
have European countries that are advertising that they are 
ITAR-free. The United States is becoming known as an unreliable 
supplier. We worked last year with Mr. Sherman and Mr. Crawley 
and Mr. Blumenauer 2 years ago on changing section 17(c) of the 
Export Administration Act that has resulted in billions of 
dollars more of aircraft parts that are being exported.
    But one in four people in the majority of the district that 
I represent are directly involved in manufacturing. Rockford, 
Illinois used to be known as the machine tool center of the 
world. And I am very concerned that this country has lost its 
cutting edge in machine tool technology. Now, I know today's 
topic is transshipment, and I don't think we have too many 
examples of transshipments of machine tools. They just copy 
them, and so that takes care of that.
    But my question to both of you in the broadest sense is how 
do we strike that balance on national security, and at the same 
time try to encourage exports of many machine tools that have 
been commoditized around the world and as to which we have 
archaic rules, such as if it is over four access in some cases, 
you need a license, and some countries you can't ship to at 
all. It is an open question.
    Mr. Wolf. No. Thank you. It is a good question. First, as a 
general principle, I don't view export controls as a balancing 
of national security against economic interests. They are 
national security controls. And then it comes to the issue of 
how you define what national security is. And if you don't have 
a healthy industrial base, and if you have export rules that 
motivate companies to offshore their work, or if you have rules 
that are so complex that no one understands, you are harming 
your national security and your economic base. And so as very 
well laid out by Secretary Gates and then later by General 
Jones, the reform plan clearly takes those issues into account 
with this, as generally described, as earlier described, a 
smaller yard with a higher fence, so that we can review the 
lists of things that are controlled now so that we can put more 
resources and more emphasis on the things that really matter 
without harming the industrial base.
    So the points that you have made are already being 
contemplated and considered. I mean, it is a general answer to 
a general question. I would be happy to go into more detail on 
this or transshipment-specific topics, as you like.
    Mr. Van Diepen. The only thing I would add to what Kevin 
has said is that one of the things that we do at State to try 
and ameliorate this problem is to promote multilateral 
implementation of export controls. To the extent to which 
export controls are not unilateral, not only are they more 
effective, but it helps the commercial playing field, so to 
speak. And so the work that we have done to expand the 
membership of the international nonproliferation regimes to 
promote countries who are not members unilaterally applying the 
same standards, the requirements of U.N. Security Council 
Resolution 1540 for all countries to have proliferation-related 
export controls, is another way in addition to the internal 
business of export control reform of trying to address some of 
the concerns that you have mentioned.
    Mr. Manzullo. The reason I mention that is we have a unique 
situation in Rockford, Illinois. When Ingersoll Machine Tool, 
the giant company, went into bankruptcy, it got split into four 
parts. One part, just prior to the bankruptcy, was sold--the 
tool cutting division was sold to an Israeli company. I am 
sorry. The cutting tool division was sold to an Israeli 
company. The machine tool division was sold to an Italian 
company. And the production line was sold to a Chinese company 
that is wholly owned by the Chinese Government, Dalian. And 
that is the Ingersoll production line. And we have a unique 
situation where if they actually wanted to manufacture high end 
machines, they may not be able to ship those machines to China, 
even though the Chinese Government owns that American company.
    And yesterday, we had a tariff act, a tariff relief act, 
where we charged tariffs to manufacturers on items that are not 
even available domestically. And the reason I raise that is 
that appears to be no focus on this country--and I am not being 
critical--no focus as to the impact on manufacturing of all the 
various agencies that are involved, except to the extent that 
we have lost this huge market share around the world on it. And 
I know we have talked to both of you, and I know of your 
sensitivities and your desire to make sure that you do 
everything possible to maintain our industrial capacity.
    But I am just really, really concerned. And as much as I 
admire my friend Mr. Royce, we do have some differences on the 
extent to which these controls have actually hurt us. But I 
just wanted to raise that as a point of thought, and I 
appreciate your comments on it. And thank you for coming today.
    Mr. Sherman. Thank you. I would just comment that on those 
occasions when we do not allow an export, not only are we not 
helping build the industrial base of the United States, we are 
helping build the industrial base in whatever country that does 
get the order. With that, I would like to recognize the 
gentleman from Florida for 5 minutes.
    Mr. Klein. Thank you, Mr. Chairman. And, gentleman, thank 
you for being here today and giving us your insight on this. 
Obviously, there is a balance of interests, as has been 
mentioned by Mr. Manzullo and the chairman. We have an interest 
in our industrial base and creating jobs in the United States. 
We also have an interest in our national security and the 
nonproliferation, and the proliferation security initiative, 
which obviously has good goals.
    What I would like to focus on for a second is the 
recognition--I think it has already been said, but just to 
reiterate this--that when other countries are not 
participating, and there is a free flow of these goods or these 
components or products, obviously as a world interest in 
national security, we are not getting to the endpoint or the 
end goal.
    Specifically, China. China is not a signatory, correct, to 
the proliferation security initiative?
    Mr. Van Diepen. Correct.
    Mr. Klein. They are not. Okay. Very large economy, very 
industrious at this point, and very much pushing itself out 
into all parts of the world. The significance of China not 
being a participant of this initiative, what does it mean, in 
your opinion, to the effectiveness of this international effort 
to control these components? And what are we doing about it as 
the United States reacting to this or using our efforts to 
reach out to them or get other countries to reach out to them 
engage them in this?
    Mr. Van Diepen. Right. I think that the presence or absence 
of their subscription to PSI, I think, is less significant than 
the extent to which China is effectively preventing 
proliferation-related transfers from coming out of its economy 
in its territory. I mean, if things were under a good control, 
but they weren't a member of PSI, I am not sure that would be a 
particularly problematic situation. Likewise, if they were a 
member of PSI, but we saw the continued levels of activity that 
we are seeing coming out from Chinese entities, that would 
still be quite problematic.
    Really, what we have been trying to do over a number of 
administrations over more than 20 years is to try and persuade 
the Chinese to put on and more effectively enforce controls on 
Chinese entities to keep them from getting involved in 
proliferation-related activity. We have done a good job over 
the years, I think, in getting them committed to the right 
standards. They are now members of the right treaty regimes. 
They support Security Council resolutions like U.N. 1540, which 
could not have passed without China's vote, that set the right 
standards. They have on paper a pretty good set of domestic 
export controls. But our most persistent problem over these 
past 20 years has been the fact that individual Chinese 
entities continue to engage in proliferation-related activity, 
and that is despite repeated imposition of U.S. sanctions 
against those entities under a variety of different laws and 
authorities, despite repeatedly bringing this up diplomatically 
with the Chinese. So this is a----
    Mr. Klein. So as to your assessment of where we are at 
today versus 5 years ago?
    Mr. Van Diepen. Is that we are--things are a lot better in 
terms of some of the details of what is being shipped. And we 
can get into some of that in a classified setting. But overall, 
there is still much too much proliferation-related activity 
going on from Chinese entities, and it is our continuing 
challenge to try and push that into a better direction.
    Mr. Klein. Mr. Wolf, any different opinion?
    Mr. Wolf. No. I agree.
    Mr. Klein. I mean, I think, Mr. Chairman, as we all know, 
this is obviously a huge issue because to the extent we are 
preventing our companies in the United States from producing--
and we understand the importance of doing it. We are doing the 
right thing in the United States. But if we are punishing, you 
know, American companies and other companies from producing 
things, and we don't have the real controls, and other 
companies are supplying components of WMDs to terrorist 
organizations or whatever, it is a very--the outcome is no 
different. And that is a big problem. So I think there really 
does have to be--and I appreciate the effort. And I am in 
agreement with you. Once you signed a piece of paper, if you 
are not following it through, it doesn't really matter. We may 
have the worst case scenario, where they haven't signed it, and 
they are not really putting the necessary controls in place.
    We want to do whatever we can to get the necessary controls 
and get other countries that engage in commerce with China to 
make this a high priority issue, that this is a matter of 
international national security, not just the United States. 
This isn't just our game. This is everybody's game in terms of 
making sure that these products don't get into the hands of the 
wrong people for development.
    Thank you, Mr. Chairman.
    Mr. Sherman. Thank you. Members are reminded that 
immediately after this open hearing, we will go into a 
classified hearing in another room, and hear the real answers 
to all these questions. With that, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman. Let me ask Deputy 
Assistant Secretary Van Diepen a question. The Obama 
administration hasn't imposed sanctions on any Iranian trading 
partner. It was clear to me, I think, and to others involved in 
the sanctions legislation on the conference committee that the 
administration really doesn't want to sanction foreign 
companies. The new sanctions law is full of waivers, 
unfortunately. So I was going to ask you, what is going to be 
different now. Will there be a willingness to sanction, and 
what role will your office play in making decisions on bringing 
sanctions?
    Mr. Van Diepen. Well, Mr. Ranking Member, first of all, I 
am not quite sure what was meant by Iranian trading partners, 
but during the time of this administration entities who have 
engaged in various proliferation-related activities with Iran 
have been sanctioned. In fact, we just recently sanctioned----
    Mr. Sherman. If I can interrupt the witness, the gentleman 
from California was referring to the Iran Sanctions Act, and 
those companies who invest in the Iranian oil sector.
    Mr. Van Diepen. Thank you. I appreciate that clarification. 
Now in terms of the new sanctions legislation, the portion of 
it that is really directly relevant to the work of the 
Nonproliferation Bureau, is Title 3, dealing with potential 
countries of diversion concern. And, you know, we will be part 
of the State Department's part of dealing with the consequences 
that will flow from the report that the DNI is supposed to be 
doing under that legislation that talks about potential such 
countries. So, you know, this will become part of the normal 
policy implementation process.
    Mr. Royce. Let me ask you another question. China has a 
long history of proliferation. I spoke in my opening statement 
about some of that past activity, especially providing those 
critical components to Pakistan's capability originally, A.Q. 
Khan's network and their ability to bring an atomic weapon 
online. China now appears determined to sell Pakistan two 
nuclear reactors, and that is certainly against the norms of 
the Nuclear Suppliers Group. What is the administration's 
position on the sale by China to Pakistan of these reactors?
    Mr. Van Diepen. Based on the facts that we are aware of, it 
would appear to us that that sale would not be able to occur 
consistent with NSG rules unless the NSG were to give it a 
specific exemption, which, of course, China does not currently 
have for that. So if they were to proceed with that sale 
without such an exemption, it would be contrary to NSG 
guidelines.
    Mr. Royce. I would ask you--well, then what will our 
position be at the--we have input. Will you advance the 
position in opposition?
    Mr. Van Diepen. Yes, sir. I mean, by definition, we don't 
support any activity that is inconsistent with the guidelines 
of these various regimes that----
    Mr. Royce. So you will raise that.
    Mr. Van Diepen. And have, yes.
    Mr. Royce. And we will have the ability to block that.
    Mr. Van Diepen. Well, what we can block is giving the 
exemption, but if China decides to go ahead without the 
exemption and violates the rules, the group per se can't block 
the sale. But we can certainly make clear our opposition and 
try and take steps to persuade them to do otherwise.
    Mr. Royce. In April, The Wall Street Journal reported that 
an Iranian procurement firm obtained critical valves and vacuum 
gauges made by a French company that until December was owned 
by a U.S. firm. Allegedly, the valves moved through an 
intermediary representing the Chinese company that was based 
outside of Shanghai. The story reported that an investigator 
said that Iran has made ten attempts to acquire valves used in 
uranium enrichment, and they did that over the last 2 years. 
That is the tenacity that we are up against.
    What could you tell us about this case?
    Mr. Van Diepen. I am not familiar with the details of that 
particular case. We would be happy to provide you with more 
information on that subsequently.
    Mr. Royce. Okay. I am going to ask you lastly about 
authority to interdict here. Assistant Secretary Van Diepen, 
you said in your testimony that the most recent U.N. sanctions 
on Iran single out the Islamic Republic of Iran's shipping 
lines for cargo inspection vigilance when there is reason to 
believe its business could contribute to proliferation-related 
activity. What does vigilance actually mean? Do you have 
authority to interdict with this vigilance? The administration 
sought a more aggressive mandate at the U.N., reportedly 
seeking to blacklist this firm. What action would that outcome 
have allowed for or required, and right now what action can be 
taken, in your opinion?
    Mr. Van Diepen. In terms of what would have been permitted 
prior, I think it is better for us to get that to you 
definitively in writing so I don't get it wrong. In terms of 
the current situation under the vigilance, I think the key 
thing it does is it provides those countries that are willing 
or can be persuaded to take action a better basis to act. It 
doesn't go as far as we would have liked because there is no 
mandatory quality to it. So if there is a country that takes 
what we would regard as the wrong course and chooses not to act 
in that situation, they would not technically be in violation 
of a U.N. Security Council resolution in doing so.
    But because of the language in the resolution, we would 
have a better basis to pressure that country to try and do the 
right thing, but it would not be required to do the right 
thing.
    Mr. Royce. Let me ask you one last question. Reportedly, 
Microsoft recently provided the source code of some of its 
biggest products to Russia's Federal security bureau. 
Reportedly, similar deals have been done with China by 
Microsoft, who provides the operating system for 90 percent of 
the world's computers, including our Government's. As I 
understand it, source code that is relevant to specific 
products like a missile or night vision goggles is controlled 
under U.S. export control laws.
    However, operating system source code used in commercially 
available computers or servers is generally not controlled. 
Given the increased emphasis on protecting U.S. national 
security and commercial infrastructure from cyber attacks, 
should such code be controlled under U.S. export control laws? 
Do you think this is a valid concern? I would appreciate your 
opinion, and ask that of Assistant Secretary Wolf.
    Mr. Wolf. Sure. I won't comment on any particular export or 
license application here because of statutory prohibitions on 
public, but with respect to the general principle about 
software and source code and operating code, there is a 
Commerce control list which identifies a wide variety of 
different types of software for the production, development, 
and use of end items and software that contains different 
degrees of encryption controls that are controlled for export 
from the U.S.
    You know, we would have to go down into the weeds about 
what the particular issues are of concern, but there are 
already significant controls in a variety of types of software. 
And the extent to which additional types should be controlled, 
that is part of the reform and the review effort now.
    Mr. Royce. But to finish the point, at the U.S.-PRC's 
Strategic and Economic Dialogue held this past May in Beijing, 
the administration reported that both countries would be 
working to expand high tech trade. China has long complained 
about U.S. export controls and the administration is promoting 
export control reform. So the question is, are plans afoot to 
relax export controls on China?
    Mr. Wolf. The reform effort is not country-specific. We are 
not attempting to change the China military end-use rule. We 
are not trying to change the prohibitions that are specific to 
China as part of the reform effort. We are not considering 
issues with respect to any particular country. So to the extent 
that there is reform and a license is no longer required for a 
particular item because its export would no longer present a 
threat, what would go for China would go for any other country 
in that same group of countries.
    So no, we are not focusing on trying to relax trade or 
export controls with China per se.
    Mr. Royce. Thank you very much, Mr. Wolf. Thank you, 
Chairman.
    Mr. Sherman. I thank the ranking member. And perhaps he 
would want to co-sponsor the bill I will introduce next week to 
6 months after the enactment of such bill in MFN for China. It 
is time to cut the Gordian Knot. Mr. Van Diepen, the ranking 
member went through a number of specifics. I will go through a 
number of specifics. But is China absolutely confident that 
everything they have done in this area does not put at risk at 
all their access to U.S. markets and does not put at risk at 
all America's policy of not encouraging or helping Taipai move 
in a nuclear direction?
    Mr. Van Diepen. Well, Mr. Chairman, that sort of requires a 
degree of insight into the Chinese mind.
    Mr. Sherman. Let me put it like this. Are you aware of 
anything the State Department has done that would lead the 
Chinese to believe that they are at any risk of a change of 
either of those two policies?
    Mr. Van Diepen. Well, I assume related to at least the 
first one is the fact that, you know, we have sanctioned many, 
many Chinese firms for engaging in----
    Mr. Sherman. No. I am asking about their access to U.S. 
markets in general for civilian goods. I am talking about Most 
Favored Nation (MFN) status for each and every one of their 
consumer products.
    Mr. Van Diepen. I guess I would say that is sort of out of 
my lane in the department.
    Mr. Sherman. Let me ask something more specific. In late 
2009, British naval forces intercepted a ship from China near 
Dubai containing nuclear components intended for the Iranian 
firm Kalaye Electric. The firm was designated by the U.S. and 
the U.N. as an entity involved in Iran's proliferation-
sensitive nuclear activities. In April 2010, The Wall Street 
Journal reported that a firm associated with that Iranian firm 
had acquired special hardware for enriching uranium from a 
French company via a Chinese trading group. And I will just use 
initials for that group, ZOT Corp.
    What are we doing to address Iran's acquisition of nuclear 
components from Chinese companies or via transshipments from 
China, Mr. Van Diepen?
    Mr. Van Diepen. Through a whole host of measures, we have 
been trying to work on that problem. Those include direct 
engagement with the Chinese to try and get them to improve 
their export controls, and more importantly, the implementation 
and enforcement of those controls; going to them to stop 
specific transfers where we have got releasable intelligence 
that we can use with the Chinese; sanctioning Chinese entities 
involved in these activities; our work in transshipment areas 
like the UAE----
    Mr. Sherman. Okay. So we begged China to not sin again, and 
we sanctioned entities. Can you identify the total amount of 
dollar exports that are prevented by our sanctions? Or are we 
just sanctioning front companies or companies that don't even 
export to the United States?
    Mr. Van Diepen. There is a mix. In some cases, we are 
sanctioning----
    Mr. Sherman. Can you for the record provide a dollar value 
of what those companies were exporting before the sanctions and 
how much that was reduced after the sanctions on those 
individual companies? Are we talking about millions of dollars 
here or billions of dollars? And does China in any way 
cooperate with us in preventing front companies or telling us 
that front companies have been created? With the cooperation of 
a government you can create as many front companies as you 
want. Does China provide any cooperation in the enforcement 
sanctions against proliferating companies?
    Mr. Van Diepen. Yes, but not enough. There have been 
concrete cases where we have gone to the Chinese on specific 
transactions and specific entities, and the Chinese have in 
fact taken action. But there are----
    Mr. Sherman. No, no, not taken--but, I mean, do they help 
us impose a sanction? Do they say, ``Here are the 19 other 
names by which the sanctioned company goes by--they have asked 
us to create 19 other company names, and here are the new 19 
names.''?
    Mr. Van Diepen. Not directly. However, they have been doing 
that as part of the U.N. Security Council process that develops 
lists of entities to be subject to designation.
    Mr. Scott. They have put their own companies on the U.N. 
list?
    Mr. Van Diepen. Not that I am aware of.
    Mr. Sherman. Okay. Mr. Wolf, in 2007, Mr. Padilla, 
Assistant Secretary of Commerce for Export Administration under 
the Bush administration, gave us testimony before this very 
subcommittee that the Commerce Department had published 
regulations that would expand the entity list to target suspect 
end users. Two years later, in July 2009, Arthur Shulman of the 
Wisconsin Project, testified before this very subcommittee that 
his organization had provided Commerce's Bureau of Industry and 
Security with concrete proposals for updating the entity list, 
but that none of the proposals had been implemented. He further 
argued that the list remained unclear, and that it was not a 
useful tool for exporters.
    What is the status of revisions to the entities list?
    Mr. Wolf. Thank you for the question. I disagree that it is 
not a useful tool. It has, since we have expanded the scope of 
the entity list in 2007, become a critical tool in focusing on 
the end use and end user based aspects of export controls. As 
we move away from controls that can't really be accomplished 
through country-specific sanctions, the key is to focus on 
those entities, those people, for which we have reason to 
believe--and it is a very open standard--have been involved in 
activities that we don't like, proliferation-related 
activities, for example.
    Mr. Sherman. You are aware of the Wisconsin Project's 
helpful suggestions to your department?
    Mr. Wolf. I am. And if they or you or anyone else has 
suggestions about additional information about also-known-ases 
or doing-business-ases for any particular companies that we 
have listed, send it to me, and we will review it. There is an 
agency-driven process.
    Mr. Sherman. And did you respond or has your bureau 
responded to the suggestions they made in July 2009, which I 
realize was before your time.
    Mr. Wolf. It was before my time. I will have to check into 
that.
    Mr. Sherman. I would like and hope that you would check 
that. Until recently, the Commerce Department had only one 
individual stationed in the UAE to carry out end user 
verifications. These verifications are obviously critical in 
our efforts to uncover illicit transshipments. Has the U.S. 
placed additional resources in the UAE to conduct end user 
unifications and investigate illicit export schemes? How many 
people have you got on the ground in the UAE?
    Mr. Wolf. There is one person full time who has an export 
compliance officer. You are correct. But the work of that 
export compliance officer is augmented from time to time by 
direct visits from other agents and from foreign commercial 
service officers. So yes, there is one employee.
    Mr. Sherman. So we have got one guy, and if somebody from 
the State Department happens to have some extra time, is 
looking for more work to do to help the U.S. Government, they 
are allowed to chip in?
    Mr. Wolf. Well, I wouldn't view it quite that way. To the 
extent that there is an opportunity to send agents or other 
officials to the UAE to participate in end user checks, that is 
done. And it is not----
    Mr. Sherman. People are sitting around Commerce and State 
saying, ``I don't have enough work on my desk. Send me to the 
UAE. I would like to work there for a couple of weeks.'' Okay. 
With all this help, are we up to 1.1 full time equivalents, or 
are we still at 1.0001 full time equivalents?
    Mr. Wolf. There is one full time----
    Mr. Sherman. There is one person, okay. Next question. On 
January 23, 2009, the Commerce Department issued a temporary 
denial order to prevent the imminent violation of the Export 
Administration regulations related to the shipment of a U.S. 
manufactured high performance motor boat from South Africa to 
Iran for use by the Iran Revolutionary Guard Corps. The next 
day, a ship owned by the Islamic Republic of Iran Shipping 
Lines left Durban, South Africa with that very boat. Obviously, 
the denial order failed to prevent the export.
    I have a number of questions about this. Why did the system 
fail in this instance, and what is Commerce doing to prevent 
similar occurrences in the future? Did the U.S. contact the 
South African Government seeking to prevent the export of that 
boat? Why don't you go with those two questions. I will come up 
with some others.
    Mr. Wolf. Sure. That also was in fact before my time. What 
I know about it generally, though, is that there has been 
significant amount of follow-up with respect to sanctioning 
particular entities that were involved in that transaction. And 
I know from my past life and my current life that the 
imposition of a sanction against a company is significant. 
Being identified as an entity effectively works as a blacklist 
in that companies in the U.S. and others actually outside the 
U.S. don't want to do business with listed companies, and we 
know that that has an impact because companies do come back to 
us and ask for relief under that. So I will just leave it at 
that.
    Mr. Sherman. I have gone over time, with the indulgence of 
the vice chair of the committee, who is now recognized. Let me 
do a second round.
    Mr. Scott. All right. Thank you, Mr. Chairman. First, let 
me get your assessment and opinions of the A.Q. Khan 
procurement network. What is your assessment of it now? How is 
it? How dangerous is it? Where is it operating? And what do we 
have to fear from it?
    Mr. Van Diepen. The network, as far as we understand, is 
basically defunct. Because of the efforts taken in a number of 
countries against the constituent parts of that network, we 
think that network is basically defunct. I think the relevance 
of the A.Q. Khan network now is that it shows that there can be 
such a thing as a non-state procurement network, and so we are 
on the lookout for sort of the next A.Q. Khan network, so to 
speak. And, of course, we have done a lot of work in a number 
of the countries where the network was able to operate more 
freely because there were not export controls in place. And so 
as the chairman noted in his opening statement, for example, 
the UAE and Malaysia are places that we focused on to get them 
to put in place export control legislation that had it been in 
place would have made illegal what the network was doing, and 
hopefully will help prevent either a resuscitation of the 
network or the creation of a new network.
    Mr. Scott. Is that your opinion, too, Mr. Wolf?
    Mr. Wolf. Yes.
    Mr. Scott. Are there any remnants of it? Is there any 
indication that--you said it has been disbanded. I think that 
is what you said, or words similar to that. But there is no 
evidence of it operating anywhere? There is no remnants of it? 
There is no shoot-off organization of it?
    Mr. Van Diepen. I think to go beyond the we assess it is 
defunct, we need to get into a classified----
    Mr. Scott. All right. We don't want to do that. We will 
wait for the classified point. Now, continuing with that in 
terms of the UAE, what is the status of the implementation of 
the UAE export control law now? They have gone through a 
process of putting it in and an implementation, setting up a 
committee. What is your assessment of that now?
    Mr. Van Diepen. As we understand it, they are continuing to 
staff up the implementation office that would oversee 
implementation of the law. Now, it is not the enforcement arm. 
That already exists. It is being enforced by the existing 
customs and law enforcement services, intelligence services, so 
on and so forth. But the people who would oversee the 
implementation of the law, that office is still being staffed 
up. Our understanding is that implementing regulations have 
been drafted, but they have not yet been approved by the senior 
levels of the UAE Government that are required to do that.
    In addition, the Federal level has been reaching out to the 
authorities and the various constituent entities of the UAE, 
the various sheikdoms that constitute the UAE, to help them get 
up to speed because a lot of the actual on-the-ground 
implementation will actually be done at that level rather than 
at the Federal level.
    Mr. Scott. And how are we, meaning the United States, 
involved in its implementation and oversight?
    Mr. Van Diepen. Our export control and related border 
security program is providing a lot of training to the UAE, 
again both at the Federal level and in some of the key 
sheikdoms. We assisted them in the drafting of the legislation. 
We have given them advice on the implementing regulation. We 
also have a continuous engagement at the export control policy 
level. We once or twice a year have interagency consultations 
between the two countries that specifically deal with these 
export control implementation issues and nonproliferation 
issues. And so there is a lot of both assistance and follow-up. 
And, of course, over all of this, we are watching what is going 
on through intelligence and other means to, you know, get a 
sense of is the problem moving in the right direction.
    Mr. Scott. Very good. The UAE has been under some degree of 
security and scrutiny as an alleged transshipment point for 
military and dual-use exports, particularly to Iran, as a hub 
of operations for weapons proliferaters. What is your 
assessment now of the current situation in the UAE? And are 
these laws effective?
    Mr. Van Diepen. First of all, it is very clear to us that 
the UAE Government, at the highest levels and also broadly 
throughout their interagency, you know, has internalized and 
understands the importance of nonproliferation and of dealing 
with the proliferation problems through effective action. And 
the UAE has taken a lot of very important steps, not just 
passing legislation, but in terms of stopping specific 
shipments, shutting down companies, dealing with specific 
individuals. A lot of concrete, real-world activities have been 
engaged in by the UAE to really do things in the real world 
that matter.
    I mean, obviously, it is very important that they have a 
good export control system in effect. But what really matters 
is the extent to which bad things are affected, and they are 
taking important, concrete steps that in a very tangible way 
are having an impact on the problem. And again, we can go into 
some of the details on that later.
    Mr. Scott. Okay. Very good. Finally, if I may, Mr. 
Chairman, as you know, I am very much involved with making sure 
we maintain excellent relationships with all of our allies, and 
we have all of our allies who are very important. But certainly 
strategically Turkey is extraordinarily important. Our 
friendship and our partnership is long. But I do want to get 
your analysis of something relative to this, particularly as 
recently we have seen Turkey--or some elements of it seem to be 
waltzing closer and closer into the orbit of Iran on some 
issues. But let me just ask you to comment on this, if you are 
aware of this.
    Earlier this year, the Institute for Science and 
International Security issues a report detailing evidence and 
allegations against a former Iranian diplomat who sought to 
smuggle U.S.-made military equipment to Iran. Are you familiar 
with that?
    Mr. Van Diepen. Not that specific case.
    Mr. Scott. All right. Well, according to this report, 
Istanbul was originally chosen as the transshipment point for 
the equipment from the United States. But in January 2006, one 
of the Iranian agents allegedly involved in this scheme cited 
potential difficulties posed by the Turkish Government as a 
reason to change the transshipment location. Now the reason 
analysis of this is so important is because I think it 
indicates that Turkey is not a destination of diversion 
concern, if this is the case, and that robust enforcement by 
Turkey has deterred any would-be weapons smugglers.
    Would you say that is an adequate statement? I mean, if you 
are not familiar with the case just from my mentioning it----
    Mr. Van Diepen. Well, again, I am not able to comment on 
the specific case, but more broadly, I mean, Turkey is a 
country that is a member of all the multilateral 
nonproliferation regimes. It has worked with us on specific 
proliferation-related cases. But no country, including the 
United States, is in a position to say that, you know, we have 
definitively stopped all bad activities from going on. And 
given the fact that Turkey shares a border with Iran, it is 
certainly a place where, as you noted in your example, Iranians 
might consider trying it. But Turkey is also a place that, you 
know, has in place and tries to enforce the right kinds of 
controls and works cooperatively with us to try and thwart 
those efforts. But it is difficult to keep yourself entirely 
from being abused by proliferaters, but they are certainly 
taking a lot of the right steps.
    Mr. Scott. Good. So I want to get on the record. This is a 
good report and a good sign from the standpoint of Turkey is 
concerned. I think that what you are saying is that this 
example works to support the fact that Turkey is very strongly 
working to make sure that this kind of activity does not happen 
in that region. But I am little bit concerned about some of the 
other countries in the Black Sea and the Central Asian region, 
which may pose diversion concerns. Are there any? Is that 
region fairly safe? Particularly as countries such as the UAE 
and Malaysia tighten their export control regimes.
    In other words, if you tighten something here, and it opens 
up something here, what we want to make sure of is that if we 
tighten here, that this stays tight, too.
    Mr. Van Diepen. No. And we are very concerned about that as 
well. And in fact, if you look at the past history of this, 
even the UAE didn't come up--wasn't originally a big place for 
this sort of thing. But business tended to gravitate there 
because other places got restricted, and so we fully expect 
that as the UAE starts to crack down, proliferaters will go 
elsewhere.
    Now, in terms of Central Asia, really that was one of the 
earliest places that we started operating in our export control 
assistance activities because we recognized with the breakup of 
the Soviet Union there was going to be a loss of centralized 
control. And given the geographic proximity of those countries 
to places like Iran and other interesting destinations, you 
know, early on we sought to try and head that phenomenon off. 
And so we have been very actively involved in all of those key 
countries, helping them put laws in place, given them 
enforcement equipment and training, X-ray machines, nuclear 
radiation detectors, that sort of thing. And so there is a 
fairly substantial effort in place to try and keep that from 
becoming the next place that folks again.
    But again, given that there is a geographic proximity, 
given that that is a region where smuggling of all types has 
been endemic for centuries, there will always be a potential 
threat there. But we have been doing a lot in cooperation with 
those governments to try and make sure that we have got as good 
a handle as we can get.
    Mr. Scott. Very good. Well, thank you very much. I 
appreciate it, Mr. Chairman.
    Mr. Sherman. I am going squeeze in a couple of questions, 
and then we will go to the classified briefing. Continuing with 
our discussion of the speedboat, the IRISL, the shipping line, 
has been sanctioned by the United States for its support of 
Iran's proliferation efforts. Why have no sanctions been issued 
against any of that entity's front companies, and why have no 
front companies been identified by the State Department?
    Mr. Van Diepen. I think I will have to----
    Mr. Sherman. Did I say State? Excuse me, by the Commerce 
Department.
    Mr. Wolf. Right. Well, there is the entity list that I was 
referring to earlier, where many of the companies that are 
associated with that network that you were just describing 
either are in the process of being listed, which would result 
in the prohibition on exports of items subject to the EAR to 
those entities. So----
    Mr. Sherman. Let me get this--okay. In January 2003, this 
incident occurred.
    Mr. Wolf. Right.
    Mr. Sherman. As it happened, a front company was used in 
that instance, and here we are, 1\1/2\ years later, and you are 
in the process of listing your first front company for the 
shipping line.
    Mr. Wolf. No, no. Some entities already have been listed. I 
can send you the information on----
    Mr. Sherman. So you have issued sanctions against front 
companies, and you have identified front companies, of the 
Islamic Republic of Iran Shipping Lines.
    Mr. Wolf. With respect to--I believe so. I will confirm, 
but I believe so.
    Mr. Sherman. Okay.
    Mr. Wolf. And to the extent that we get new information on 
names and addresses that are the same entity, we will----
    Mr. Sherman. Well, one would expect that the first thing 
you would do is look at the ship that left Durban, see who it 
is registered to, and say, well, if we have said that that ship 
was carrying a speedboat, a power boat, to the Revolutionary 
Guard, then whoever owns that ship needs to be listed on the 
list or as a front company on the list.
    In March 2008, the Bureau of Industry and Security issued a 
temporary denial order against Iran Mahan Air and several 
additional entities after it was discovered that three Boeing 
aircraft had been exported to Iran by use of Mahan Air, and an 
additional three aircraft were in the process of being 
exported. Despite the denial order, Mahan Air has continued to 
seek and acquire aircraft with substantial U.S. components to 
add to its fleet. And, of course, these planes can be used for 
military and transport purposes.
    Likewise, Air Iran has acquired several aircraft that 
required a U.S. export license. What steps is the Commerce 
Department taking to crack down on illicit acquisition of U.S. 
aircraft and aircraft with substantial U.S. components by Iran 
and by Mahan Air?
    Mr. Wolf. Well, through the aggregation of information 
gathered during the licensing process, enforcement activities, 
intel, tips from private sector companies, we listed and 
continue to list the companies that you are referring to as 
denied entities. And, you know, it is part of the regular 
listing and the review of the process activity of those 
companies that are involved in exports and re-exports to Iran.
    Mr. Sherman. So has anyone been sanctioned as a result of 
the fact that Iran has gotten both U.S.-made planes and planes 
with substantial U.S. components?
    Mr. Wolf. The reason I am hesitating a little bit is 
because these are topics probably better left for the closed 
session.
    Mr. Sherman. Okay. I hope that during the closed session 
you will be able to show me that companies with substantial 
U.S. business interest have suffered a significant penalty for 
this. But I would comment that Congress is also at fault here. 
We have allowed the export to Iran of airport parts or airplane 
parts. I realize it is a safety issue for the planes that Iran 
acquired many decades ago, and our proper response is to tell 
Iran ground your planes until you ground your nuclear program. 
Instead, Congress is allowing those Boeing parts to go to Iran, 
showing that we screwed up, too.
    So we now have votes, I believe, and then immediately after 
those votes, we will--wait, do we have votes? We do not have 
votes? Okay. Then we will move to the classified session, and 
then we will be interrupted by votes.
    [Whereupon, at 11:35 a.m., the subcommittee was adjourned.]
                                     

                                     

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     Material Submitted for the Hearing RecordNotice deg.



                                 
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