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




               COMMERCIAL SALES OF MILITARY TECHNOLOGIES

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

                                HEARING

                               BEFORE THE

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 4, 2009

                               __________

                           Serial No. 111-43









      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov

                                _____

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                    COMMITTEE ON ENERGY AND COMMERCE

                   HENRY A. WAXMAN, California, Chairman
JOHN D. DINGELL, Michigan           JOE BARTON, Texas
  Chairman Emeritus                   Ranking Member
EDWARD J. MARKEY, Massachusetts     RALPH M. HALL, Texas
RICK BOUCHER, Virginia              FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey      CLIFF STEARNS, Florida
BART GORDON, Tennessee              NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois             ED WHITFIELD, Kentucky
ANNA G. ESHOO, California           JOHN SHIMKUS, Illinois
BART STUPAK, Michigan               JOHN B. SHADEGG, Arizona
ELIOT L. ENGEL, New York            ROY BLUNT, Missouri
GENE GREEN, Texas                   STEVE BUYER, Indiana
DIANA DeGETTE, Colorado             GEORGE RADANOVICH, California
  Vice Chairman                     JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California              MARY BONO MACK, California
MIKE DOYLE, Pennsylvania            GREG WALDEN, Oregon
JANE HARMAN, California             LEE TERRY, Nebraska
TOM ALLEN, Maine                    MIKE ROGERS, Michigan
JAN SCHAKOWSKY, Illinois            SUE WILKINS MYRICK, North Carolina
HILDA L. SOLIS, California          JOHN SULLIVAN, Oklahoma
CHARLES A. GONZALEZ, Texas          TIM MURPHY, Pennsylvania
JAY INSLEE, Washington              MICHAEL C. BURGESS, Texas
TAMMY BALDWIN, Wisconsin            MARSHA BLACKBURN, Tennessee
MIKE ROSS, Arkansas                 PHIL GINGREY, Georgia
ANTHONY D. WEINER, New York         STEVE SCALISE, Louisiana
JIM MATHESON, Utah                  PARKER GRIFFITH, Alabama
G.K. BUTTERFIELD, North Carolina    ROBERT E. LATTA, Ohio
CHARLIE MELANCON, Louisiana         
JOHN BARROW, Georgia                
BARON P. HILL, Indiana              
DORIS O. MATSUI, California         
DONNA CHRISTENSEN, Virgin Islands   
KATHY CASTOR, Florida               
JOHN P. SARBANES, Maryland          
CHRISTOPHER MURPHY, Connecticut     
ZACHARY T. SPACE, Ohio              
JERRY McNERNEY, California          
BETTY SUTTON, Ohio
BRUCE BRALEY, Iowa
PETER WELCH, Vermont                 

                                  (ii)
              Subcommittee on Oversight and Investigations

                    BART STUPAK, Michigan, Chairman
BRUCE L. BRALEY, Iowa                GREG WALDEN, Oregon
  Vice Chairman                        Ranking Member
EDWARD J. MARKEY, Massachusetts      ED WHITFIELD, Kentucky
DIANA DeGETTE, Colorado              MIKE FERGUSON, New Jersey
MIKE DOYLE, Pennsylvania             TIM MURPHY, Pennsylvania
JAN SCHAKOWSKY, Illinois             MICHAEL C. BURGESS, Texas
MIKE ROSS, Arkansas
DONNA M. CHRISTENSEN, Virgin Islands
PETER WELCH, Vermont
GENE GREEN, Texas
BETTY SUTTON, Ohio
JOHN D. DINGELL, Michigan (ex officio)









                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Bart Stupak, a Representative in Congress from the State of 
  Michigan, opening statement....................................
Hon. Greg Walden, a Representative in Congress from the State of 
  Oregon, opening statement......................................
Hon. Edward J. Markey, a Representative in Congress from the 
  Commonwealth of Massachusetts, opening statement...............
Hon. Diana Degette, a Representative in Congress from the State 
  of Colorado, opening statement.................................
Hon. Bruce L. Braley, a Representative in Congress from the State 
  of Iowa, opening statement.....................................
Hon. Phil Gingrey, a Representative in Congress from the State of 
  Georgia, opening statement.....................................
Hon. Betty Sutton, a Representative in Congress from the State of 
  Ohio, opening statement........................................
Hon. Marsha Blackburn, a Representative in Congress from the 
  State of Tennessee, opening statement..........................
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................

                               Witnesses

Gregory Kutz, Managing Director, Forensic Audits and Special 
  Investigations, Government Accountability Office...............
    Prepared statement...........................................
Anne-Marie Lasowski, Director, Acquisition and Sourcing 
  Management, Government Accountability Office...................
    Prepared statement...........................................
Matthew Borman, Deputy Assistant Secretary, Bureau of Industry 
  and Security, Department of Commerce...........................
    Prepared statement...........................................
Thomas Madigan, Director of the Office of Export Enforcement, 
  Bureau of Industry and Security, Department of Commerce........
    Prepared statement...........................................
Michael Alvis, Vice President for Business Development, ITT 
  Industries.....................................................
    Prepared statement...........................................
    Answers to submitted questions...............................
John Roush, Senior Vice President and President, Environmental 
  Health, Perkin Elmer...........................................
    Prepared statement...........................................
Nicholas Fitton, Chief Executive Officer, Section 8..............
    Prepared statement...........................................

 
               COMMERCIAL SALES OF MILITARY TECHNOLOGIES

                              ----------                              


                         THURSDAY, JUNE 4, 2009

                  House of Representatives,
      Subcommittee on Oversight and Investigations,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2322 of the Rayburn House Office Building, Hon. Bart 
Stupak (chairman) presiding.
    Members present: Representatives Stupak, Braley, Markey, 
DeGette, Doyle, Welch, Green, Sutton, Walden, Burgess, 
Blackburn, and Gingrey.
    Staff present: David Rapallo, General Counsel; Theodore 
Chuang, Chief Oversight Counsel; Dave Leviss, Deputy Chief 
Investigative Counsel; Scott Schloegel, Investigator, Oversight 
& Investigations; Stacia Cardille, Counsel; Jennifer Owens, 
Special Assistant; Earley Green, Chief Clerk; Caren Auchman, 
Communicates Associate; Kenneth Marty, Detailee HHS-IG; Alan 
Slobodin, Minority Chief Counsel; Karen Christian, Minority 
Counsel; Peter Keethy, Minority Legal Analyst; and Scott 
Sherrill, Minority Detailee.

  OPENING STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Stupak. This meeting will come to order. Today we have 
a hearing titled, ``Commercial Sales of Military 
Technologies.'' The Chairman, Ranking Member, and Chairman 
emeritus will be recognized for 5 minutes opening statement. 
Other members of the subcommittee will be recognized for 3 
minute opening statements. I will begin.
    Less than 2 weeks ago North Korea detonated a nuclear 
weapon during an underground test. North Korea is now 
threatening to test fire an intercontinental ballistic missile 
capable of striking Alaska.
    At the same time our Nation remains at war in Iraq and 
Afghanistan, and here at home we are faced with the threat of 
attack from Al Qaeda and other terrorist groups. In 2009, the 
world is a very dangerous place.
    Today we will examine two specific ways we may be allowing 
our national security to be compromised; domestic sales and 
illegal export of military and scientific technology overseas.
    In 2008, our committee began investigating controls on the 
export of military and dual-use technology, technology that has 
both military and commercial uses. As part of our investigation 
we asked the Government Accountability Office to conduct 
undercover testing to determine how vulnerable we are to covert 
acquisition and export of our sensitive technology. The results 
are troubling.
    We will hear today how GAO established a fictitious company 
led by a fictitious individual who acquired 12 different 
military or dual-use items that are subject to export control 
laws. The GAO was able to obtain several devices used in the 
nuclear weapons program, including a triggered spark gap, which 
is a high-voltage switch that can be used a nuclear weapon 
detonator, an accelerator meter, an instrument used to measure 
motions generated by nuclear and chemical explosives, and a 
GyroChip, a device that can be used to stabilize and steer 
guided missiles.
    The GAO also successfully acquired several pieces of 
military equipment that give our troops technological 
superiority in battle, including night-vision scope used by our 
troops to see and track enemy in the dark, body armor, the type 
used by U.S. military in battle, and an F-16 engine-monitoring 
system computer.
    The GAO will explain how 12 out of the 12 of the companies 
approached 100 percent agreed to sell these sensitive items to 
the fictitious company. None of these companies discovered that 
the company was fake. None of the companies determined that the 
buyer was a fake person. In fact, none of the companies ever 
met the buyer, and most conducted the transactions entirely by 
e-mail.
    The company that manufactures the night-vision scope even 
signed up GAO's fake company as an authorized distributor of 
its product. The only thing more surprising than the ease at 
which GAO acquired the sensitive equipment is the fact that it 
was apparently entirely legal. When questioned afterwards, the 
companies involved explained that they were not required by 
current law to apply for an export license when selling 
specific military or dual-use products directly to domestic 
purchasers. There is no requirement for them to conduct any 
background check or due diligence on the buyers, much less 
submit the proposed sale to the government for a license to 
purchase.
    The Commerce Department, which testify today, agrees that 
no violations occurred. This is obviously not a satisfactory 
result. GAO illustrated the weaknesses of this legal regime 
when it turned around and successfully exported some of these 
items simply by sending them to the Fed Ex and sending them 
overseas. GAO sent them to a country known as a trans-shipment 
point for military and nuclear technology. So there is an 
enormous loophole in our law.
    We will hear today from GAO, the Department of Commerce, 
and three of the companies that sold these products to GAO, 
either as a manufacturer or a seller. We will ask them the 
following questions: Are some military items so sensitive that 
they should be banned from commercial sales to the public 
entirely? Are some military or dual-use items sensitive enough 
to require licenses for domestic sales? Can additional controls 
be put in place to make it more difficult for our enemies to 
gain access to our sensitive military and dual-use 
technologies?
    The stakes cannot be higher. A 2008, report by the 
Strategic Studies Institute reveals that in the past North 
Korea has sought to procure from foreign sources at least one 
of the products GAO acquired, the accelerator meter to enhance 
its guided missile program.
    I look forward to the testimony today and hope we can 
discuss ways in which the government and business can work 
together to ensure our technological advantage is not used to 
jeopardize the safety of our troops, our allies, and our 
communities here at home.
    Mr. Stupak. I next turn to Mr. Walden for his opening 
statement.
    I should just mention, members are going to be coming in 
and out. We have another hearing down on the first floor. In 
fact, I may have Diana DeGette or someone take the chair for me 
as I am going to have to go down to that hearing also. But Mr. 
Walden, your opening statement, please, sir.

  OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Mr. Walden. Thank you very much, Chairman Stupak, for 
convening this hearing.
    Since this country was attacked almost 8 years ago on 
September 11, we have become all too aware of the fact that 
terrorist groups that are constantly seeking to exploit any 
weakness in our national security and to gain any access to 
America's advanced technology. Any information they might gain 
about United States intelligence or military operations could 
potentially be used to attack our men and women in uniform 
abroad and here at home. This threatens our national security.
    In Iraq we have heard on the news too many times the cases 
where terrorists posed as Iraqi soldiers or police in order to 
get close to military checkpoints or barracks, only to detonate 
improvised explosive devices and suicide bombs, sometimes 
killing U.S. soldiers as well as civilians in the process. We 
cannot ignore the link between illegal exports and military 
items and such attacks.
    For example, in 2008, various individuals and companies 
were indicted for purchasing items capable of being used to 
make IEDs with Iran being the final destination. For fiscal 
year 2008, the Department of Justice reported that 145 
defendants were charged for criminal violations of export 
control laws. About 43 percent of the defendants charges were 
attempting to illegally transport or transfer items to Iran and 
China.
    Since 2007, GAO has included ensuring effective protection 
of technologies critical to the U.S. national security 
interests as high-risk areas. As troubling as those weaknesses 
may be, what is more disturbing is there appears to be a 
gigantic loophole in our laws that make it easier for our 
enemies to get ahold of our sensitive military technology and 
one day use it against us.
    The loophole the GAO uncovered in this investigation 
reveals that the military and sensitive dual-use technology can 
be easily and legally bought within the United States. Then 
those items can be illegally exported with almost zero chance 
of detection. Here is how easy it is to make these buys.
    GAO bought a number of sensitive dual-use items from United 
States companies, including night-vision goggles, body armor, 
and F-16 engine computer and technology used in nuclear weapons 
and IEDs. Dual use means these items have both military and 
commercial use. You can see some of these items displayed right 
up here on this table in the front of the room.
    The GAO did so by setting up a bogus company, a company Web 
site, a mail drop box. They also used fake military ID to 
facilitate the purchase, and the fake military ID from what I 
am told was even not very well constructed.
    When GAO purchased these items, in many cases they weren't 
asked a single question by the seller about what they were 
doing with the items. There was no face-to-face contact and 
sometimes not even contact over the phone. The companies in 
most cases did not make an attempt to verify the minimal 
information that GAO provided.
    But here is the rub. The companies did absolutely nothing 
illegal. They did not violate the law because no law or 
regulation places any meaningful restriction on the domestic 
sale of these military items. That is right. You, Joe Q. 
Public, can buy a body armor, night-vision goggles, and F-16 
engine computer, and our laws do not require any kind of 
verification for your identity or background.
    However, if you then tried to export the items, you would 
need to go get a license to do so. Now, how many of you really 
thing that an Al Qaeda operative or some other terrorist is 
going to be the first in line at the Department of Commerce or 
State to get a license to ship these items to say, oh, China, 
Syria, or Iran. I don't think so either.
    This may be one of those rare oversight hearings where we 
show not how the law has been broken or evaded by a bad actor 
but how the law is simply inadequate. In other words, the 
scandal here may be what is legal, not what is illegal.
    Now that we have identified this gap in our laws, it is our 
responsibility to figure out how to close it. Now, to do it in 
a way that does not place an undue burden on Commerce. As I 
mentioned before, these are dual-use, sensitive items. These 
items have legitimate, critical uses sometimes in medical and 
aircraft equipment. My understanding is the companies here 
today and the other companies who sold dual-use items to the 
GAO are very concerned these items might fall into enemy hands 
and want to help solve this problem.
    I look forward to hearing their thoughts about what we can 
do about it.
    Mr. Chairman, our men and women in uniform deserve the best 
technology that our country's industry has to offer. They 
deserve to know that when they are on the battlefield, they 
have every advantage over the enemy, and that includes the best 
technology our industry can produce.
    So I look forward to working with you to figure out how we 
can make sure that these dual-use items don't fall into the 
wrong hands and put our men and women and civilians in peril.
    I yield back the balance of my time.
    Mr. Stupak. Thank you, Mr. Walden.
    Mr. Markey for an opening statement, please.

OPENING STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN 
        CONGRESS FROM THE COMMONWEALTH OF MASSACHUSETTS

    Mr. Markey. Thank you, Mr. Chairman, and thank you so much 
for having this important hearing.
    Every day the United States superiority in high technology 
is on display in our military, our universities, our computer 
and software manufacturers, and our healthcare industry, and 
every day the United States is under assault by foreign 
countries and groups that seek to acquire U.S. technologies and 
products that threaten U.S. national security.
    Our Export Control System is woefully inadequate to ensure 
that high technology U.S. goods are not misused either for 
conventional military or WMD purposes. As we will hear today 
undercover GAO investigators used fake information to purchase 
dangerous dual-use technologies, including some which could be 
useful for a nuclear weapons program. Clearly, our export 
control program must be strengthened.
    The particular loophole which GAO exploited in their 
investigation is frighteningly simple. While exports of dual-
use technologies require a government license, domestic sales 
of the exact same sensitive items are not regulated in any way 
whatever. GAO was able to provide false information, mask its 
identity, and pretend to be a qualified domestic purchaser. 
Clearly foreign countries or terrorist groups could do the same 
thing. And as GAO proved, a cardboard box and the U.S. Postal 
Service is all it takes to move dual-use items out of the 
country.
    We must strengthen our Export Control System, but private 
industry must also play a cooperative and constructive role. 
Private companies can and must assist the government by 
identifying questionable orders and reporting them to law 
enforcement for action.
    In this context I would like to say a word about Perkin 
Elmer, one of the companies which will testify today and is 
headquartered in my district. GAO was able to purchase a 
sensitive item, potentially abused to a nuclear weapons program 
from Perkin Elmer, but given the domestic sales loophole the 
GAO exploited, Perkin Elmer seems to have followed the law.
    An event in 2003 demonstrates how Perkin Elmer has helped 
prevent dangerous export control violations. When the company 
received an order for 200 triggered spark gaps, alarm bells 
sounded at the large quantity requested. Perkin Elmer reported 
the order to law enforcement, and at the request of federal 
authorities the company played along with the order, eventually 
shipping sabotaged products which were then traced. At the end 
of the day a plot to acquire a key technology for the Pakistani 
nuclear weapons program was thwarted in large part because of 
Perkin Elmer.
    That is the kind of cooperation that we need to be 
successful. To keep the American people safe, we now have to 
make sure that we close this domestic loophole so that we 
ensure that we have a uniform policy to protect against this 
kind of proliferation of dangerous technology.
    Thank you, Mr. Chairman, for having this hearing.
    Mr. Stupak. Thank you, Mr. Markey.
    Next we will hear from Ms. DeGette for an opening 
statement. Three minutes, please.

 OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF COLORADO

    Ms. DeGette. Thank you very much, Mr. Chairman.
    To say what we are going to hear today from the GAO is 
troubling is an understatement. We live in a world where 
pirates are seizing U.S. flagged cargo ships off the Somali 
coast, a world where North Korea is desperate to get its hands 
on any components or weapons that allow its regime to maintain 
its position as a long-term, legitimate threat to international 
security. Additionally, the United States and its allies have 
serious concerns about Iran's nuclear program.
    Yet here we are after decades of problems being identified 
related to America's export control process, once again 
learning about the gaps in our system. It is difficult enough 
to make sure our military men and women are equipped and able 
to defend themselves against the IEDs made by our adversaries 
with the materials they have obtained. The President's budget 
demonstrates the magnitude of the issues being raised by this 
hearing and includes increased funding, and I quote, ``to 
expand operations targeting the illicit procurement in the U.S. 
of U.S. origin items for the use in improvised explosive 
devices, IEDs being employed against U.S. troops.''
    OK. So a system that allows material which can be used to 
build an IED or detonate a nuclear device to be available on 
the open market and over the internet is just simply not a 
functioning system at all. Voluntary industry compliance and 
government-issued guidance for businesses is great when it 
works. It hasn't worked entirely in the area of food safety, 
and in this case it doesn't seem to be working at all.
    I have no doubt that our witnesses from the Department of 
Commerce share our concerns and that the Bureau of Industry and 
Security is making efforts to improve its system, and I want to 
emphasize that I am sympathetic to workforce challenges that 
might be discussed during this debate. However, this committee 
is interested in seeing the Bureau of Industry and Security 
address all of the concerns identified by the GAO and Congress 
in a systemic and coordinated fashion and fast.
    Unfortunately, I am afraid that anything less than 100 
percent compliance in this area represents too serious a threat 
at a time when we are using vast resources to confront 
terrorists and other adversaries overseas.
    And with that, Mr. Chairman, I yield back.
    Mr. Stupak. Thank you, Ms. DeGette.
    Mr. Braley for an opening statement, please, sir. Three 
minutes.

OPENING STATEMENT OF HON. BRUCE L. BRALEY, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF IOWA

    Mr. Braley. Thank you, Mr. Chairman and Ranking Member 
Walden, for holding this hearing today to examine commercial 
sales of technology with military applications and U.S. export 
control programs.
    I have serious concerns about the GAO's findings through 
their undercover investigation that sensitive dual-use and 
military technology can easily and legally be purchased from 
dealers and manufacturers in the United States and exported 
without detection. I believe that these disturbing findings 
have serious implications for our national security and for 
American troops working to keep us safe overseas.
    I think most Americans would be alarmed to learn that by 
using a fake company and fictitious identities GAO 
investigators were able to purchase items that could 
potentially be used for the development of nuclear and chemical 
weapons, guided missiles, and improvised explosive devices 
which have been frequently used to attack our troops in Iraq 
and Afghanistan.
    They were also able to purchase military-grade radios, 
night-vision goggles, and infrared flags, which could 
potentially be used against U.S. troops in combat. GAO 
investigators were also able to export dummy versions of some 
of these items without detection to a country which is a known 
transshipment point to terrorist organizations and foreign 
governments attempting to acquire sensitive military 
technology.
    These findings are even more disturbing when you consider 
the frequency with which terrorists and criminal organizations 
and foreign governments attempt to obtain these types of 
sensitive technologies from manufacturers and distributors in 
the United States. The Department of Justice recently reported 
that foreign states and criminal and terrorist organizations 
seek arms, technology, and other materials to advance their 
technological capacity on a daily basis.
    Given this information and the ease with which the GAO was 
able to purchase and export sensitive items, you can't help but 
worry about how many times these attempts have been successful 
and about what that could mean for our national security. GAO's 
findings demonstrate a clear lack of regulation over the 
domestic sales of military and dual-use technologies and 
serious loopholes in our Export Control System. That is why I 
look forward to hearing the testimony of our witnesses today 
and hearing the witnesses' recommendations on how we in 
Congress can improve safeguards for domestic sales and improve 
our export control programs to make sure that these potentially 
dangerous items don't end up in the wrong hands.
    As the GAO's investigation clearly demonstrates, improving 
these safeguards is essential to protecting our troops serving 
overseas and to protecting every American.
    And with that I yield back.
    Mr. Stupak. Thank you, Mr. Braley.
    Mr. Gingrey, opening statement, please. Three minutes.

  OPENING STATEMENT OF HON. PHIL GINGREY, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF GEORGIA

    Mr. Gingrey. Mr. Chairman, thank you.
    Today the subcommittee will have an opportunity to shine a 
spotlight on a very, very critical but less visible aspect of 
our national defense; preventing the export of sensitive 
military technology, particularly to individuals in countries 
that wish us harm.
    Mr. Chairman, we expend a lot of time, effort, and 
resources trying to stop dangerous materials from being brought 
into this country, however, the failure to properly oversee 
what is being taken out of this country may pose an equal, if 
not greater, threat to our national security.
    Mr. Chairman, American manufacturing components and 
products should never be allowed to be used against this Nation 
or its citizens. Yet it seems that this could be a very real 
possibility and a threat that must be addressed. As we move 
forward I hope that we can reach a consensus on the best course 
of action needed to ensure this threat never becomes a reality.
    While national defense should remain our first and foremost 
concern, we must also approach this question with a keen eye 
and some commonsense. While we need to ensure sufficient 
safeguards, we should also provide for a streamline and a safe 
process to expedite legitimate sales for commercial and 
strategic purposes, particularly when trading with our allies.
    American businesses and manufacturers are hurting, and the 
simple and stark reality is that over 95 percent of the world's 
consumers live as we know outside of the United States. 
Accordingly, Mr. Chairman, we must commit ourselves to adopting 
a sound security policy that also strengthens the ability of 
American manufacturers to be successful in the global 
marketplace.
    Mr. Chairman, I look forward to carefully listening to the 
testimony from the witnesses today, and with that I will yield 
back my time.
    Mr. Stupak. Thank you, Mr. Gingrey.
    Ms. Sutton from Ohio, opening statement, please.

  OPENING STATEMENT OF HON. BETTY SUTTON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF OHIO

    Ms. Sutton. Thank you, Mr. Chairman, and thank you for 
holding this important hearing on the commercial sale of 
military technology.
    Comprehensive oversight and complete control of the sale of 
sensitive defense and dual-use military technologies is 
absolutely essential to our national security. It is imperative 
that the responsible federal agencies exert every available 
resource to prevent our sensitive technologies from ending up 
in the hands of terrorists. And it is more than disturbing to 
learn what investigators have brought to light. The dangerous 
implications are extraordinarily serious.
    The Department of State and Department of Commerce have 
primary jurisdiction over export controls. It is apparent that 
the two agencies do not, however, have clear lines drawn when 
it comes down to jurisdiction on an individual product.
    For instance, a development company in Ohio tested an 
undersea robot in U.S. and international waters with no 
immediate intention of foreign sales. To cover all bases, they 
reached out to the agencies to see whose jurisdiction their 
product would fall into in the event that they decided to apply 
for an export license. Depending on who answered the phone, the 
company received a different answer. In the end they were 
disappointed that they were not able to secure a concrete 
answer regarding which agency had jurisdiction over their 
product.
    Now, I am left to believe that this problem exists with 
countless products, and I support Ms. Lasowski's call for a 
fundamental reexamination of the current programs and processes 
within the agencies that have jurisdiction over export 
controls. And once that examination is completed, I look 
forward to working with my colleagues to ensure agency 
procedures are fluent, effective, and that the safety of our 
Nation is guaranteed.
    Today I look forward to hearing from our panel, and I am 
especially interested in hearing from GAO on their 
investigative report on domestic sales. We will hear that there 
are no rules or authorities in place to regulate the domestic 
sale of sensitive military technologies. Companies are able to 
make domestic sales of sensitive items with little or no 
restrictions unless self-imposed, and that is disturbing. The 
idea that a U.S. citizen can legally purchase and then rather 
easily mail a sensitive item that would otherwise have to be 
granted a license for export is shocking.
    Mr. Chairman, while our men and women in uniform are 
bravely serving overseas, the Federal Government has no tool in 
place to regulate domestic purchases of sensitive military 
technologies that could be used by terrorists and others 
against our service members.
    I look forward to working with my colleagues to ensure that 
the proper oversight and regulations are in place for all 
commercial sales of sensitive military technologies.
    Thank you, again, Mr. Chairman, and I yield back.
    Mr. Stupak. Thank you.
    Ms. Blackburn, opening statement.

OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF TENNESSEE

    Ms. Blackburn. Thank you, Mr. Chairman, and I will be 
brief. I want to welcome our witnesses. Some of you are 
returning, and we welcome you back. I am certain you all have 
already heard. We have a TELCOM hearing that is taking place 
downstairs, so some of us are going to be up and down and back 
and forth. So we ask that you please be patient with us.
    And I do thank you, Mr. Chairman, for the hearing today, 
and I think it is appropriate that our committee today examine 
the process that we go through for selling our military's 
sensitive technologies to U.S. residents. These buyers could 
potentially export them to a country that is adverse to U.S. 
national security, and we are aware of that, and of course we 
are concerned about that.
    The apparent gap is the tracking of the item by the seller 
and the security background of the buyer. Proper collection of 
information on these sales should be placed as a high priority 
for this Administration, but it must not violate privacy rights 
of U.S. citizens.
    Even though domestic sales pose a problem, the regulations 
of foreign sales should also be reexamined, and I think that is 
an imperative for us. Over the past 2 decades we do know that 
some military technologies and equipment were exported to 
China. That could pose national security risks. That is on our 
radar as we go through this hearing today. A few examples are 
anti-jamming and encryption for military satellite systems and 
advanced U.S. computers.
    The U.S. military, we know, is the strongest in the world, 
and a significant part of that strength is due to innovation 
into superior military technology. So we must not allow gaps in 
our system that will allow this technology to fall into the 
wrong hands.
    We appreciate the information that you are bringing to us 
today. Mr. Chairman, I thank you for the time, and I yield 
back.
    Mr. Stupak. Thank you.
    Mr. Doyle is going to be up here shortly. He is down in the 
Health Committee, but he wanted to make an opening statement 
for a particular issue that affects his district directly and 
what has--with the sales of some items, and when he comes up 
without objection we will allow him to make that opening 
statement.
    Hearing no objection we will allow him to do so.
    We will move forward with our hearing. So of the members 
present that concludes our opening statements. Our first panel 
of witnesses, we are going to have one panel today. They are 
all before us. Let me introduce them before we swear them in.
    Mr. Gregory Kutz, who is the Managing Director of the 
Forensic Audits and Special Investigations at the Government 
Accountability Office. Ms. Anne-Marie Lasowski, who is the 
Director of Acquisition and Sourcing Management of the 
Government Accountability Office. Mr. Matthew Borman, who is 
the Acting Assistant Secretary for Export Administration in the 
Bureau of Industry and Security at the U.S. Department of 
Commerce. Mr. Thomas Madigan, who is the Acting Deputy 
Assistant Secretary for Export Enforcement in the Bureau of 
Industry and Security of the U.S. Department of Commerce. Mr. 
Michael Alvis, who is the Vice President of Business 
Development at ITT Industries. Mr. John Roush, who is the 
Senior Vice President and President for Environmental Health at 
Perkin Elmer. And Mr. Nicholas Fitton, who is the Chief 
Executive Officer of the Section 8 Corporation.
    Gentlemen, Ladies, it is the policy of the subcommittee to 
take all testimony under oath. Please be advised that you have 
the right under the rules of the House to be advised by counsel 
during your testimony.
    Before I go much further, Mr. Burgess, did you want to do 
an opening? We were holding open for Mr. Doyle, and I knew you 
had mentioned you wanted--did you want to do an opening or----
    Mr. Burgess. If it is not out of order.
    Mr. Stupak. It is not out of order. I will swear the 
witnesses in in a minute. I just introduced the panel. I will 
swear them in after your opening, and then maybe Mr. Doyle will 
be here.
    So if you want to go ahead.

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Mr. Burgess. Well, thank you, Mr. Chairman.
    The advancements this country has made with regards to 
military technology surpasses those of any other nation. 
Investment in military ingenuity has led to cutting edge 
commercial advancements in avionics and healthcare.
    Contrary to popular belief, the United States military 
actually created the technology that led to the advent of the 
internet as opposed to that other guy who said he invented it. 
Most importantly, these technological advancements have 
contributed to the safety of our citizens, but it has also 
placed a high burden on our various federal agencies to ensure 
the safe production and sale of these sensitive technologies.
    While there are laws that expressly prohibit the direct 
sales of our most sensitive military technologies to foreign 
countries or entities, the laws which govern the domestic sales 
of these items are far weaker than they could be. In fact, some 
component parts to manufacture weapons of mass destruction may 
be sold domestically and then potentially resold 
internationally with little or no accountability under the law.
    Currently most of these companies undergo voluntary due 
diligence to ensure the sales of items on the Commerce Control 
List are then not resold to foreigners, but in this global 
world in which we live today controls must be in place 
throughout the transaction process to ensure that the 
counterparty corporations are legitimate. We cannot ignore the 
fact that there are groups trying to reverse engineer our 
technology and use them directly against our men and women in 
uniform.
    For instance, the Navy's Grumman F-14 Tomcat immortalized 
in the movie, ``Top Gun,'' this technology was considered to be 
of such strategic importance that only one foreign purchaser 
was ever allowed to procure the F-14; the Imperial Iranian Air 
Force that existed during the reign of the Shah. We all know 
that in 1979, the monarchy fell. Since then the United States 
has essentially severed all relations with Iran, including 
imposing an embargo on the sale of any spare parts for the F-
14s. Yet shadow companies have ordered parts for the Iranian 
Tomcats, and no one seems to have been paying attention to what 
parts were being sold and to whom.
    We must make certain our standards for export are as 
rigorous as our standards for import. We must make certain that 
the Department of Commerce, Bureau of Industry and Security, 
implements true post-market verifications of sales. We must 
make certain that the Department of State, working in 
conjunction with the Department of Homeland Security, ensures 
that no exports are being made of our sensitive military 
technology.
    We must also work with the Federal Trade Commission to 
ensure that Commerce is unimpeded, and for those who would 
violate our existing laws, those who would compromise the 
security of our Nation, but more importantly compromise the 
courageous lives of our men and women in uniform, they should 
be prosecuted by the Department of Justice to the fullest 
extent under the law.
    Thank you, Mr. Chairman. I will yield back my time.
    Mr. Stupak. Thanks, Mr. Burgess.
    As I was saying to our panel, under the rules of the House 
you have the right to be represented by counsel. Do any of you 
wish to be represented by counsel? Anyone?
    OK. You are all shaking your head no, so we will take it as 
a no.
    So, therefore, I am going to ask you to please rise, raise 
your right hand, and take the oath.
    [Witnesses sworn.]
    Mr. Stupak. Let the record reflect the witnesses replied in 
the affirmative. Each of you are now under oath.
    We will now hear a 5-minute opening statement from you, and 
thank you for being here. We are going to try to do this one 
panel, and we will start with you, Mr. Kutz. You are a veteran. 
If you want to hit your mike and start with your opening 
statement, and we would appreciate it.

 TESTIMONY OF GREGORY KUTZ, MANAGING DIRECTOR, FORENSIC AUDITS 
 AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE; 
    ANNE-MARIE LASOWSKI, DIRECTOR, ACQUISITION AND SOURCING 
 MANAGEMENT, GOVERNMENT ACCOUNTABILITY OFFICE; MATTHEW BORMAN, 
 DEPUTY ASSISTANT SECRETARY, BUREAU OF INDUSTRY AND SECURITY, 
DEPARTMENT OF COMMERCE; THOMAS MADIGAN, DIRECTOR OF THE OFFICE 
    OF EXPORT ENFORCEMENT, BUREAU OF INDUSTRY AND SECURITY, 
   DEPARTMENT OF COMMERCE; MICHAEL ALVIS, VICE PRESIDENT FOR 
 BUSINESS DEVELOPMENT, ITT INDUSTRIES; JOHN ROUSH, SENIOR VICE 
 PRESIDENT AND PRESIDENT, ENVIRONMENTAL HEALTH, PERKIN ELMER; 
    AND NICHOLAS FITTON, CHIEF EXECUTIVE OFFICER, SECTION 8

                   TESTIMONY OF GREGORY KUTZ

    Mr. Kutz. Mr. Chairman and members of the subcommittee, 
thank you for the opportunity to discuss the sale of military 
and dual-use technology.
    There are widespread reports of the illegal transfer of 
U.S. technology to Iran, China, and terrorist organizations. 
Today's testimony highlights the results of our investigation 
into the credibility of this security threat.
    My testimony has two parts. First, I will briefly discuss 
what we did and provide some background, and second, I will 
discuss the results of our investigation.
    First, Justice has reported numerous cases of foreign 
governments and terrorist organizations seeking to acquire U.S. 
technology. Items identified in criminal cases are suitable for 
military, nuclear, guided missile, and improvised explosive 
device applications. As you have all mentioned, these items can 
legally be sold within the United States.
    The objective of our investigation was to make undercover 
purchases of technology here in the U.S. If successful, we plan 
to ship several of these items overseas. To set up this 
operation we established a bogus front company called Monacasey 
Tech Consultants. We also used bogus identities and undercover 
credit card and a mailbox as our business address. Most of the 
items that we targeted for purchase are identical to items 
cited in recent criminal cases.
    Although we had a limited budget and relatively simply 
backstops, our operation could have easily been financed by 
foreign governments or terrorists organizations seeking to 
acquire U.S. technology.
    Moving onto the results of our investigation. We were able 
to purchase a number of sensitive U.S. military and dual-use 
items. We then successfully shipped several of these items by 
mail undetected to southeastern Asia.
    The items that we purchased are displayed on the table 
before you, and I have a few with me I am going to show you by 
hand. It is important to note that for many of these items our 
bogus individuals signed a certificate promising not to export 
them.
    Let me discuss several of the more troubling dual-use items 
that we purchased, and they will also be shown on the monitors.
    First, in my hand I have a triggered spark gap. We 
purchased this item for $700 from the manufacturer. We also 
received a price quote for an additional 100 of these items. In 
addition to medical applications, these items can be used to 
detonate nuclear weapons. In 2005, this item was cited as part 
of a criminal case involving illegal export to Pakistan.
    Second, I have in my hand an accelerometer. We purchased 
this item for $2,800 from the manufacturer. In addition to 
having commercial applications, this item can be used in smart 
bombs and nuclear and chemical explosive applications. In 2007, 
this item was cited as part of a criminal case involving 
illegal export to China.
    And third, I have in my hand this GyroChip. We purchased 
this item for $3,100 from the manufacturer. We also obtained a 
price quote for an additional ten of these items. In addition 
to commercial use, these items can be used to help steer guided 
missiles. A large corporation was recently found to have 
illegally exported 85 of these items to China.
    Examples of the sensitive military items purchased include, 
first, the modular tactical vest body armor you see on my right 
in front of me and also shown on the monitors. We purchased 
this item for $2,400 from a distributor. We also received a 
price quote for an additional 20 of these vests.
    Also displayed in front of me are ESAPI plates that we 
purchased on eBay as part of a prior investigation and could 
have also purchased from this same distributor. These vests are 
currently used by the U.S. Marines in Iraq and Afghanistan.
    And second, the night-vision monocular I have in my hand. 
We purchased this item for $3,600 for a distributor. As was 
mentioned, we also became an authorized distributor of this 
item. These items are currently used by the military in 
nighttime operations. Recent criminal cases show that these 
items are in demand, not only by China and Iran, but by the 
terrorist organization, Hezbollah, in Lebanon.
    In conclusion, our work clearly shows that anybody with a 
credit card, computer, and a mailbox that is willing to lie can 
acquire U.S. military and dual-use technology. For the dual-use 
items they are more difficult to address but additional 
controls at the point of sale for high-risk items should be 
considered. For military items we continue to believe that the 
technology used by our soldiers today should not be available 
to anybody with a credit card. Our soldiers deserve better than 
to have our own technology used against them on the 
battlefield.
    Mr. Chairman, this ends my statement. I look forward to 
your questions.
    [The prepared statement of Mr. Kutz 
follows:]*************** INSERT 1 ***************
    Mr. Stupak. Thank you, Mr. Kutz, and your investigation is 
found in a GAO report which is now released publicly based on 
your testimony? OK. Very good. So it is available.
    Ms. Lasowski, did you have an opening statement, please?

                TESTIMONY OF ANNE-MARIE LASOWSKI

    Ms. Lasowski. Yes. Mr. Chairman and----
    Mr. Stupak. Could you just hold that up a little bit and 
make sure that green light is on. Thank you.
    Ms. Lasowski. Mr. Chairman and members of the subcommittee, 
I am pleased to be here today to speak about our work on the 
U.S. Export Control System, one part of a complex web of 
programs intended to protect technologies critical to U.S. 
national security, both military and economic.
    In the decade since these programs were established, the 
world has changed significantly. As you are aware, new security 
threats, increased globalization, and evolving technology 
creates significant challenges in maintaining a balance between 
our military and economic interests. Yet our work has shown 
that for the most part these programs have been neglected or 
may not be well equipped to deal with these challenges, 
prompting GAO to add this area onto our high-risk report in 
2007, and calling for a strategic reexamination of existing 
programs.
    My statement today focuses on three key areas that should 
be part of this reexamination. First, interagency coordination 
and jurisdictional control, second, export licensing 
efficiency, and third, system assessments.
    With regard to the first area, we found that poor 
interagency coordination and jurisdictional debates between 
State and Commerce have weakened export controls over certain 
sensitive items. For example, Commerce claimed jurisdiction 
over specialized explosive detection equipment when 
jurisdiction for this item belonged to State. Consequently, the 
items were subject to Commerce's less-restrictive export 
control requirements.
    Until such disputes are resolved, it is ultimately the 
exporter, not the government, who determines the level of 
government review and control that will follow. This weakness 
also creates considerable challenges for other players, namely 
the enforcement community. Without information as fundamental 
as what items are controlled by which agency and which need a 
license, enforcement officials are limited in their ability to 
carry out inspection, investigation, and prosecution 
responsibilities.
    The second area concerns the need for efficiency in the 
export licensing process. At State medium processing times 
doubled in 4 years, and license applications reached an overall 
time--and all-time high of over 10,000 open cases. Clearly 
reviews of export license applications require careful 
deliberation. However, licensing decisions should not be 
delayed due to process inefficiencies.
    Recently State took steps to restructure its workforce and 
establish standards to reduce processing times and cases in the 
pipeline We are encouraged by this action and hope that it will 
yield needed improvements.
    The overall efficiency of Commerce's licensing process is 
unknown in part due to its limited assessments. While most 
Commerce-controlled exports can occur without a license, it is 
no less important for Commerce to seek efficiencies where 
needed. Most recently Commerce has established new performance 
measures in its fiscal year 2010, budget, which we have not 
evaluated.
    The third and final area of concern is a more fundamental 
issue; management's due diligence in performance assessments. 
State and Commerce have argued that no fundamental changes are 
needed due to their Export Control Systems. We have been 
somewhat perplexed by this stance, since neither department has 
conducted a thorough assessment to support this conclusion, and 
our work has repeatedly demonstrated that the U.S. Export 
Control System is in need of repair.
    Redefined security threats, evolving technology, and 
increasing globalization, coupled with the numerous weaknesses 
we have identified demand that the U.S. government step back, 
assess, and rethink the current system's ability to protect 
multiple U.S. interest.
    Mr. Chairman, this concludes my prepared statement. I would 
be pleased to respond to any questions that you or members of 
the subcommittee may have.
    [The prepared statement of Ms. Lasowski 
follows:]*************** INSERT 2 ***************
    Mr. Stupak. Thanks, Ms. Lasowski.
    Mr. Borman, your opening statement, please.

                  TESTIMONY OF MATTHEW BORMAN

    Mr. Borman. Thank you, Mr. Chairman.
    Mr. Stupak. We are going to need you to turn on a mike and 
pull it up there a little bit.
    Mr. Borman. Thank you, Mr. Chairman----
    Mr. Stupak. Thank you.
    Mr. Borman. --and members of the committee. We do 
appreciate, Tom Madigan and myself, the opportunity to come up 
here and talk to you about this. This is a very important 
topic, and we really appreciate your interest, the work of GAO, 
and industry interest. From our perspective this is an issue 
that really needs significant coordination between the 
Legislative Branch, the Executive Branch, and the U.S. private 
sector.
    Just to give you a quick overview of our role in the 
system, of course, the U.S. Export Control System there is 
several different components. The dual-use system governs the 
export of items that have civilian and military applications 
and we administer at BIS the dual-use system in conjunction 
with a number of other agencies including the Departments of 
Defense, Energy, Homeland Security, Justice, State, and 
Treasury, as well as the intelligence community.
    In administering the Dual-Use Export Control System BIS and 
other agencies develop control policies based on technologies, 
countries, end usages, and end users. While most items in the 
U.S. economy are subject to controls, that is, they are subject 
to the regulations, only a small percentage of U.S. exports by 
dollar value actually need a specific license from Commerce 
that goes through an interagency process.
    And in administering the system we are very aware of the 
challenges of the 21st century, and the way we look at them is 
you have diffuse challenges; diffuse security threats ranging--
there are a range of Nation States all the way down to non-
State actors to individuals, but you also have a real diffusion 
of markets. When the Export Control System was first crafted, 
many of the major markets were not markets then, China and 
India being two obvious examples, and you have a much greater 
diffusion of technology. The U.S. is no longer the world leader 
in a range of technologies as it was say 20 years ago.
    And our authorizing statute, which is the Export 
Administration Act of 1979, is a Cold War statute, and if 
anyone looks at it, you will see it replete with references to 
the Coordinating Committee for Multi-Lateral Export Controls. 
That was the trade equivalent to NATO that has ceased to exist 
in 1994. Not only is it the EAA 1979, it is in lapse. It is not 
permanent legislation, and in the years I have been in 
Commerce, I have been both in this position and our legal 
office for more than 15 years, it has only been in effect for 
about a year and a half total. So clearly there is a statute on 
the dual-use side that seriously needs revisions.
    Pursuant to an executive order, we continue to apply the 
provisions of the act to the extent permitted by law and 
implement our regulations under another statute called the 
International Emergency Economic Powers Act or IEEPA. This 
authority provides for a limited control over domestic 
transfers of items subject to the EAR that are deemed to be 
exports. That is in the technology area, technology to foreign 
nationals in the United States.
    Consistent with our existing authority, we have outreach 
compliance and enforcement actions that address exports, re-
exports, and foreign transfers, and these include certain 
domestic and third-country transfers of technology deemed to be 
exports or re-exports based on the involvement of foreign 
nationals.
    Given the volume of trade from the United States, for 
example, it was about $1.3 trillion dollars worth of exports 
for the United States last year, informing U.S. and foreign 
businesses of the requirements of our regulations is a critical 
component to our Export Control System. We have a robust 
outreach program which includes seminars, web information, 
training, phone counseling, and direct preventative enforcement 
visits to companies. In addition to this outreach program we 
also have a broad compliance and enforcement program to help 
ensure that exports are in accord with the regulatory 
requirements.
    Regarding compliance, we do things like following up with 
license reporting requirements, carefully reviewing data from 
the automated export system, which is the system exporters put 
their data in before trade leaves the country, and inform U.S. 
manufacturers, exporters, and shippers how to avoid becoming 
involved in potential export violations with various 
publications, including red-flag indicators, one of which 
specifically speaks to domestic transfers.
    With that I will turn it over to my colleague who will 
address the enforcement aspects of our program. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Borman 
follows:]*************** INSERT 3 ***************
    Mr. Stupak. Thank you, Mr. Borman.
    Mr. Madigan.

                  TESTIMONY OF THOMAS MADIGAN

    Mr. Madigan. Thank you, Mr. Chairman.
    Mr. Stupak. Do you want to share that mike there? There we 
go.
    Mr. Madigan. Excuse me. Thank you, Mr. Chairman, Ranking 
Member Walden, and distinguished members of the subcommittee. 
As a follow up to Mr. Borman's comments on BIS outreach 
efforts, I would only add that BIS's export enforcement arm 
conducts additional targeted specialized outreach visits. These 
preventive enforcement efforts involve direct outreach to 
members of the exporting committee, community to educate them 
on export control requirements, to encourage voluntary 
compliance, and to detect potential violations. Over the past 
year we have conducted over 3,400 such targeted outreach 
visits.
    BIS's mission of keeping U.S. dual-use goods and technology 
from being diverted to prescribed end users and end uses is an 
important one. Our enforcement priorities include weapons of 
mass destruction, proliferation, terrorism, and State sponsors 
of terror, and unauthorized military end use of such items. To 
further this mission we have special agents assigned to eight 
regional field offices across the U.S. and in five foreign 
locations supported by administrative staff of analysts and 
other employees.
    With respect to AES, which Matt mentioned, BIS special 
agents use the automated targeting system of AES to identify 
violators in the United States and overseas. ATS queries can be 
conducted to identify unwitting suppliers to foreign diverters. 
Violations can then be prevented by advising these exporters 
through this targeted outreach that their products may 
ultimately be diverted in violation of the EAR.
    In addressing the threat of dual-use diversion by foreign 
procurement networks, BIS sometimes encounters circumstances in 
which foreign parties have attempted to secure what appears to 
be a domestic order but which is, in fact, intended for export. 
During its targeted outreach BIS has identified such attempts 
in the past and has investigated and prosecuted the suspects 
with its partner agencies.
    A recent example of this included the disruption of the 
network attempting to control--to acquire controlled thermal 
imaging cameras for export to the PRC. After receiving an 
industry tip and conducting at thorough investigation, the 
suspects were arrested while boarding a flight to Beijing with 
ten of the controlled cameras concealed in their luggage. Due 
to the successful outreach in this case, agents were able to 
interdict the goods, disrupt the domestic procurement attempt, 
and prosecute the individuals involved.
    We greatly appreciate the opportunity to testify in front 
of the committee today, subcommittee today, regarding BIS's 
important national security mission. Our dedicated staff, with 
support from many other agencies, is committed to protecting 
our national security, foreign policy, and economic interests 
by ensuring secure trade in high-technology items, so we 
welcome this discussion.
    We would be pleased to answer any questions you may have.
    Mr. Stupak. Thank you, Mr. Madigan.
    Mr. Alvis, your opening statement, please, sir, and pull 
that mike up and you got to hit the button there. It should 
turn on a green light, and you'll be all set there. Pull that 
up there a little bit. Thanks.

                   TESTIMONY OF MICHAEL ALVIS

    Mr. Alvis. Good morning. Chairman Stupak, Ranking Member 
Walden, members of the committee. My name is Mike Alvis, and I 
am a Vice President at ITT Night Vision, a $500 million 
business within the ITT Corporation, Fortune 500 corporation 
with over 40,000 employees worldwide. Our products serve a 
broad range of applications in both military and commercial 
markets. They include products like pumps for residential and 
commercial water, imagers on weather satellites, and the ground 
station network for the next generation U.S. air traffic 
control system.
    I am joined at the hearing today by Mr. Gregg Nivala, ITT's 
general counsel and the head of our trade compliance 
organization. His organization monitors all--the sale of all 
products, military and commercial. Also in attendance today is 
Mrs.--Ms. Ann Davidson, Corporate Vice President at our world 
headquarters, and she serves as ITT's Vice President for 
Corporate Responsibility. Also in attendance is Mr. Doc Syres, 
our Vice President for Congressional Relations.
    ITT has been in the night-vision business for 50 years. We 
are pleased to make ourselves available to this committee as it 
investigates the sale of sensitive military technology into the 
commercial marketplace. In the interest of full disclosure, in 
early 2007, ITT settled a criminal matter with the U.S. 
Department of Justice by pleading guilty to violations of the 
International Traffic and Arms Control Regulations or ITAR. The 
individuals joining me here today hold key positions created as 
a result of that settlement, and they serve at the corporate 
and business unit level that is designed to ensure that all ITT 
employees know and understand the law and operate their 
business activities legally and ethically.
    Ms. Davidson is the first ever Vice President for Corporate 
Responsibility and presides over a worldwide network of 
compliance officials that monitor the business units to ensure 
that ITT moves forward with a premiere ethics and compliance 
program.
    ITT Night Vision where I work is the world's largest 
developer and manufacturer of night-vision goggles and image-
intense fire tubes for other systems. We are only one of two 
manufacturers of the Generation 3 image tubes. Both companies 
happen to be U.S. This is the technology of the goggle.
    We began making these tubes in 1982, and have manufactured 
over a million Gen 3 tubes, and we have ceased manufacturing 
the Generation 2 tubes, which many of you see in the commercial 
marketplace and in catalogs. Our key domestic business areas 
are night-vision goggles and spare tube sales to U.S. and 
Federal Government agencies and State and local first 
responders. ITT also sells its Generation 3 aviation goggles to 
the civil helicopter community, primarily emergency medical 
services.
    Although not a governmental entity, private medical 
evacuation helicopters perform a key first responder role, and 
the use of night-vision goggles in their operations is 
recommended by the Federal Aviation Administration. ITT is 
currently in the process of doubling the number of goggles 
available to the civil aviation community for Medi-Vac.
    Less than 1.5 percent of our sales are to commercial end 
users, and 85 percent of those sales are to the civil 
helicopter community I just referred to. The other .04 percent 
of our business, the remaining 15 percent, go to the--into the 
commercial market, but it should be noted that ITT does not 
provide military specification tubes for those sales. They go 
to people like ranchers, nature lovers, and other recreational 
users. We call these fall-out tubes. These are the scrap that 
come out of our process and as--and they have some value 
commercially.
    ITT is also the developer and sole provider of the enhanced 
night-vision goggle, the most versatile and multi-faceted 
night-vision device ever fielded. The ENVG and its special 16 
millimeter tube is only sold to the United States Army, and 
this views also in special operations. It will continue to 
ensure that U.S. forces always have the critical technological 
edge or overmatch over potential adversaries.
    In closing, ITT is pleased to answer your questions today 
concerning our technology and our experience in developing a 
first-class trade compliance organization, consistent with the 
requirements set forth in the ITAR. We will limit our responses 
to questions concerning night-vision technology that are in the 
public domain. We look forward to your questions.
    [The prepared statement of Mr. Alvis 
follows:]*************** INSERT 4 ***************
    Mr. Stupak. Thank you.
    Mr. Roush, your opening statement, please.

                    TESTIMONY OF JOHN ROUSH

    Mr. Roush. Good morning, Chairman Stupak----
    Mr. Stupak. You might--you got that mike on?
    Mr. Roush. --other members of the committee. Thank you for 
the opportunity to participate in today's hearing. My name is 
John Roush, and I am a Senior Vice President at Perkin Elmer 
and President of the company's environmental health business 
segment.
    Perkin Elmer has a 60-year history of innovation in life 
sciences, analytical instrumentation, and optoelectronics 
products. We are a global leader focused on improving the 
health and safety of people and the environment. We are 
headquartered in Massachusetts and have about 8,500 employees 
serving customers in more than 150 countries. We have 
significant U.S. operations in six different States. In 2008, 
we reported revenue of approximately $2 billion, and we are 
proud to be a component of the S & P 500 index.
    As discussed, today's hearing will review the U.S. 
Government's safeguards in place to prevent the unauthorized 
diversion of sensitive products by a domestic purchase. Let me 
say that Perkin Elmer is committed to help solve this problem 
in various ways as discussed by Representatives Walden, Markey, 
and other members of the committee.
    As you know, the Department of Commerce and the Department 
of State are responsible to export control regulations within 
their respective jurisdiction. Let me tell you that Perkin 
Elmer takes these requirements very seriously. As part of our 
commitment, we have implemented an export management system to 
ensure that we are complying with all applicable U.S. export 
control laws. Our system establishes a robust internal 
compliance capability to prevent the transfer of sensitive or 
controlled products for improper end uses or to unauthorized 
destinations or purchasers.
    Additionally, our compliance processes incorporate the know 
your customer and red-flag indicators' guidelines issued by the 
U.S. Government. We have a staff of dedicated export control 
compliance personnel who are regularly trained on U.S. export 
control requirements and who play an integral role in the sale 
of these controlled products.
    Let me tell you that Perkin Elmer's export compliance 
program is very effective. In fact, we have been viewed a model 
within our industry by various compliance agencies that we have 
dealt with in the past. As mentioned by Representative Markey, 
of particular interest to this committee Perkin Elmer has also 
shown a track record of cooperating with government agencies in 
export compliance matters.
    In 2003, Perkin Elmer alerted representatives of BIS's 
Office of Export Enforcement of a request we had received to 
purchase 200 triggered spark gaps for shipment abroad. Perkin 
Elmer followed its established internal screening procedures 
and identified several red flags. In this transaction the 
number of items in the order quantity was inconsistent with the 
stated medical purpose in that region of the world, and the 
proposed sale lacked appropriate export documentation.
    In this case Perkin Elmer worked closely with OEE and other 
federal agencies in a sting operation involving a New Jersey 
customer to track the ultimate destination for those goods, 
which was Pakistan. The individual who attempted to arrange 
this transaction was convicted of violating U.S. export control 
laws and received a 3-year prison sentence. We are proud that 
the U.S. authorities publicly acknowledged Perkin Elmer for its 
role in this investigation.
    I want to say that Perkin Elmer is fully committed to 
compliance with all applicable U.S. laws. We commend this 
committee and other interested stakeholders for your interest 
in considering possible ways to enhance U.S. Government 
safeguards for domestic sales of certain sensitive products. We 
stand ready to support the committee's efforts.
    We do hope that such reforms will not disrupt the ability 
of domestic buyers to purchase these products for critical and 
legitimate medical needs. We look forward to working with you 
to ensure that any such proposals are effective and can be 
implemented in a reasonable manner. We thank you for the 
opportunity to make this statement, and I will be happy to take 
your questions at the appropriate time.
    [The prepared statement of Mr. Roush 
follows:]*************** INSERT 5 ***************
    Mr. Stupak. Thank you.
    Mr. Fitton, your opening statement, please, sir.

                  TESTIMONY OF NICHOLAS FITTON

    Mr. Fitton. Honorable Chairman and members of the 
committee, I am Nicholas Fitton, sole owner and operator of a 
small store located in Georgia Section 8. I am here today 
because of the sale of an F110-GE-129 engine computer. This is 
an item which is restricted from export. Other than that there 
are no restrictions placed on the sale of this item.
    When I purchased it in 2006, from Government Liquidations, 
the institute which controls the sale of auction surplus, 
government military items, I filed paperwork stating it was for 
resale. The customer was unknown at that time, and that it 
would not be exported or altered in any way.
    In December of 2008, I was contacted by a person 
identifying himself as Joseph Fitzpatrick, wished to have more 
information on the item. After several contacts the individual 
placed an order on January 20, 2009. You have in your 
possession copies of all correspondence between the purchaser 
and myself, along with my inter-office file on the transaction.
    After the order was placed, I had the individual fill out 
an end-use certificate and send a copy of identification along 
with the application to my office. Unfortunately as a seller I 
do not actually have access to background checks and 
certificates that I could submit to a government agency such as 
Government Liquidations does. The end-use certificate I had the 
customer fill out is one that I copied and edited from their 
Web site. After I received the customer's information I 
obtained satellite imagery of the street address the buyer's 
home address was listed as and did the same for his place of 
business. The imagery verified they were residential and 
business districts. I also pulled public information on the 
company the buyer had listed, all information include IP 
addresses of the computer the transactions were placed from is 
maintained both in digital and hard-copy formats.
    I also called in a favor from a local law enforcement 
officer who just simply ran the buyer's name through a computer 
to see if there were any wants or warrants. Pretty much this is 
all that I can do as a seller.
    During the process I had the buyer believe a more complex 
investigation was taking place than there actually really was. 
I also drew the process out over a long period of time. My 
experience in law enforcement military operations has shown 
that the longer transactions take and more security measures 
that are presented to an individual, if they are committing 
nefarious or criminal activities, they tend to become nervous 
and back out of the transactions or tend to give tells as to 
something is going wrong. The entire process from initial 
contact until the package was shipped on April 23 was over 4 
months. A short time after the package was delivered, I was 
contracted by your investigators in regards to the matter, and 
here we are today.
    What we are really looking at here has several issues which 
need to be addressed. One, formal guidelines need to be set for 
as to what is expected from resellers and end users, and this 
needs to be something other than no exports as we have already 
talked about here.
    Two, resources need to be opened up to resellers to which 
they can validate an end user. There are currently no such 
services available to vendors who sell materials deemed 
sensitive. Other industries such as firearms dealers have 
services available to them such as those offered by the Bureau 
of Alcohol, Tobacco, and Firearms, which will allow sellers to 
perform checks and investigations into those wishing to 
purchase these items. Government Liquidations has such services 
available and any vendor or person wishing to purchase these 
items has to be checked prior to them being able to pick up 
these items. Once it falls into the hands of the vendor or end 
user, the only requirement is not to export the item unless 
prior approval is granted.
    The demilitarization codes is my third issue which needs to 
be addressed. Right now the demilitarization codes are fairly 
broad. For example, a piece of cloth is considered a restricted 
item because it is used as covering for a piece of armor or a 
helmet and thus classified in the same manner as body armor. A 
shirt or jacket which is 40 years old and hasn't been issued in 
years is classified the same way current issue items are.
    And on that note we need to look at why certain items are 
classified as sensitive and no longer offered for sale. Many of 
these items while being available directly from manufacturers 
without restrictions are sold new across the country. Why is 
that same item being used by the military and in many cases, no 
longer serviceable, classified as sensitive?
    Also, many items which do have restrictions such as armor, 
more specifically helmets, are now no longer available for 
sale. These items were once available with approval by an end-
use certificate. While many people don't understand why someone 
would want or need one of these, they fail to realize that the 
primary consumer for such items tend to be law enforcement 
agencies. Many departments only have the budget to purchase 
tactical equipment including ballistic shields and helmets for 
their swat or quick reaction teams. They cannot afford four or 
$500 for a helmet for every patrol officer, even realizing the 
first responder to a hostile situation such as an active 
shooter is not a tactical unit but actually patrol officers. 
These surplus military helmets can be normally sold for under 
$50.
    By restricting items for sale and commercial trade, not 
only are you taking away items from average citizen, but in 
many cases you are also affecting law enforcement as well. Even 
with policies such ammunition and weapons restrictions to 
civilians, law enforcement and even our military are adversely 
affected. This could be seen in the 1994, assault weapons ban 
and its subsequent sunset. After the ban was lifted more 
companies were able to afford research and development and 
quickly improve long-standing, stagnant technologies and 
simultaneously improve quality and lower the price of items 
used by military and law enforcement agencies.
    With continued heavy taxation and uncoming restrictions, I 
am afraid it will not take much to make us rely on foreign 
powers for our military and law enforcement needs.
    In conclusion, what we are dealing here with is not an 
inability to enforce security measures, but a lack of policy 
and procedures to enforce and lack of using commonsense to 
understand what the actual items are that are being sold. I 
currently have a bag with several types of simple cloth items 
which are current regulations considered more sensitive than 
many of the items up there on display. I have no restrictions 
as to what I can do with those items, however, a piece of cloth 
is required for me to be returned to the government for 
destruction.
    At this time I open myself up for any questions in regards 
to these matters. Thank you.
    [The prepared statement of Mr. Fitton 
follows:]*************** INSERT 6 ***************
    Mr. Stupak. Well, thank you and thank you to all of our 
witnesses for your testimony, and I think it is fair to 
emphasize again that the industries are here, the companies are 
here and a representative for Mr. Fitton by himself, basically 
a one-man operation through ITT which a $500 million operation, 
did not violate any laws. Probably--and they did cooperate with 
GAO after we made the purchases, but we are going to try to 
expose some of the problems with the laws or the policies that 
we have and see if we can't correct them as the purpose of this 
hearing as we do in oversight investigation.
    Let us start with questions. I will begin.
    Mr. Fitton, just out of curiosity, so you bought this--the 
F-16 engine monitoring system computer from the government. 
Right? And you are cleared by the government to buy this stuff 
as surplus military?
    Mr. Fitton. That is correct, and might I add that many of 
the items which I purchased over the last several years, they 
have recalled, such as clothing.
    Mr. Stupak. Sure.
    Mr. Fitton. Such as helmet covers and things of that 
nature. However, sensitive items such as the F-16 engine 
computer, they have never asked me to return those items.
    Mr. Stupak. OK. So you buy it, and you are licensed by the 
government, you are checked out, you are oK. But once you sell 
it in the United States, as long as you sell it in the United 
States, there is no restriction on that. Right?
    Mr. Fitton. That is correct.
    Mr. Stupak. What on God's green earth would anyone want 
with an F-16 engine monitoring system computer? Why would that 
have a resale value?
    Mr. Fitton. Well, typically a lot of items which a lot of 
people wouldn't understand what someone would want actually go 
to museums, collectors, I have sold a great deal of items to 
movie production companies and things of that nature----
    Mr. Stupak. OK.
    Mr. Fitton. --out in Hollywood. And things such as the 
infra-red flags there which----
    Mr. Stupak. Right.
    Mr. Fitton. --are a restricted item----
    Mr. Stupak. Right.
    Mr. Fitton. --honestly a lot of these things I purchase 
from overseas countries such as China. So export restrictions 
are kind of curious to me simply because a lot of the things we 
are restricting from export we actually import into this 
country from the countries we are trying not to export to.
    Mr. Stupak. Right.
    Mr. Kutz, let me ask you a couple questions. Your 
undercover investigation showed how easy it is to obtain 
military and dual-use items on the State Department's Munitions 
List and the Commerce Department's Commerce Control List. Your 
investigation also illustrated that our laws impose few, if 
any, controls on domestic sales of these items. In the post 9/
11 world, I don't think it makes any sense to assume that all 
attacks against the United States will occur or will occur from 
overseas.
    So in your undercover operation, your investigators bought 
seven items or several items that could be used to make IEDs, 
improvised explosive devices. Is that right?
    Mr. Kutz. Yes. Several of these have IED applications.
    Mr. Stupak. Which are those? Which items are they? I know 
you have some of them up here.
    Mr. Kutz. For example, the quadruple differential line 
receiver, you can put that on the monitor, too. It is----
    Mr. Stupak. Is your mike on?
    Mr. Kutz. Yes, it is.
    Mr. Stupak. OK.
    Mr. Kutz. It is a little chip, and I think they can----
    Mr. Stupak. OK.
    Mr. Kutz. --put it on the monitor for you. That is one of 
them. The inclinometer, which I believe those are both of my 
left----
    Mr. Stupak. Right.
    Mr. Kutz. --there. Those are two, and I believe some of the 
other ones have other applications. We actually look for ones 
that appeared to have been going to Iran as part of prior 
criminal cases that were being built into IEDs and used in 
Iraq. That is the type of things we are talking about.
    Mr. Stupak. OK.
    Mr. Kutz. And this is low-end technology unlike some of 
these others. This is very low end. It is potentially available 
other places. Why they come to the United States looking for it 
I don't know exactly.
    Mr. Stupak. Well, we have many reports that these IEDs when 
they go off, they find U.S.-made parts in them.
    Mr. Kutz. Correct.
    Mr. Stupak. So it is a serious problem that we are facing 
in Iraq, Afghanistan, and elsewhere right now.
    Mr. Kutz. Yes.
    Mr. Stupak. All right. Let us take a look at some of the 
items you purchased. Body armor, night-vision scopes, and 
secure radios. Are you concerned these could be used by not 
just terrorists but criminals and terrorist organizations 
operating within the United States?
    Mr. Kutz. Yes. I do think there is--especially like the 
body armor seems to be more of a domestic. We didn't see any 
criminal cases of export of the body armor, but there is many 
criminal cases of--the Binghamton case recently, the shooter 
there was----
    Mr. Stupak. That's the one up in Pittsburgh?
    Mr. Kutz. No. Binghamton, New York.
    Mr. Stupak. OK.
    Mr. Kutz. The one where about 12 or 13 people were murdered 
by someone. They had body armor. We don't know what type of 
body armor, but body armor was used in some of the bank 
robberies from the 1990s you are probably familiar.
    Mr. Stupak. Oh, yes. There was legislation introduced some 
timeframe to restrict those sales, and we never could get 
anywhere with it.
    Mr. Kutz. Yes and----
    Mr. Stupak. And I know Mr. Doyle wanted to come and testify 
because of the recent shooting of three police officers in 
Pittsburgh, that individual was in the body armor that we see 
here today.
    Mr. Kutz. Right, and we actually have--I have a quote of 
actually a Craig's List ad that we had as a prior 
investigation, and it actually said, and I quote, ``a must have 
for any gangster.'' So that is another use of the body armor 
that we understand.
    Mr. Stupak. OK. Ms. Lasowski, let me ask you this. You 
testified that GAO placed the lack of control over sensitive 
military targets on your high-risk list. Correct?
    Ms. Lasowski. Yes. That is correct.
    Mr. Stupak. OK. Let me ask you about this. The Arms Export 
Control Act and the Export Administration Act date back several 
decades. Were any of these laws amended or updated at any point 
since 9/11?
    Ms. Lasowski. There has not been a fundamental change in 
the laws. As Mr. Borman has mentioned the Export Administration 
Act has lapsed----
    Mr. Stupak. Right.
    Ms. Lasowski. --and has been kept alive through executive 
order and----
    Mr. Stupak. Through an emergency executive order.
    Ms. Lasowski. Exactly, and so there has not been a major 
overhaul of either law.
    Mr. Stupak. OK. For committee members, remember we had our 
hearing there in April about the chemical plant in West 
Virginia that blew up, and we mentioned a lot about what if a 
terrorist would view this as a target. Everything they wanted 
to do to hit that chemical plant that we had the hearing on, 
the night vision, body armor, IEDs, it is all there. So it goes 
farther than that.
    We are going to try to keep the 5 minutes. We will keep 
going back and forth. We have votes soon, so let me go to Mr. 
Walden for his set of questions.
    Mr. Walden. Thank you very much, Mr. Chairman.
    Mr. Kutz, what kind of checks did some of the companies run 
on your GAO undercover company called Monacasey Tech 
Consultants? What kind of background checks, and what did the 
companies think those checks would show?
    Mr. Kutz. There were a variety of controls we were using. I 
want to start with the end-use certificate that was mentioned 
here. If we could put that up on the monitor, too. I actually 
would like to read to you. It is essentially a self-
certification that you won't export, et cetera, so it says, ``I 
confirm that the products listed above,'' and this was the Ka-
bank amplifier, ``will be so used for the end use stated above 
and will not be used in or for nuclear, biological, chemical 
weapons, or missiles capable of delivering these weapons. I 
further confirm that the products will not be exported.''
    So that was considered part of the control system to get a 
self-certification from us in several of these key products.
    Mr. Walden. So if I wanted to do something bad with what I 
got, I would just sign this and say I promise not to use this 
to create a nuclear, biological, or chemical weapon. Honest.
    Mr. Kutz. That is what----
    Mr. Walden. Signed Osama bin Laden. It would be believable 
and enforceable.
    Mr. Kutz. Well, we signed it in all cases, and I don't 
believe there are any other checks done. Some of the other 
things just real quickly, they had copies of our 
identifications, they checked to see if our credit card worked. 
Some of them actually checked to see that we had a Web site, 
and so there were some things--one actually claimed they did a 
background check, but I don't know how they do a background 
check of a person that doesn't exist. I am not sure what kind 
of record you would get on that. So that is the type of things 
we understood were happening.
    Mr. Walden. Is there any information that companies could 
do or require of buyers when making a domestic purchase of 
dual-use items that would identify a possible export situation 
or deter a bad actor who wanted to buy the item in order to 
ship it abroad? I mean, is there--how can you stop that?
    Mr. Kutz. I think it is very difficult. I think some of the 
points that were made by the witnesses to my left here are 
valid points. Mr. Fitton, I guess, mentioned some of the things 
that he had said he did, and he maybe exhausted all options, 
and it still wasn't good enough to get us. And he appears to 
have a lot more training than a lot of the other people we were 
probably dealing with here in recognizing a kind of a situation 
like we were.
    Mr. Walden. You have met with all the manufactures and 
distributors who were the subject of your investigation. 
Correct?
    Mr. Kutz. We either met with or talked by phone after this. 
There were no contacts with them before the transactions.
    Mr. Walden. While any restrictions they place on domestic 
sales are voluntary, do you think they were sufficient to 
prevent foreign nationals or terrorists from obtaining these 
sensitive items?
    Mr. Kutz. No, and as I think we had found based on 
discussions with law enforcement, the kind of front company we 
used and the kind of scheme we used is one that is being used 
by real foreign governments and terrorist organizations today. 
This is not a hypothetical. This is a real.
    Mr. Walden. That is pretty disturbing.
    Mr. Kutz. Yes, it is, and again, we, again, these items we 
were successful with, and I think it raises questions. I mean, 
I think that the military and the dual-use items are different. 
The military, some of the discussions here about what should be 
done, what possible use does anybody have for whatever the 
U.S.--according to the U.S. military this is being used today 
by our soldiers. Why would anyone else need exactly what our 
soldiers need? That is something that has a more easy solution 
than the dual use.
    Mr. Walden. Do you have your domestic buyers sign--well, I 
want to go to the companies.
    Do you have your domestic buyers sign end-use agreements? 
Could you answer verbally into the microphone each of you?
    Mr. Alvis. Yes, sir. We have instituted as much out of our 
own experience as we learned and instituted a compliance, a 
rigorous compliance system. We have required our distributors, 
dealers, the people that we sell to, which is a very, very 
small part of our business, to sign end-use agreements.
    Mr. Walden. Mr. Roush.
    Mr. Roush. No, we don't ask for--on domestic sales of these 
items we don't ask for an end-use statement.
    Mr. Walden. Really? OK. Mr. Fitton.
    Mr. Fitton. Yes, I do, and contrary to something that was 
said earlier in the proceedings, I do require the customer to 
actually say what the end use is going to be. Granted, it is 
just what they are stating it is going to be.
    Mr. Walden. Right.
    Mr. Fitton. In this case it was for display, but that is 
essentially all I as a buyer from the government am required to 
give as well.
    Mr. Walden. So do any of you that are selling this 
equipment, I realize you are following the absence of the law, 
it doesn't exist, do you get comfort from these end-use 
agreements? Do you see--do you share our concern that just 
because somebody signs it and says I promise I won't use this 
for nuclear, biological, or chemical weapons or missiles, 
signed Kim John Ill, what do we do here? It doesn't----
    Mr. Fitton. Personally, if--this is what I am required to 
give to the government. If it is good enough for the government 
to use, shouldn't it be good enough for me to use as a 
reseller? And on that note a lot of the things that are 
considered dual-use technology and no longer authorized for the 
government to release, these are common, off-the-shelf items 
that you could be--purchase at Radio Shack, including a 
oscilloscope, which the government----
    Mr. Walden. Right.
    Mr. Fitton. --no longer releases, but I as a buyer 
sometimes get confused as to what I should be----
    Mr. Walden. Yes.
    Mr. Fitton. --concerned with and what I shouldn't be 
concerned with considering some of the items up here the 
government doesn't seem to be very worried about where a lot of 
items they should be worried about they don't care.
    Mr. Walden. I appreciate that. That is the struggle I think 
we are all having here because we are all under risk, at risk 
here.
    Thank you, Mr. Chairman. My time has expired.
    Mr. Stupak. Is this agreement there is no penalty if you 
lie on it or anything like that? I mean, it is just something 
to give you some comfort. Right?
    Mr. Alvis. In our case, sir, what we would do is we would 
probably sever our relationship with----
    Mr. Stupak. With that buyer.
    Mr. Alvis. --that distributor or dealer.
    Mr. Stupak. But there is no criminal penalty or anything 
like that?
    Mr. Alvis. Not that I know of.
    Mr. Kutz. Could I comment on that real quickly? I mean----
    Mr. Stupak. Yes.
    Mr. Kutz. --the one value we have seen of the end use, it 
doesn't really prevent anything.
    Mr. Stupak. Right.
    Mr. Kutz. Law enforcement has used it in making criminal 
cases to show knowledge and intent.
    Mr. Stupak. Sure.
    Mr. Kutz. So it does have value after the fact.
    Mr. Stupak. But if I don't do it, there is no penalty 
involved in it?
    Mr. Kutz. No.
    Mr. Stupak. I just wanted to clear that. Go ahead.
    Mr. Walden. Mr. Alvis, you said you would sever your 
relationship with the distributor, do you go back, do any of 
your companies go back and do random checks to see if the 
person who signed the agreement is actually following the 
agreement?
    Mr. Alvis. Our dealer agreements do require, have a proviso 
that allows us to come and audit and----
    Mr. Walden. So you do audit?
    Mr. Alvis. --check to see if they do that.
    Mr. Walden. And you do audits then?
    Mr. Alvis. We have resource constraints as any other 
organization does, and we have not because--we have not done 
that to date.
    Mr. Walden. Do any of you do audits back on this? I realize 
you are not required to but----
    Mr. Fitton. Unfortunately, there is not a whole lot I as a 
seller can do. I am at a little bit of a difference situation 
than Mr. Alvis in that I would actually purchase--I would be 
the type of customer he would sell to. Sell----
    Mr. Walden. Right.
    Mr. Fitton. --to military and law enforcement agencies----
    Mr. Walden. Right.
    Mr. Fitton. --who are my primary buyer. But while he would 
essentially come to me and see who I sold it to----
    Mr. Walden. Right.
    Mr. Fitton. --I really don't have somebody I can report to 
such as the ATS to get information on my buyers from, and this 
one thing that I would like to have access to. As a firearms 
dealer I have got it, so why wouldn't I have it as a sensitive 
materials dealer?
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Stupak. Ms. Sutton, thanks for letting us step on your 
time. We will give you your 5 minutes back, Ms. Sutton, for 
questions.
    Ms. Sutton. Thank you very much.
    Mr. Kutz, I am sitting here in a bit of astonishment at 
what your undercover investigation was able to buy right here 
in the United States, and if you just look at these tables, a 
detonator for a nuclear bomb, an accelerometer used in a 
nuclear weapons program, a steering instrument for a guided 
missile, components for an IED, bulletproof vests, secure 
radios, and night-vision equipment. It is as if our own country 
has become a terrorist bazaar.
    Mr. Kutz, I know you do this for a living, but you were 
surprised at your success--were you surprised at your success 
in obtaining these items?
    Mr. Kutz. In some cases probably, other cases, no. We have 
done work on eBay and Craig's List. We have bought these same 
types of items there. We have actually bought from the Surplus 
Property System from the Department of Defense before when they 
were selling F-14 parts, and that was one of the reasons I 
believe Congress passed a law----
    Ms. Sutton. Right.
    Mr. Kutz. --prohibiting the Department of Defense from 
selling F-14 parts, which had only one customer, Iran. And so 
not really would be my answer.
    Ms. Sutton. Well, your investigation is just so important 
because it shows the whole picture, you know. You found that 
all of these items can be easily and legally purchased inside 
the United States, and I want to thank the companies who are 
represented here today for your cooperation with the committee 
and for your willingness to look at making changes to the law.
    But you, too, are looking at this issue through your more 
narrow viewpoints and with respect to your products, and I 
think the lesson here is that we need to look at this issue 
holistically, and I think Ms. Lasowski, you would agree. We 
need to see the bigger picture. Each year billions of dollars 
in military and dual-use items are exported from the U.S. as 
has been made clear here today, and for too long we have viewed 
the problem through isolated stovepipes.
    And Ms. Lasowski, you are also from GAO, you have analyzed 
this problem from the perspective of a federal agency 
coordination, and I think you are finding support that Mr. 
Kutz's undercover investigators, all that they found, you know. 
Every 2 years GAO issues what is called its high-risk report. 
It has been referenced, and in this report you list some of the 
biggest problems in government. You have placed the security of 
our sensitive military technologies on this list.
    And I want to just read very quickly a portion of your 
testimony that explains why. You say this, ``Poor interagency 
coordination, inefficiencies in processing licensing 
applications, and a lack of systematic assessments have created 
significant vulnerabilities in the Export Control System. Now, 
Ms. Lasowski, the Departments of Defense, State, Commerce, 
Homeland Security, Treasury, Energy, and Justice all have a 
role in regulating exports of defense-related technology, yet 
their coordination is poor. Can you tell us why?
    Ms. Lasowski. Thank you for the opportunity to respond to 
that. What we have found over the years is that for various 
aspects of the Export Control System there has not been a good 
coordination for agreeing upon, for example, the jurisdiction 
of certain items or for enforcement actions. Some of the 
individual agencies have taken some actions towards making some 
improvements, and we certainly applaud any individual agencies' 
attempts to improve inefficiencies or an ineffective part of 
the system.
    However, for something as important as this, it really is 
important to get all the stakeholders to look together at this 
particular topic, and what we are calling for is a 
reexamination of the system, and this would entail bringing 
each of those agencies together to represent their particular 
viewpoints and bring their knowledge and expertise to the 
topic. But then in addition what we have done here, too, is we 
have addressed this issue with the Office of Management and 
Budget. They, in turn, have informed us that given that there--
this is a cross-cutting type of issue, the National Security 
Council may have an important role to play in this 
reexamination, and we welcome that opportunity for bringing all 
the players together to come up with solutions to the 
vulnerabilities and weaknesses that we have identified over the 
years.
    Ms. Sutton. OK, and you mentioned that there have been 
failures to conduct systematic assessments, and that that 
failure has caused significant vulnerabilities, and if you 
could just expand upon your answer a little bit, could you tell 
us what assessments they should be doing?
    Ms. Lasowski. What we are calling for in terms of those 
assessments is to determine how effective their system is. The 
system has a particular mission and goals and objectives, and 
it would be important to identify the appropriate measures for 
figuring out are they meeting their mission and their 
objectives, and so what we would be asking for is to take a 
look at the current environment, to develop measures that would 
determine whether they are being efficient and effective in the 
current environment, and then periodically measure those to see 
if they are making improvements.
    Ms. Sutton. I thank you. My time is up.
    Mr. Stupak. Thank you, Ms. Sutton.
    Mr. Gingrey, for questions, please. Five minutes.
    Mr. Gingrey. Mr. Chairman, thank you.
    Mr. Borman, do you have any sense about the number of 
legitimate transactions that these products go through for 
legitimate purposes as part of their normal production or the 
supply chain? I would just like to get a sense of how often 
these products may need to change hands before they reach their 
end use.
    Mr. Borman. In general terms, of course, we have just 
received a copy of the report and heard the report today, so we 
will have to look at this in detail, and, again, I am talking 
about on the dual-use side really, the items on this table, not 
the items on this table. But a lot of these are components, so 
it is very likely that they will go through several iterations 
either from the manufacturer to a distributor or to a sub-
vendor who then puts it into a sub-system and so on.
    But one of the things we did look at in thinking about the 
scale of domestic commerce, just to give you two examples, last 
year it was estimated that the domestic market for 
semiconductor goods was almost $40 billion. That is just the 
domestic market. The domestic market for aerospace goods, about 
$35 billion. So, you know, when you are talking about dealing 
with domestic, potential domestic controls on at least the 
dual-use items like this, that is a significant challenge.
    Now, others of these are more specialized, and maybe some 
of the products like the triggered spark gap are more 
specialized, and they really just go from the manufacturer to 
an original manufacture equipment in OEM, and that--there is 
only one transaction there. So it really varies, but these 
kinds of things I think, the accelerometers, certainly the QRS-
11 chip, which goes into a component that then goes into civil 
aircraft, you are talking about several stages usually.
    Mr. Gingrey. Let me do a follow up on this same question, 
particularly for these items that we are talking about that 
have the domestic commercial use.
    Is there any kind of a protocol or oversight of their 
ultimate disposal process? Because at some point the technology 
is going to either malfunction or exhaust its primary purpose, 
and it would likely need to be discarded. Should this--is this 
an area that we should be concerned about?
    Mr. Borman. Well, again, I think there is a distinction to 
be made at least currently between those things that are 
exported and those that are used commercially. So, for example, 
the QRS-11 chip, that is probably in thousands of commercial 
airliners around the world; Boeings, air buses, Embraers, also 
Commadiers. To the extent they are operating domestically and 
the companies need to replace them, again, that is one set of 
circumstances.
    If they are going to be replaced abroad, then, again, they 
are subject to the Export Control System, and so there are 
certainly requirements that if companies want to export them to 
replace them in China or some other country, they have to go 
through that process.
    Mr. Gingrey. I was referring to those who were primarily 
for domestic use.
    Let me go to--and thank you, Mr. Borman. Mr. Fitton, thank 
you for being here today. As the sole employee of your 
business, I know it certainly had to make a sacrifice to get up 
here, and we know that this committee appreciates your presence 
and your testimony.
    In light of what you said, it seems to me that you took 
most every possible precaution that you could to evaluate your 
buyer, the end user. Take a moment and further expand on the 
current limitations that a reseller faces in validating the 
information and the background of a potential buyer. You 
touched on that just a little bit a minute ago. Could you 
elaborate in the remaining time that I have got?
    Mr. Fitton. Correct. Say if you are dealing with a firearms 
transaction, an individual has to fill out what is essentially 
an end use certificate stating that there is nothing preventing 
them from purchasing the weapon or any of this type of 
business. They have got their Social Security number, their 
names, their addresses, everything is listed on that 
application. That application is then submitted to the ATF for 
approval. This may be instantaneous approval, and in many cases 
take a week or 2 weeks for that approval process to take place.
    This is no reason that we can't go through a similar 
process to at least validate the person purchasing that item. 
Now, what happens beyond that point, let us face it. If 
somebody wants to do some nefarious activities to the U.S., 
they can do it. There is no way to prevent this in its 
entirety. All we can do is try and do as many measures as 
possible, and one of the things that we have to look at is the 
fact that there are terrorists that are trying to destroy 
America, there are individuals throughout the world who want to 
see our downfall, but our current political correctness and the 
fact that we do have so many privacy rights protecting American 
citizens, these privacy rights are also protecting the 
terrorists, and we are not able to actually hunt down the real 
cause of what is causing damage to the countries. It is not the 
items. It is the end user, simply because I could do more 
damage with a truck full of fertilizer and gasoline than I can 
with any of the items that have been brought up on display 
today.
    Mr. Gingrey. Thank you, Mr. Fitton, and I yield back, Mr. 
Chairman.
    Mr. Stupak. Thanks, Mr. Gingrey.
    Mr. Braley for questions, please.
    Mr. Braley. Thank you, Mr. Chairman. Mr. Alvis, I 
appreciated your comments about some of the changes that have 
been made at ITT, but you may want to count me as someone who 
is still skeptical about the progress that is being made, and I 
want to talk to you about that.
    In 2007, your company was convicted of one of the biggest 
criminal violations in the history of the Arms Export Control 
Act for illegally exporting to China and other countries 
technology relating to your highly-sought-after night-vision 
goggles, and the company was fined $100 million. And I want to 
show you what Daniel Wilkins at the Defense Criminal 
Investigative Services said about your company. He said this, 
``The illegal export of U.S. military technology and equipment 
threatens our national security in the most direct way. 
Americans' security and its critical military technology are 
simply not up for sale.''
    And Julie Myers, who was the assistant secretary for U.S. 
Immigration and Customs Enforcement at the Department of 
Homeland Security said that your company placed profits ahead 
of the security of our Nation.
    So my question for you is are you here today to vouch on 
behalf of ITT that those concerns are no longer valid about 
your company?
    Mr. Alvis. Yes, we are. The people that were involved are 
no longer with the company. I talked earlier in my opening 
statement about the structure we put in place. I was not there. 
I've only been there 2-1/2 years. I was redeployed there along 
with--our entire senior staff has come on board within the last 
3 years to include our president.
    Mr. Braley. OK. Well----
    Mr. Alvis. We are totally--yes, sir. That----
    Mr. Braley. Let us talk about that. Here is another quote 
from Kenneth Wanstein, who is the assistant attorney general at 
the Department of Justice, and he said, ``ITT's exportation of 
this sensitive technology to China and other nations 
jeopardized our national security and the safety of our 
military men and women on the battlefield,'' which is an 
extremely strong statement coming from the Department of 
Justice.
    And what I don't understand and what the committee doesn't 
understand is your company is still doing business with the 
Federal Government. Correct?
    Mr. Alvis. That is correct.
    Mr. Braley. And the Justice Department allowed your company 
to defer $50 million of that $100 million criminal fine by 
allowing you to invest it towards a new, more-advanced line of 
night-vision goggles. Isn't that true?
    Mr. Alvis. That is true.
    Mr. Braley. Now, normally when a company is convicted of 
illegal activities of this magnitude, they are automatically 
debarred from future government contracts. Why hasn't ITT been 
debarred, according to your understanding?
    Mr. Alvis. As I mentioned in my opening statement and my 
written statement, we are the world leader, and we have made 
drastic changes. One of the things that I think the government 
believes, and this is my opinion, is that the heart of the 
night-vision technology was not compromised. The goggle is 
nothing but a wrapper for the tube. The tube is the essence of 
the goggle. The tube cannot be reverse engineered. The tube 
is--and the government is convinced of this. I have talked to 
the former customer general officer level, that the security of 
the United States was not compromised via any of the activity.
    Mr. Braley. Well, that would seem to de-lie $100 million 
fine, which apparently was levied in connection with the 
activity. Wouldn't you agree with that? That if there is no 
compromise of the national security, why in the world would 
$100 million fine be imposed?
    Anyway, let me move on. This isn't the only time that ITT 
has been engaged in illegal export activities. The committee 
requested from the Department of Commerce copies of documents 
relating to other ITT export violations, and one of the 
documents shows that in 2007, which would have been within the 
timeframe you are talking about after this changeover in 
management at the company, one of your subsidiaries, Engineered 
Values Group, was fined for illegally shipping valves used in 
chemical and biological weapons to China, Israel, Saudi Arabia, 
and Taiwan. Isn't that right?
    Mr. Alvis. As I mentioned earlier, I am in the night-vision 
business area. I have no knowledge of that.
    Mr. Braley. But that certainly would have been within the 
period of time that you have indicated the company has had a 
change in management if it happened in 2007.
    Mr. Alvis. We can respond to that question and get back to 
you for the record. I really don't feel comfortable, 
particularly under oath, responding to something I have no 
knowledge about.
    Mr. Braley. All right. Then, Mr. Chairman, I would 
specifically request that we get an official response from the 
company in regard to that question.
    Mr. Kutz, let me close with you. After ITT's conviction and 
$100 million fine, the company officials issued a statement 
saying they had conducted a comprehensive review of their 
policies and procedures and were initiating new monitoring to 
prevent illegal exports. But in November, 2008, which is even 
later than this 2007, incident, you were able to purchase their 
night-vision technology from one of its distributors using fake 
company and fake individuals' identification. Isn't that true?
    Mr. Kutz. Yes, and in fact, we became a distributor.
    Mr. Braley. So, Mr. Chairman, that illustrates why I 
continue to have serious concerns about ITT's actions. The 
company's history of illegal exports is troubling and raises 
serious questions about whether it continues to put profits 
over the security of our Nation.
    And in closing, Mr. Chairman, I would just like to point 
out that while this hearing has been going on in response to 
the memo we received from the committee, I drafted a very 
simply certification that I think could address many of the 
issues that have been raised here at the hearing today. It 
would require the name, address, phone number, e-mail, business 
address, employer identification number of anyone purchasing 
these items, and it simply states in a very short form, ``I 
understand that the item I am purchasing is, A, a defense items 
under the Arms Export Control Act, or B, a dual-use item under 
the Export Administration Act. I also understand that this item 
is subject to export control laws that may prevent or restrict 
the sale or delivery of this item to anyone outside the United 
States. I am aware that I may face criminal prosecution and or 
civil fines and penalties if I attempt to sell or distribute 
this item in violation of these export control laws, and I 
certify that neither I nor anyone on my behalf will attempt to 
export this item at any time.''
    Now, there is a paper trail that would certainly add some 
teeth to prosecution and enforcement of anyone attempting to 
violate our laws.
    And with that I yield back the balance of my time.
    Mr. Stupak. Thank you, Mr. Braley.
    Mr. Burgess for questions. Five minutes, please.
    Mr. Burgess. Thank you.
    Mr. Alvis, we heard I think it was Ms. Lasowski testify 
that the exporter determines the level of government review. Is 
that--do you generally agree with that?
    Mr. Alvis. That the company----
    Mr. Burgess. Yes. That the exporter, the person who is 
doing the export of--exporting the item in question is--because 
of the ambiguity of our laws and the problems with 
jurisdiction, that many, much of that is left up to your 
discretion. Is that a fair statement?
    Mr. Alvis. On the exports it is pretty specific. On our 
international business we sell to the U.S. Government which 
sells to other governments as a government-to-government sale 
through the Foreign Military Sales Program, but we also do 
direct sales to other militaries. ITT is in the business of 
selling to militaries overseas. We can sell to them directly, 
but the ITAR that I mentioned earlier does have provisos. Every 
time you ship an item, every time you get an order from an 
international customer, you apply to the State Department to 
receive an export license. Each export license is handled on a 
case-by-case basis and can have specific provisos in it that 
regulate the technology. So we just respond to whatever our 
government determines.
    Mr. Burgess. And do you think that is an adequate safeguard 
the way that is set up, or would you structure something 
different having come through the experience that you have 
endured?
    Mr. Alvis. From my personal experience having used these 
goggles as a military officer and also--and having been down in 
the night-vision business for the past 2-1/2 years, my personal 
opinion is that the ITAR is rigorous enough with its figure of 
merit calculations. A lot of people don't know that the stuff 
we export, even to our closest allies, is not the same night 
vision that the U.S. military gets. The goggle may look the 
same, but the tube inside--we made 200 different types of tubes 
of varying degrees, all the way down to the ones which I would 
not consider to be cutting edge that we sell commercially, to 
the best tube that the U.S. military gets.
    So my personal opinion is that the ITAR is rigorous enough 
to control the export of night vision.
    Mr. Burgess. OK. Let me ask a question. I guess, Ms. 
Lasowski, I need to direct this to you. You talked about the 
turf battles that go on between Commerce and State. I guess, 
Mr. Chairman, I don't really understand why we don't have the 
State Department here today. Perhaps that would be helpful, but 
is this a frequent occurrence that these turf battles occur 
between Commerce and State?
    Ms. Lasowski. We have noted various instances where there 
have been jurisdictional disputes that have occurred. Sometimes 
it has occurred due to some confusion about where space 
technology, for example, is controlled. But the instances that 
I was referring to had to do with actually an exporter who 
became aware that his competitor of the very same item was 
going through the Department of Commerce and utilizing that 
system to export his item, while this other company was going 
through the State Department.
    Mr. Burgess. So they were at a competitive disadvantage.
    Ms. Lasowski. They were at a competitive disadvantage, and 
therefore----
    Mr. Burgess. Do you get----
    Ms. Lasowski. --in that kind of situation you have an 
unlevel playing field----
    Mr. Burgess. Sure.
    Ms. Lasowski. --and that is why I referred to the exporter 
as being really the first step in terms of deciding which 
process to use.
    Mr. Burgess. Because they can venue shop or, I am sorry, 
agency shop as to the most expeditious way to get their product 
out.
    Ms. Lasowski. It is a complex system, and it is up to them 
to be--to understand the export control laws and regulations.
    Mr. Burgess. Why is it like that? Why is there a dual 
jurisdiction?
    Ms. Lasowski. That has been----
    Mr. Burgess. I am just a simple country doctor, and so tell 
me, why did we set it up like that? When did it happen, why did 
it happen, was there something we were trying to accomplish by 
setting up this dual jurisdiction?
    Ms. Lasowski. The system is bifurcated because they are to 
accomplish different activities. The State Department is to 
control the most sensitive defense items, while the Commerce 
Department is to control those items that are commercial and 
military applications.
    Mr. Burgess. But has it always been that way?
    Ms. Lasowski. The system has been established, yes, as that 
long ago.
    Mr. Borman. Sir, if I could just add a little bit to that.
    Mr. Burgess. Yes.
    Mr. Borman. The Export Administration Act originally was 
passed in 1949, but it is a Cold War statute as I mentioned. 
The Arms Export Control Act actually predates World War II, and 
as Ms. Lasowski said, they originally had different purposes. 
One of the challenges now is, of course, you have so much 
commercial, off-the-shelf technology going into military 
systems and conversely, you have some military systems moving 
back into the commercial area, and that is a big difference 
over the last 20 years.
    Mr. Burgess. Now, when I was just a regular person and not 
in Congress, I mean, I seem to recall a lot of controversy back 
in the '90s about selling satellite technology to China. Did we 
not get into some of this same difficulty between Commerce and 
State with selling the satellite technology to BRC back in the 
'90s?
    Ms. Lasowski. That is correct. The late '90s there were 
export violations that occurred and then the Congress passed 
legislation to change the jurisdiction of satellites and 
related components from the Commerce Department to the State 
Department.
    Mr. Burgess. Well, was that fix then just inadequate, that 
it should have been a broader fix that has led us now to these 
additional problems that we are discussing today?
    Ms. Lasowski. I think the best thing--response that I would 
have for that is that we are calling for a reexamination of the 
system and the whole safety net of programs, and as part of 
that one of the first key steps is determining what is it we 
want to control and how do we want to control it, particularly 
given the challenges of the 21st century.
    So it would be a good set of questions for the agencies 
that are responsible to come together and discuss to see if 
they are--if the current structure best supports the current 
challenges.
    Mr. Burgess. That is an excellent piece of advice.
    Mr. Chairman, I am just concerned that 10 years ago 
Congress took it upon itself to fix this problem, and here we 
are 10 years later, and the problem is not fixed, and people 
are put at risk, and fines are being levied. It seems like an 
inconsistent way for us to be doing business. So I hope we take 
this problem seriously, and I just thank the witnesses for 
being here today. I think it is a terribly important issue that 
we need to get resolved.
    I yield back.
    Mr. Stupak. That is why we are having the hearings, and we 
hope to have some resolutions.
    Mr. Markey, for questions, and Mr. Welch, I want to try to 
get you in, too, before votes.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Borman, as you know, I have been a long-time critic of 
your bureau's validated end-user program which allows certain 
foreign companies to import certain controlled U.S. goods 
without individual export licenses. Of the five Chinese 
companies originally certified as validated end users, two were 
found to be closely affiliated with China's military industrial 
complex, and two companies that had been under U.S. Government 
sanctions for proliferating WMD-related technologies.
    Apparently, these bad background checks by your bureau are 
continuing. On April 24 you signed an order which added a new 
Chinese company, Avesa Technology, to the program, that is this 
validated end-user program, which basically says we trust you. 
We are not going to put you through the full process.
    The order named five import destinations that Avesa was 
authorized to receive certain sensitive U.S. goods without 
export licenses. Here we are talking about a pressure 
transducer, which is used in uranium enrichment.
    Are you aware that one of the import locations that you 
authorized to receive a pressure transducer is also listed as 
the address of a company that the United States sanctioned by 
the State Department in December of 2006?
    Mr. Borman. Mr. Markey, the validated end users go through 
an extensive review with many agencies including the 
intelligence community and----
    Mr. Markey. Are you aware that one of them was sanctioned 
in December of 2006?
    Mr. Borman. I don't believe that is correct, sir, that any 
of those validated end users, the ones that we approved, were 
sanctioned by the U.S. Government, because if they were, they 
wouldn't have been approved.
    Mr. Markey. OK. Then I have here pages and pages of 
documents that show this Chinese company called CEIEC 
International Electronics, which has been sanctioned by the 
State Department, is headquartered at the exact address that 
you have now authorized to receive certain sensitive, dual-use, 
high-technology U.S. products. The location that you have 
authorized to import sensitive U.S. goods, including pressure 
transducers, which are extremely important to uranium 
enrichment, is Building A-23, Buxing Road, Beijing. And these 
documents show the exact same address is the headquarters of a 
company that has been sanctioned by our government for WMD-
related proliferation, Building A-23, Buxing Road, Beijing.
    These documents were provided to me by the Wisconsin 
Project on Nuclear Arms Control, which was the organization 
that originally blew the whistle on your VEU Program.
    How is it that this small NGO can consistently do a better 
background check on these Chinese companies than you can do?
    Mr. Borman. Well, I have to say respectfully I disagree 
that they can do a better job. We would be happy to take a look 
at what information they provided you, they have not provided 
to us, but what I can tell you is all of those validated 
agencies go through a thorough interagency review, including 
the intelligence community. So right now today I can't discuss 
this with you. We would be happy to look at it, but I can tell 
you that, again, it goes through a thorough review, and as you 
recall from the response our bureau gave to you earlier on the 
original five, there is a significant distinction between the 
specific entities that are approved and other entities that the 
Wisconsin Project is----
    Mr. Markey. Well, you have just certified a sixth Chinese 
company to ignore our Export Control System, and that is 
essentially what this program does, ignores the Export Control 
System, sets up a special fast lane that doesn't have the same 
level of scrutiny, and it is the third one where you did not 
know it was associated with a company that had been sanctioned 
by the United States Government.
    Mr. Borman. Well----
    Mr. Markey. And I think that when three out of the six are, 
in fact, not properly scrutinized, then the program is 
essentially unacceptable. It is not something that should be in 
place, and we will share these documents with you, but it just 
seems to me that it shouldn't be an NGO that identifies that 
this new transfer is going to the exact same address as a 
company which was sanctioned just 2 years ago for violations of 
the very same type that we are talking about here today.
    Mr. Borman. Well, again, all I can tell you is there is a 
thorough interagency review, including the intelligence 
community. We would be happy to look at that information, but I 
would be very surprised if this is information that really 
correlates as the Wisconsin Project apparently is alleging.
    The other point I would like to make with the validated 
end-user program is very extensive review. All of these 
companies have extensive individual licensing history. Many of 
them have been visited by U.S. Government officials in an 
official capacity, and there is a check once things are shipped 
there on the back end. So the requirement is that it eliminates 
individual rights and requirements. They don't get a free ride.
    Mr. Markey. Well, I just think that this whole concept of 
validated end user that allows for a circumvention of a full 
inspection is a very questionable process. It would be like 
being at the airport and them being able to say, well, you 
don't have to go around, you don't have to go through the full 
screening, you don't have to go through the full screening, but 
all the rest of you do. Well, if you are going to have a 
program like that, then you cannot have mistakes. You cannot 
have--there ought to be a trusting relationship which is 
developed where the same address 2 years later is receiving 
materials that could be used in uranium enrichment in a country 
about which we still have questions in terms of their nuclear 
non-proliferation record.
    So I thank you, Mr. Chairman, very much. I just have very 
serious questions about this validated end-user program. I 
think it ultimately turns into a validated end-abuser program 
if, in fact, you can have violations like this, and I will 
share the material with you, and I look forward to getting a 
response.
    Thanks, Mr. Chairman.
    Mr. Stupak. Yes.
    Mr. Burgess. Mr. Chairman, can I ask unanimous consent that 
Mr. Markey's documents be shared with members of the minority 
as well as the witnesses?
    Mr. Markey. It will be done so. Yes.
    Mr. Stupak. For the record, shared with both.
    Mr. Welch, for questions, please. We got votes on the 
floor, but let us get your 5 minutes in.
    Mr. Welch. I will try to be quick.
    Mr. Stupak. No. Take your time.
    Mr. Welch. I want to ask Mr. Kutz a few questions if I 
could, and it is about the nuclear weapons issues.
    Two weeks ago if you note North Korea detonated a nuclear 
weapon during an underground test and is threatening to test 
fire an intercontinental ballistic missile. And what concerns 
me is this. Last year the Strategic Studies Institute, a 
component of the Army War College, issued a report about the 
North Korean ballistic missile program, and I don't know if you 
want to make this part of the record, but that report is here.
    And it concluded, and this is what is relevant to us, that 
North Korea almost certainly depends upon outside sources for 
advanced electronic components and other sophisticated hardware 
for missile guidance systems, and incidentally, North Korea 
then sells what it makes, including possibly to Iran. And the 
report warned that as early as 1999, North Korea was trying to 
procure gyros and accelerometers and other components for its 
ballistic inertial guidance.
    And what I want to ask you is about those two items, the 
accelerometers and the GyroChips, those are two of the 
categories of items that you were able to purchase using the 
fake company and a fake buyer. That is right. Correct?
    Mr. Kutz. Yes.
    Mr. Welch. And I don't know if you want to put the photos 
of those two items--I guess you have done that.
    Mr. Kutz. I have got these over here, too.
    Mr. Welch. All right. How easy was it for you to purchase 
those?
    Mr. Kutz. The accelerometer there was an end-user 
certificate, and it was done by credit card, fictitious name, 
bogus company, and mailbox. So that was----
    Mr. Welch. Easy.
    Mr. Kutz. --relatively simple I would say, and then the 
GyroChip, the same thing, and we got a quote for additional 
ones of those. So I would say that they were similar in how 
difficult they were to obtain.
    Mr. Welch. And is it correct that those items can be sold 
within the U.S. without any license?
    Mr. Kutz. Legally, yes.
    Mr. Welch. OK, and let me ask you, after you bought these 
items, you were then able to send them to Federal Express to a 
country in southeast Asia?
    Mr. Kutz. Correct.
    Mr. Welch. And I won't ask you what country it is. I know 
that is sensitive information, but can you tell us why you 
chose that specific country?
    Mr. Kutz. Because it is a known transshipment point to 
terrorist organizations.
    Mr. Welch. All right. So we send it there or someone sends 
it there, and that is a location from which it goes to people 
who are trying to do Americans warm.
    Mr. Kutz. Correct.
    Mr. Welch. These items are very small and lightweight. Just 
out of curiosity, how much did it cost to mail these halfway 
around the globe?
    Mr. Kutz. Fifty dollars and what we labeled them as was 
documents. That was the word we used on them.
    Mr. Welch. To me your undercover investigation, thank you 
for doing that, even though it is quite alarming, it shows that 
our current system does not adequately prevent the export of 
items that are actually used in nuclear weapons programs. Do 
you agree with that conclusion?
    Mr. Kutz. Yes. I mean, that is why we chose these items. We 
took the exact same part number out of indictments and criminal 
cases, and that--these two items you just mentioned are the 
exact same part that was cited in cases going to China, Iran, 
terrorist organizations, et cetera. So that was why we chose 
them so this was real examples of what is going on.
    Mr. Welch. Well, I really thank you. It is incredibly 
alarming. Mr. Chairman, it is troubling because North Korea 
manufactures nuclear things and then exports their technology. 
So I do hope and I appreciate your efforts to have a thorough 
review of export controls.
    And I yield back my--the balance of my time.
    Mr. Stupak. Thanks, Mr. Welch. Mr. Doyle still plans on 
coming. I am sure there will be questions after.
    We got votes here. Why don't we just recess until--about 25 
minutes here. How about 12:20, give you a chance to stretch 
your legs. We will come right back, and I am sure we can finish 
up in probably within an hour after that. So I ask you all be 
back about 12:20.
    Thank you. We are in recess.
    [Recess.]
    Mr. Stupak. The hearing will come back to order. Thanks for 
your patience. I know Mr. Doyle has come in and I think one or 
two other members.
    I have a couple questions. Mr. Kutz, let me ask you this if 
I--because one that sort of caught my eye was GAO's purchase of 
the infrared American flag patches. I think you have one up 
here. Can you pull in those on screen, what they look what?
    These infrared flags can appear as a United States flag or 
just a black material when you look at it. Right? A black----
    Mr. Kutz. Right. They can appear as black or if you use the 
infrared and you turn on the----
    Mr. Stupak. Right.
    Mr. Kutz. --specialized item that is made----
    Mr. Stupak. So show that. So it is black up there and then 
when you look with the infrared it comes out the American flag.
    Mr. Kutz. It looks like a U.S. flag with the goggles. Yes.
    Mr. Stupak. That is with the night-vision technology. And 
these flag patches are currently worn by our troops during 
combat to help identify friendly forces at night. What is the 
danger to our troops if these flags are available to our 
adversaries?
    Mr. Kutz. Well, certainly on the battlefield and I guess 
there are public statements made by Defense Criminal 
Investigative Service and the Department of Defense that the 
enemy does have these in Iraq and Afghanistan, so there is a 
concern that these are the kinds of things that could--they are 
supposed to be able to identify friendly versus foe, and if the 
foe has them, then they are going to look like a friend, and 
that is the risk.
    Mr. Stupak. OK. Now, you purchased these flags. Did you buy 
them in person or over the internet?
    Mr. Kutz. Internet.
    Mr. Stupak. How many did you purchase?
    Mr. Kutz. We purchased several, but we got a quote for 400. 
They were going to ship us 400 if we wanted them.
    Mr. Stupak. OK. So you got 400 and then you put an offer 
for--I mean, you had four----
    Mr. Kutz. Like four, eight, but we----
    Mr. Stupak. OK, and then you offered to buy 400, and that--
--
    Mr. Kutz. Yes.
    Mr. Stupak. --was approved?
    Mr. Kutz. Yes. They would have shipped us 400.
    Mr. Stupak. It seems that there aren't really any 
legitimate reasons for anyone other than our service men and 
women to have these flags, is there?
    Mr. Kutz. No, although I think this is probably considered 
lower-end technology now. It is apparently exactly what is 
being used by our soldiers according to the Department of 
Defense officials we spoke to.
    Mr. Stupak. Were you required to show that you were a 
member of the Armed Forces in order to buy them?
    Mr. Kutz. The agreement that this distributor had with the 
manufacturer was that they required a military ID, but this 
distributor did not request a military ID from us, and so we 
were not--we did do a counterfeit military ID in another case, 
but in this one they were supposed to, and they didn't. 
According to the manufacturer, this will no longer be a 
distributor of theirs.
    Mr. Stupak. Like I said, this one sort of caught my eye 
because no one really needs this except maybe your military 
people. So I asked our staff to do some research on this, and 
this--here is what they tell me.
    First, anyone can buy these legally in the United States. 
Correct?
    Mr. Kutz. Correct.
    Mr. Stupak. And you cannot export these items to certain 
countries like North Korea, China, or Afghanistan. Correct?
    Mr. Kutz. These are on the Commerce Control List, I 
believe.
    Mr. Stupak. OK, but you can export these flags to countries 
like Saudi Arabia, Yemen, and Cambodia. Is that correct?
    Mr. Kutz. I don't know the difference in who you can ship 
it to----
    Mr. Stupak. OK.
    Mr. Kutz. --and who you can't.
    Mr. Stupak. Well, let me ask you this then. Does it make 
any sense that you can--you can't export to North Korea, China, 
or Afghanistan, but you can to Saudi Arabia, Yemen, Cambodia. 
They are readily available here in the United States even 
though there really is no use for it, I guess, as far as 
military and for identification. If we believe our adversaries 
shouldn't have these, I think it is a pretty bizarre way to 
implement that goal, and I really think it highlights why we 
think we should reexamine the entire system for controlling 
items that only have military uses.
    Mr. Kutz. Yes. I concur with that. I think that many in the 
military and especially the soldiers concur. I don't think that 
they are excited about the items that they use on the 
battlefield today being so readily available. That is something 
that is a concern.
    Mr. Stupak. Mr. Fitton, would your customer base be 
interested in these?
    Mr. Fitton. Actually, the largest percentage of my customer 
base is military and law enforcement, and in the past I have 
had difficulty getting these from U.S. suppliers. I have 
purchased them directly from China. So----
    Mr. Stupak. So they export back you are saying.
    Mr. Fitton. --no matter what exports you restrict here in 
the U.S., it doesn't make a difference if a Chinese person can 
buy it directly from their own country. So our export 
regulations won't affect this market whatsoever.
    Mr. Stupak. Buy from their own country. Do you know if they 
are manufactured in China?
    Mr. Fitton. Yes. They are manufactured in China.
    Mr. Stupak. So you just export them back here, and you 
can----
    Mr. Fitton. Right. This is not high-tech technology that 
only the U.S. has access to. Countries around the world produce 
IFF flags and patches for----
    Mr. Stupak. But then in order to view it or to see it, you 
have got to have night vision, don't you?
    Mr. Fitton. Correct.
    Mr. Stupak. And I take it not very high-tech night-vision 
goggles, just probably any night vision.
    Mr. Fitton. Correct. Gen 1, Gen 2, or both will reflect it.
    Mr. Borman. Mr. Stupak, if I could just add an observation.
    Mr. Stupak. Sure.
    Mr. Borman. Based on what I have just seen and heard, I 
think it would be more likely that those items would be on the 
U.S. Munitions List and not on the Commerce List. Because the 
definition for a military item is specifically designed for 
military application, and off the top of my head it would seem 
to me that is exactly what those things are. Just a little 
correct there or observation.
    Mr. Stupak. But either way they are on a list, they are 
restricted but readily available, or we can bring them in from 
China if we wanted to. So there is plenty of opportunities for 
our adversaries or terrorist groups or whatever, domestic or 
foreign, to get them, to use them to harm Americans.
    Mr. Doyle has arrived. I know the Penguins aren't going to 
show up for the game tonight, but I am glad to see you did, so 
if you would like to ask some questions, now would be a good 
time.
    Mr. Doyle. Later, my friend, have your fun now because 
tonight you are going to be crying in your beer.
    Mr. Stupak. Are those Penguin colors you are wearing?
    Mr. Doyle. Black and gold. Yes.
    Thank you, Mr. Chairman. Mr. Chairman, on April 4 in my 
district three Pittsburgh police officers were killed and two 
others were injured by a heavily-armed man who fired on them as 
they responded to a domestic disturbance call. The three 
officers who were murdered in the line of duty left five 
children without their fathers. The standoff between the armed 
man and the police units lasted for hours that morning. SWAT 
officers were pinned down by a hail of bullets, and the wounded 
policemen lay where they fell. It was complete chaos.
    But the gunman, armed with an AK-47 and a number of 
handguns, was protected. Although the gunman had been shot in 
the chest and the leg, he wore a bulletproof vest to shield 
them. The gunman was able to continue to fire on the police as 
a result of this protection he was wearing.
    Now, Mr. Kutz, you were able to purchase a bulletproof vest 
over the internet, and you could have acquired the protective 
inserts from the same company, enabling it to withstand even 
heavy ammunition.
    Could you tell me how did you purchase these bulletproof 
vests?
    Mr. Kutz. We actually in this case represented that we were 
part of an active reserve unit and provided counterfeit 
military documentation, and we were shipped this item along 
with the commitment to ship 20 more.
    Mr. Doyle. Had--did they do any background check on you?
    Mr. Kutz. I don't know. Well, the military ID seemed to be 
what they were looking for.
    Mr. Doyle. What threats do you think these bulletproof 
vests pose to our emergency first responders and military?
    Mr. Kutz. I think this really is a domestic threat. Again, 
I mentioned earlier when you weren't here that there--we didn't 
seen any export cases for these items. We see these more as a 
domestic threat, something that, you know, the military's best 
body armor here, the ESAPIs are the newer plates that have 
additional protection from the regular SAPIs, and this is what 
the Marine Corps uses today. It is hard to understand why 
anybody but military and potentially law enforcement would have 
a use for those.
    Mr. Doyle. Thank you. Three officers from my district were 
killed and two were wounded by a man who was able to continue 
this onslaught because he had the same product you were able to 
buy off the internet. I see no reason, Mr. Chairman, why 
criminals should be able to buy bulletproof vests for use on 
our streets, just as terrorists overseas should not be able to 
acquire them for use on the battlefield.
    Mr. Chairman, for the sake of brave Americans who make our 
country and community safe, including the three brave officers 
from Pittsburgh who died in the line of duty, we have to do 
more to keep this equipment out of the hands of criminals and 
terrorists.
    And I yield back.
    Mr. Stupak. Thank you, thank you, Mr. Doyle, and Mr. Kutz 
mentioned earlier the gunman up in Brighton where he killed 
about 12, 13 people, same thing, body armor. I mentioned James 
Gelf legislation, the San Francisco police officers on a bank 
robbery where there was almost like a robo-cop, just head to 
toe, and they got them through the mail. And we tried to 
restrict that with the James Gelf legislation I had a few years 
ago. We could never really put any severe or--curtail it, and I 
agree with you, and that is one of the purposes of looking at 
it, and I know a number of members have mentioned both--not 
just terrorists but also criminal activities with being able to 
purchase these items.
    So we will continue working on it, and thanks for your 
input.
    Mr. Fitton. Mr. Chairman.
    Mr. Stupak. Yes.
    Mr. Fitton. Might I? As a dealer for these items, I do have 
serious reservations when you start restricting strictly to law 
enforcement and military. The reason for this, one of the 
primary consumers I have interested in body armor right now is 
not civilian, it is not military and law enforcement because 
they are typically supplied with these items. It is first 
responders such as EMT and firemen.
    Typically in active-shooter situations and things of this 
nature they are some of the first people that are on site. 
Gunmen will typically fire at anyone in uniform or of a 
government capacity. Once you restrict them to military and law 
enforcement, all the sudden these individuals are no longer 
authorized to use, as well as contractors serving overseas in 
security details, as well as VIP protection details here in the 
United States.
    So we have to really address a fine line when we start 
doing restrictions to make sure individuals who do have a need 
for these items can still obtain these items, and that is 
something we tend to forget about when we think just tactical 
situations involving military and law enforcement.
    Mr. Stupak. No. I--we are cognizant of that fact, and but 
there is no reason why this stuff should be purchased without 
some kind of identification, verification of who they are. Just 
going on the internet I think what we have seen is if you have 
a credit card that is valid, they will accept the purchase. We 
don't care who you are, and this committee has shown time and 
time again everything from cat, Viagra for our cat, as long as 
have--that cat has a credit card, he got his Viagra. And that 
is the problem we see. It is not just in this area. We see it 
in drugs, we see it in pornography, we see it in gaming, we see 
it in e-commerce, and there is some legislation we are working 
on to really put some kind of restrictions on this credit card 
or verify the individual using that credit card before he can 
even use it.
    So there is other areas we are looking at, so while we have 
this hearing, the purpose of this hearing was military and 
dual-use technology, we still go back--it filters in many of 
the areas of jurisdiction this committee has. And so we are 
trying to look at the whole thing.
    But you are right. You are right.
    Mr. Roush.
    Mr. Roush. Yes. If it is possible, I would like to just 
clarify one point. I think a lot of excellent points have been 
raised by the committee today, but there is one factual point I 
did want to clarify. The triggered spark gaps were mentioned in 
the GAO's report. We didn't get the chance to see the report 
ahead of time. There is a few things we want to clarify.
    Triggered spark gaps are not used as detonators for nuclear 
weapons. In fact, Perkin Elmer has an entirely separate product 
line that is completely ITAR controlled and not available for 
commercial sale that is used in conjunction with nuclear 
weapons. Triggered spark gaps are primarily used in medical 
equipment, lithotripters, which are treatment devices for 
kidney stones, and there is a second use of the product on 
conventional munitions which accounts for the minority of its 
sales.
    I just wanted to make that clarification.
    Mr. Stupak. Well----
    Mr. Kutz. Sir, could I just comment briefly?
    Mr. Stupak. Sure, and I want to get into that a little bit 
because there's the Central Contractor Registration Database 
which sort of looks like it is like government-approved site, 
and we are buying the stuff.
    Go ahead.
    Mr. Kutz. I don't know if the manufacturer knows why these 
purchased, but the source of information we used was the 
Department of Commerce and Justice saying that these items 
could be used, and I will just for the record, if you want me 
to submit it for the record, I would, too, but according to the 
indictment the triggered spark gap and the exact model number 
we bought could be used as a detonating device for nuclear 
weapons as well as other applications. And the testimony of 
Christopher Podea in 2007, asserted the same thing for the 
Department of Commerce.
    So, again, whether it was designed for that and could be 
used, again, I am not an expert at that, and I would certainly 
defer to the manufacturer to what it was designed for.
    Mr. Stupak. Well, whether it was the triggered spark gap or 
a couple of these other items we purchased which are sort of 
technical, a lot of them fall on this Federal Central 
Contractor Registration Database, which is an approved 
government supplier via the General Services Administration 
Schedule. It seems to me like if you are on this Central 
Contractor Registration that somehow you have--it is government 
approval, but yet you are able to purchase it like there is 
no--it is like the government is approving what you are doing 
but yet you can purchase anything you want off this CCR 
Registration.
    Shouldn't there be some safeguards in there that if a 
company is on a CCR, this database that is government approved, 
that there is some restrictions on how they do the sales or 
something? Or even licensing?
    Mr. Kutz. The Central Contract Registry is something--
actually a lot of our undercover companies are in the Central 
Contract Registry. I mean, no one validates anything in there. 
There is approved GSA vendors that go through a little bit more 
stringent process. So there is a distinction between the CCR 
and an approved government vendor, I believe, but to do 
business with the government you have to be registered in the 
Central Contract Registry.
    Mr. Stupak. So if you are registered, doesn't it give it 
some form of legitimacy to the outsider?
    Mr. Kutz. It does, and we use that all the time. We say we 
are registered in the Central Contract Registry, and it is 
similar to your IRB hearing several months ago where we were 
registered with HHS and assured.
    Mr. Stupak. Right.
    Mr. Kutz. It did mean something to people who look at it.
    Mr. Stupak. Well, let me ask you a little bit about this, a 
little bit about know your customer, Mr. Borman, and I think it 
is tab number five. Do we have a book up here? On the far end. 
Mr. Fitton, could you pass that book down?
    Look at tab number five because it is some helpful hints 
that you get from Commerce and all that on--to know your 
customer, and we just have parts of your form there. It is 
about a 40-page form. We have certain parts of it in there, and 
I think it was page 38. I want to highlight a few portions of 
this guide.
    First it says, ``Absent red flags, there is no affirmative 
duty upon exporters to inquire, verify, or otherwise go behind 
the customer's representations.'' It also says, ``You can rely 
upon representations from your customers and repeat them in the 
documents you file unless red flags oblige you to take 
verification steps.''
    So, Mr. Borman, do you think this guidance is adequate 
given the GAO was able to, you know, basically subvert that, 
know your customer?
    Mr. Borman. Well, I think it goes back, Mr. Chairman, to 
what I mentioned earlier. I think the first issue would be for 
us does existing legal authority, that is the statutory 
authority we have, give us the authority to do anything 
differently? In this case extend regulations in a significant 
way to domestic transfers. And that is something that we would 
have to look at very carefully to see whether the existing 
authority goes that far.
    Mr. Stupak. OK. Well, GAO is able to convince these 
companies to sell sensitive military technologies every time it 
tried in all 12 cases. The Commerce Department guidance also 
lists--also includes a list of red flags for companies that--
for companies to look for, and I think it is page 40 there, 
maybe the last one there.
    For examples, custom--companies should be on the lookout 
if, and ``the customer is willing to pay cash,'' or ``the 
customer is reluctant to offer information about the end use of 
the item.'' By posting this guidance on the internet, aren't 
you really informing terrorists and criminals how to beat the 
system?
    Mr. Borman. Well, I think the issue is, though, we do want 
legitimate companies to have some specific guidance from the 
government, and it is very difficult, I think, for us to 
identify the thousands, if not hundreds of thousands of U.S. 
companies that do business and sort of repeat individually to 
them, and it seems to me the Perkin Elmer example we talked 
about earlier exactly shows the benefit of these kind of--
because it is that kind of information that they have 
incorporated with their product and to their corporate 
compliance program that said there are some red flags on that 
particular transaction, they contacted our field office in 
Boston, and that is exactly what we want to have happen.
    So, I mean, I suppose you could take the position that, 
sure, bad guys can read this and figure out, oh, I know how to 
get around this, but----
    Mr. Stupak. Right.
    Mr. Borman. --you know, I think it is more important to 
have all--the vast majority of companies in the United States 
that want to do legitimate business to have this information 
available to them so that they do come to us, and that is a lot 
of our cases as Mr. Madigan can tell you----
    Mr. Stupak. Sure, but----
    Mr. Borman. --come from tips from U.S. companies.
    Mr. Stupak. --it just shows you how much the internet has 
changed. I mean, if you take the way we do business, all--most 
of these purchases were on the internet or over the internet. 
Right, Mr. Kutz?
    Mr. Kutz. Yes. For all the purchases we made----
    Mr. Stupak. Yes.
    Mr. Kutz. --we never spoke on the phone or met face to face 
with anyone. It was all fax and e-mail transactions.
    Mr. Stupak. So it almost made the red flag almost--you can 
get around it so easy.
    Let me ask this. Mr. Roush, if I will, you represent Perkin 
Elmer, the company that sold the trigger spark plug gap to GAO, 
a fake company. Your company adopted the Department of Commerce 
guides right there on tab five and created your own customer 
screening procedure.
    Mr. Roush. Yes.
    Mr. Stupak. Right.
    Mr. Roush. That is correct.
    Mr. Stupak. OK. Do you agree that both your guidance and 
the Commerce Department guidance was inadequate? Would you 
agree with that?
    Mr. Roush. Well, I would say it doesn't protect against the 
kinds of examples that you are talking about; if somebody were 
to try to buy a product under a legal transaction and then 
subsequently illegally, you know, use it for a unintended use 
or export it----
    Mr. Stupak. Sure, but----
    Mr. Roush. --the screening might not uncover that.
    Mr. Stupak. --is your screening and even this guide here 
just for honest people? Keeping honest people honest?
    Mr. Roush. I believe----
    Mr. Stupak. I mean, people who want to do us harm or 
terrorists, they don't care what--they aren't going to give you 
an honest answer. Right?
    Mr. Roush. I think it is a valid question. What I would say 
is if you make the red flags in those processes robust enough, 
they start to triangulate in a way that unless somebody is 
extremely informed and diligent, they are going to become 
fearful as Mr. Fitton said, and back away from the transaction, 
or you will start to detect that in their behavior.
    Mr. Stupak. Well, you know, here GAO made up a fictitious 
company, it had fictitious reason for wanting these trigger 
spark gap, and its promise was not to export, and then your 
company sort of relied upon those statements or misstatements, 
but we didn't go any further to try to verify that. Right? Your 
company?
    Mr. Roush. That is correct.
    Mr. Stupak. OK. Mr. Kutz, did Perkin Elmer conduct any 
verification on the representations you made? Do you know? Did 
you know if anyone tried to verify what you had said or put 
down? In your own--anything come back to you?
    Mr. Kutz. I don't know exactly what they did. I--there was 
no end-use certificate on that one as I understand, but we did 
meet with their folks, and they do have a compliance group, and 
so, again, there was no violation of the law, and their 
processes seemed to be consistent with some other companies we 
dealt with, the bigger companies.
    Mr. Stupak. OK. Mr. Roush, if I could go back to you there 
on this spark plug and--I am sorry. Spark--yes. You submitted 
with your testimony an article from the Boston Globe describing 
a real case which your company cooperated with law enforcement 
officials to thwart an illegal shipment of trigger spark gaps 
to Pakistan in 2003.
    Mr. Roush. Correct.
    Mr. Stupak. According to this article it was--the size of 
the order was 200 spark gaps, which is enough to detonate three 
to ten nuclear bombs, that caused your company to alert law 
enforcement, and one of your spokesmen said, ``It was such a 
huge quantity, a hospital buys one or two.'' Is that correct?
    Mr. Roush. Those statements are correct, and I would say 
that particularly the geographic region of the world affects 
whether you would view a quantity as valid or not for medical 
purposes, because in the United States the healthcare 
infrastructure is much larger. So it is normal that customers 
in the United States might order, you know, as many as a few 
hundred of these, particularly if they were a distributor 
serving multiple hospitals.
    Mr. Stupak. But you would know those customers, wouldn't 
you? Pretty much?
    Mr. Roush. Typically that is correct. Yes.
    Mr. Stupak. So then Mr. Kutz, before you made your purchase 
from Mr. Roush's company, Perkin Elmer, you asked him for a 
quote on a larger order of trigger spark gaps. Right?
    Mr. Kutz. One hundred. Yes.
    Mr. Stupak. OK, and so you had a totally new customer then 
asking for 100, Mr. Roush, that you never dealt with before, 
and they were seeking 100 spark gaps, why didn't that alert 
you, or why didn't you have law enforcement check these guys 
out?
    Mr. Roush. This is actually a completely normal practice 
for our new customers in all of our product lines, including 
trigger spark gaps, that normally a customer will buy one 
sample of something and test that under an R&D or development 
process. And if it does then meet their specifications, they 
are going to want to purchase production quantities of that, so 
we will typically provide the pricing for the sample and the 
pricing for the production quantity upfront. That is the 
normal, competitive practice, and it was followed in this case, 
and in fact, this, you know, fictitious company indicated they 
wanted one piece for development purposes, and if that worked 
in the application, then further quantities would be ordered at 
that time, and you know, there would be a separate transaction 
that would be screened in its own right at that time.
    So this was a normal commercial practice.
    Mr. Stupak. Any comments?
    Mr. Kutz. That could very well be true. I mean, we didn't 
want to spend $70,000 instead of $700.
    Mr. Stupak. Right.
    Mr. Kutz. That was really the reason we did it that way.
    Mr. Stupak. OK. What would you use--what would a company 
buy 100--what would you use 100 for? I guess I am still trying 
to figure this one out.
    Mr. Roush. Well, because this part is used in the 
lithotripter treatment devices in hospitals around the United 
States, there is an awful lot of hospitals--it is--there are 
spare parts demands as well as new system demands that we sell 
2,000 of these devices in a year, in excess of 2,000, and 70 
percent of those are for medical uses. So the quantity of, you 
know, one now and potentially 100 later is not at all unusual.
    Mr. Stupak. I see. So it wasn't the fact that 100, it was 
that they had wanted one for research and then might possibly 
want 100 more?
    Mr. Roush. Correct, and so we provided standard quantity 
pricing for various quantities that would be ordered. That is 
the normal practice. Nobody will design your component into a 
system if they have no idea what they are going to be paying 
once they go into production, because they have to work 
towards, typically towards some kind of cost for that system, 
and they want to know for planning purposes what your price 
would be.
    Typically there is a volume discount----
    Mr. Stupak. Right.
    Mr. Roush. --you know.
    Mr. Stupak. But wouldn't you then sort of ask like, oK, I 
got my one for research and--or for testing purposes but then 
when I asked for 100, wouldn't you usually ask what the product 
is? In this case you never even asked what they were going to 
use the 100 for, did you?
    Mr. Roush. Well, in this case we did not, but I will tell 
you that, you know, triggered spark gaps are not one thing. It 
is a product group. OK. We offer a lot of different models. 
Most of them are specifically designed for a range of 
performance of a medical device. So some of them operate at 20 
kilobolts, some at 10 kilobolts, 12. The military versions we 
sell typically operate at 2 kilobolts. There is no overlap in 
the operating range, so there was nothing about this that would 
have indicated that it was for use in some sort of, you know, 
munitions application. It was entirely consistent with our 
medical versions.
    Mr. Stupak. Sure, and there is no requirement under law 
since it was domestic to make sure they were licensed, and 
there is no requirement to follow up to end user or anything 
like that. Right?
    Mr. Roush. Correct.
    Mr. Stupak. Mr. Gingrey, questions?
    Mr. Gingrey. Mr. Chairman, thank you.
    Let me go to Mr. Borman. Mr. Borman, some items can be 
exported to some countries without a license but require a 
license if going to certain other countries. Some items can be 
exported to some countries as long as they are intended for 
commercial purposes but not for military purposes. Some items 
can't be exported to some countries for any reason.
    I think you are getting my drift here. With all of the 
variables and exceptions, is it not--and I think it is but I 
want your answer, is it not confusing for government agencies 
and businesses involved in export and export controls to make 
sure everyone is doing the right thing? Do you know?
    Mr. Borman. Well, that is a very good question, sir, and it 
is a complex system, and I think it has evolved that way 
because of what I mentioned earlier. Last year, for example, 
there were $1.3 trillion worth of exports from the United 
States. Probably the vast majority of those are subject to our 
regulations but have gradated requirements, depending on what 
the item is and where and who it is going to.
    And so off the top of my head certainly the system could be 
made simpler but to make it simpler I think it has to go one of 
two ways. Either you drastically reduce requirements for items 
and places or you drastically increase the level of control. 
And when you are talking about a, you know, $1.3 trillion worth 
of exports, that would have a significant impact.
    And so that is why the system has evolved to try to give 
exporters more and more information about the types of 
transactions and the technologies that they need to be most 
concerned about.
    Mr. Gingrey. Well, you earlier before we went to vote, 
there was, I think Mr. Burgess from Texas was questioning why 
the dual system or responsibility when you, of course, have the 
Department of State and Department of Commerce, the Department 
of Commerce controlling these products that are dual use, and 
Department of State controlling those that are just for 
military purposes and military sales, and you got into some 
discussion, actually, any one of the three of you, Mr. Kutz, 
Ms. Lasowski, Mr. Borman, let us elaborate that a little bit 
more, if you will. Because I think what Burgess was getting at 
was to simply, to make it so that the right hand will know what 
the left hand is doing, the left hand will know what the right 
hand is doing, it would be a more efficient way and less 
chances for sales that would be inappropriate.
    Let us talk about that a little bit in my remaining time 
and throw it open to the GAO.
    Ms. Lasowski. I think you have raised some excellent 
questions because the system that was created decades ago was--
--
    Mr. Gingrey. How long ago would you say the system was 
created?
    Ms. Lasowski. Well, the current laws were established in 
their most recent form in the 1970s, but they do date back 
earlier in different forms.
    Mr. Gingrey. I think you said back into the 1940s earlier, 
didn't you?
    Ms. Lasowski. There--that is where there was an 
origination, yes, but the current laws that are in existence 
really were in the 1970s, and there hasn't been a major 
overhaul of these particular laws, and has previously 
mentioned, the Export Administration Act is currently lapsed.
    So it is fair that in terms of a reexamination, which is 
what we have been calling for, that it would be appropriate to 
take a look at the current challenges that have been evolving 
for the 21st century and reexamine the system to look at the 
very basic questions; what is it that needs to be controlled 
and how do we want to control it. And then establish clear 
lines of responsibility and accountability for how best to do 
that.
    And so those would be I think the fundamental aspects of 
such a reexamination.
    Mr. Gingrey. Mr. Kutz, any comment? Mr. Borman?
    Mr. Borman. I think that--I generally agree with that. To 
add a little bit of, I guess, fuel to the fire to your concern 
about the complexity, we are talking about dual use in 
munitions items, but there are actually several other agencies 
that have direct authority to regulate the control of other 
exports. For example, the Nuclear Regulatory Commission on 
their Atomic Energy Act controls the export of nuclear 
materials and equipment. Department of Energy has specific 
authority.
    So it seems more complicated, although these are the two 
main systems. But clearly the current threat challenges, 
technologies and markets, are really challenging the system as 
it currently exists.
    Mr. Gingrey. Yes, you know, and just continue along that 
same line and all these variables and exceptions, is it not 
confusing for government agencies and businesses involved in 
exports and export controls to make sure everyone is doing the 
right thing? I mean, that is my main point.
    Mr. Borman. It is certainly a challenge. That is why we do 
so much on outreach, for example. We do 30, 40, 50 outreach 
events every year throughout the country just BIS, and there is 
a whole cottage industry of private entities that do export 
control compliance seminars, I think in part as a reaction, a 
market reaction to that.
    Mr. Gingrey. Are some dual-use items more sensitive than 
others?
    Mr. Borman. Oh, certainly. Certainly. I mean, there is a 
whole strata of--most of what we control on our controllers are 
based on multi-lateral agreements by most of the supplier 
countries. There is one specific, the Nuclear Missile 
Technology Cambio and sort of conventional arms, and then there 
is another strata that are controlled really just to the 
terrorist countries or to specific bad end users in different 
countries.
    So there is certainly a large gradation.
    Mr. Gingrey. You touched on the fact that a number of 
different laws and regulations, agencies, multi-lateral 
agreements play a role in how we control our exports. Can you 
describe some of the challenges that this presents?
    Mr. Borman. Well, absolutely. I mean, on the multi-lateral 
side there is agreement, again, among most but not all 
suppliers as to items to be listed but then certainly each 
country has individual discretion as to how they actually 
implement those controls. And what we hear a lot from U.S. 
industry is that our system is much more rigorous than other 
countries, and therefore, they are at a competitive 
disadvantage when they are selling into markets like China and 
India, for example.
    So that is a real challenge. Another real challenge, of 
course, is what we call foreign availability. It was alluded to 
earlier. There are--many of the things we control are available 
from many countries including the countries that are the target 
of those controls. So----
    Mr. Gingrey. Mr. Borman, thank you, and Mr. Chairman, I 
yield back to you at this point.
    Mr. Stupak. Thanks. Just a couple of questions if I may.
    Mr. Kutz, if I could ask you, have you got the book there, 
the document binder there? I want to look at tab number three, 
because one of the things that caught my attention, you 
mentioned in your testimony that one seller actually signed up 
your fake company as a reseller or dealer. That was on the 
night vision. Is that right?
    Mr. Kutz. It was a distributor. It wasn't the manufacturer.
    Mr. Stupak. OK. No, no. It was the distributor. Right. Not 
the manufacturer. So if you look at tab three, which is the 
reseller dealer agreement between GAO's fictitious company and 
a company called KERIF Night Vision.
    Mr. Kutz. Correct.
    Mr. Stupak. Whose idea was it to make your company, your 
false company a dealer of night-vision equipment?
    Mr. Kutz. It was the only way we could get the item. They 
wouldn't sell it to us otherwise, so we agreed to fill out this 
agreement, and that was the way we got the items.
    Mr. Stupak. OK. So in order to obtain the item you had to 
fill out this dealer, reseller, dealer----
    Mr. Kutz. Reseller, dealer agreement was necessary to get 
our target item. Yes.
    Mr. Stupak. What information were you required to provide 
to become a dealer?
    Mr. Kutz. Well, it was interesting. We didn't have to 
provide a Social Security number or an EIN, and that would be 
something, you know, employer identification number. It was 
other information, you know, name, address, and I believe other 
information, but it wasn't any personably identifiable 
information.
    Mr. Stupak. Well, did you have a face-to-face meeting with 
this company?
    Mr. Kutz. Yes, we did. No, we did not. Not until 
afterwards. No.
    Mr. Stupak. OK.
    Mr. Kutz. Afterwards. We actually met with this individual 
afterwards.
    Mr. Stupak. After. So before you became a dealer you never 
even had a face-to-face meeting with this company that was 
going to make you a dealer of their night vision?
    Mr. Kutz. That is correct.
    Mr. Stupak. OK. What is your understanding of what access 
to night-vision equipment would you have as a dealer?
    Mr. Kutz. Well, I guess ITT could probably better answer 
that because it was ultimately their product, but we were at 
several levels below the distributor level so----
    Mr. Stupak. OK.
    Mr. Kutz. --our understanding was we could have actually 
purchased more of these from this individual. That was one of 
the discussions, I believe, we had. We don't know how many or 
under what circumstances.
    Mr. Stupak. OK, and Mr. Alvis, I realize that your company, 
you are the manufacturer and there is probably multiple layers 
between you and this KERIF Night Vision. Do you know how many 
layers that would be between you and probably KERIF? Two or 
three?
    Mr. Alvis. My guess is the company that sold to them----
    Mr. Stupak. Right.
    Mr. Alvis. --is probably one of our three dealers because--
--
    Mr. Stupak. OK.
    Mr. Alvis. --they do have 25 distributors, now 26.
    Mr. Stupak. But before you ever would deal with them, would 
there be a couple layers?
    Mr. Alvis. We wouldn't deal with----
    Mr. Stupak. KERIF?
    Mr. Alvis. --anybody. We deal with three companies----
    Mr. Stupak. And then they----
    Mr. Alvis. --that we are allowed to audit.
    Mr. Stupak. OK.
    Mr. Alvis. As I mentioned earlier, we haven't audited them, 
however, we do cooperate with law enforcement, FBI whenever--
obviously as the biggest manufacturer whenever there is an 
investigation, we cooperated with GAO on this end.
    We are a resource, and every time we have gone to one of 
our dealers, all their paperwork has been right on the money. 
So the end-use statements that we put out there, whenever we 
have had to follow up, they have always had all the paperwork 
and all the documentation.
    Mr. Stupak. Well, I take it from your answer then KERIF had 
no requirement of contacting you and saying, hey, I signed up a 
new company to sell night vision.
    Mr. Alvis. No.
    Mr. Stupak. OK.
    Mr. Kutz. Mr. Chairman, I would just say, too, ITT was able 
to trace this item down within a couple of hours, very quickly.
    Mr. Stupak. By going through----
    Mr. Alvis. We make 175,000 night-vision tubes a year. Every 
tube we make is serial numbered whether it is going to the U.S. 
military. Everything we do is ITAR, so we don't have the dual-
use distinction. Everything is ITAR. The downgraded tubes or 
the non-military spec tubes that we sell into the commercial 
market are also serial numbered. So whenever GAO--and that is a 
very--that--there is 2 generations behind that goggle up there 
on the front is 2 generations behind what the U.S. Army 
currently has. We could still take that serial number. We can 
also autopsy any tubes and see what has been done to it.
    Mr. Stupak. Sure. Let me ask you this in tab three, and you 
may want to pass that down to him, in there it says, ``KERIF 
shall exercise no control over the activities and operations of 
reseller, dealer.'' In other words, Mr. Kutz's company there 
with the GAO.
    Have you ever seen these agreements like that? Is that 
something your distributors do, where they shall exercise no 
control over the activities and operations of a reseller, 
dealer?
    Mr. Alvis. I have actually never looked at a dealer 
agreement that came from one of our distributors to a lower-
level distributor.
    Mr. Stupak. OK.
    Mr. Alvis. However, I will see if our team--Greg, have you 
ever looked at----
    Mr. Stupak. He can't answer. He would have to answer 
through you, sir. He can advise you but he can't----
    Mr. Alvis. Oh. OK. Fine.
    Mr. Stupak. It is also on the board up there, too.
    Mr. Alvis. KERIF, even though they are the distributor----
    Mr. Stupak. KERIF. OK.
    Mr. Alvis. Yes. KERIF. They gave the agreement to the 
fictitious company.
    Mr. Stupak. Right.
    Mr. Alvis. They are not the one--they are not our dealer. 
So there is----
    Mr. Stupak. Right.
    Mr. Alvis. --a layer in there.
    Mr. Stupak. There is a layer in there.
    Mr. Alvis. And that layer in there is required to have the 
end-use statements and all the documentation that we are likely 
to audit and occasionally call on them to give back to us in 
cooperation with law enforcement.
    Mr. Stupak. OK. I guess the part that gets me a little bit 
is the law prohibits exports of your product outside the United 
States, but when it is--but when you hire a distributor, you 
don't control who that distributor signs up as dealers of your 
product. So the distributor signs up a dealer and doesn't 
control the activities of the dealer. So it sounds like we got 
a crazy system here. You can't export, you hire a distributor, 
he hires dealers, and everyone says we exercise no control over 
the activities of the next person.
    Go ahead.
    Mr. Alvis. This distributor, this real-world distributor, 
not the fictitious company----
    Mr. Stupak. Right.
    Mr. Alvis. --would be the distributor that hired him, would 
be in violation of our agreement.
    Mr. Stupak. Of your agreement?
    Mr. Alvis. Of our agreement.
    Mr. Stupak. OK.
    Mr. Fitton. Mr. Chairman.
    Mr. Stupak. Sure.
    Mr. Fitton. As a dealer myself in night-vision goggles and 
equipment, the certificates that I signed as a dealer setting 
up myself as a distributor or dealer for the company I have to 
agree not to export the items through any distributor I 
purchase it through. So even down to my level giving it to the 
end user I have to abide by these same laws and regulations.
    Mr. Stupak. Sure, because you are in the United States, but 
then after you sell it to someone, they can do anything they 
want with it in a way.
    Mr. Fitton. Correct. Once it falls into civilian hands, 
then it is out of our control.
    Mr. Stupak. OK. Thanks.
    Mr. Gingrey, anymore questions? Wrap it up here.
    Mr. Gingrey. Mr. Chairman, thank you. I did have a couple 
more that I wanted to address to the GAO, Mr. Kutz or Ms. 
Lasowski, excuse me.
    In my State of Georgia we--in fact, in my Congressional 
district even we have a large number of defense contractors and 
businesses, both large and small, who work every day in good 
faith towards the defense of our Nation as well as the defense 
of our international allies, which is also in our own national 
defense.
    While there are clearly areas upon which we need additional 
oversight, it also seems that many of these small businesses 
that I represent, who play by the rules, experience sometimes 
massive delays when trying to secure the necessary licensing 
through the State Department and its Directorate of Defense 
Trade Controls.
    So my first question is this. As a result of your 
investigation do you have any insight with respect to the 
existing process at the Directorate and its efficiency in 
approving clearly, clearly aboveboard export activities, how 
timely do you believe the Directorate is in the approval 
process? How long should American businesses be expected to 
wait in this process, because time is money obviously. They 
lose these opportunities if it drags on too long, and I have 
had one of these companies come to me with this concern.
    Mr. Kutz. Yes. Nothing we did in the investigation was 
aboveboard, so I will pass.
    Ms. Lasowski. Over the years we have looked at the State 
Department----
    Mr. Gingrey. Is your mike on, Ms. Lasowski?
    Ms. Lasowski. Over the years----
    Mr. Gingrey. You got a sweet, low voice.
    Ms. Lasowski. Oh, thank you. Let me see if I can speak up a 
little bit here.
    Mr. Gingrey. That is fine.
    Ms. Lasowski. Over the years we have looked at the State 
Department's licensing process, and we have noted a number of 
inefficiencies associated with the process. We have recognized 
that it is important for the process to take the time necessary 
to deliberate and to do various verifications and come up with 
the appropriate restrictions that will be placed on the 
licensed conditions for the exports.
    However, we have noted that a number of inefficiencies have 
delayed the process, and a couple of years ago when we looked 
at the process, we noted that there were not particular 
standard operating procedures, there was not a lot of attention 
in terms of the--taking a triage approach in terms of referring 
the licenses to the appropriate parties.
    So when we completed our review, we made a number of 
recommendations to improve the efficiency of the licensing 
process. We have not been back into examine the current state 
of play, however, we have been briefed by State Department 
officials that they have taken a number of steps to restructure 
their workforce and to establish procedures and training in an 
attempt to reduce the number of licenses that are in the 
pipeline and also to ensure that they are consistent in terms 
of their processing with license applications.
    Mr. Gingrey. Well, I appreciate that answer. I would 
suggest to you that the problem is still there, and my 
information is very, very recent, and I sincerely do believe 
the problem is still there.
    Is this applicable as well to the Department of Commerce? 
You mentioned the Department of State but----
    Ms. Lasowski. In terms of the Department of Commerce, most 
of the exports can occur without an actual license application. 
So very few in terms of what is ultimately under the control is 
licensed and compared to a much larger volume of licensed 
applications that occur at the State Department.
    Mr. Gingrey. I see. Sure. Of course. That makes sense. 
Well, thank you all very much. I appreciate the opportunity to 
hear from you and ask you some questions.
    And I thank you, Mr. Chairman. I yield back to you.
    Mr. Stupak. Thank you, Mr. Gingrey.
    As I said, we started this investigation in 2008. We are 
going to continue our investigation. I want to emphasize again 
that the witnesses that have appeared here today, they have 
created no violation of law. ITT, Perkin Elmer, and Mr. Fitton, 
you guys followed the law, you did not violate the law, and you 
probably followed the absence of law as I think Mr. Walden said 
earlier.
    So that is work for this committee to do some more work, 
and I want to thank you for your cooperation in providing the 
requested documents as well as the other companies that were 
part of this sting operation that did provide documents to us.
    And I just--I have to for the record note there is one 
exception. Systron Donner of Walnut Creek, California, a 
company which sold the GyroChips to the GAO undercover company, 
that company, Systron Donner, stands out for defiant failure to 
comply with the document request from our committee. While 
everybody else complied with it, they refused to--and we are 
going to continue to press to receive the information from this 
company.
    So I want to thank you for your being here, thank you for 
your cooperation, thank you for your testimony, and thank all 
of our witnesses. And that concludes our testimony for today.
    The rules provide that members have 10 days to submit 
additional questions for the record. I ask unanimous consent 
that the content of our document binder be entered into the 
record, provided that the committee staff may redact any 
information that is of business proprietary nature or relates 
to privacy concerns or is a law enforcement sensitive in 
nature.
    Without objection, the documents will be entered in the 
record.
    That concludes our hearing. The meeting of the subcommittee 
is adjourned.
    [Whereupon, at 1:15 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

                                 
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