[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
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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
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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:]