Export Controls: Post-Shipment Verification Provides Limited
Assurance That Dual-Use Items Are Being Properly Used (12-JAN-04,
GAO-04-357).
The United States controls certain dual-use technologies that
could be used to enhance the military capabilities of countries
of concern. The Department of Commerce (Commerce) conducts
post-shipment verification (PSV) checks to ensure that these
technologies arrive at their intended destination and are used
for the purposes stated in the export license. GAO was asked to
(1) assess the number of dual-use export licenses approved and
subject to postshipment verification and (2) evaluate how the PSV
process ensures that sensitive exports are used as intended.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-357
ACCNO: A09084
TITLE: Export Controls: Post-Shipment Verification Provides
Limited Assurance That Dual-Use Items Are Being Properly Used
DATE: 01/12/2004
SUBJECT: Dual-use technologies
Export regulation
Technology transfer
Licenses
Foreign military arms sales
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GAO-04-357
United States General Accounting Office
GAO
Report to Senator Jon Kyl,
U.S. Senate
January 2004
EXPORT CONTROLS
Post-Shipment Verification Provides Limited Assurance That Dual-Use Items Are
Being Properly Used
a
GAO-04-357
Highlights of GAO-04-357, a report to Senator Jon Kyl
The United States controls certain dual-use technologies that could be
used to enhance the military capabilities of countries of concern. The
Department of Commerce (Commerce) conducts post-shipment verification
(PSV) checks to ensure that these technologies arrive at their intended
destination and are used for the purposes stated in the export license.
January 2004
EXPORT CONTROLS
Post-Shipment Verification Provides Limited Assurance That Dual-Use Items Are
Being Properly Used
The Department of Commerce approved 26,340 licenses for the export of
dual-use items during fiscal years 2000 to 2002. Twenty-eight percent of
these licenses involved dual-use exports to countries of concern such as
China, India, and Russia. However, Commerce conducted PVC checks on few of
these licenses. We found that, during fiscal years 2000 to 2002, Commerce
completed PSV checks on 428, or about 6 percent, of the dual-use licenses
it approved for countries of concern. Commerce and other departments
attached conditions to nearly all (99 percent) of the licenses for
countries of concern to alleviate concerns about potential diversion or
misuse.
GAO was asked to (1) assess the number of dual-use export licenses
approved and subject to postshipment verification and (2) evaluate how the
PSV process ensures that sensitive exports are used as intended.
We recommend that the Department of Commerce
o improve technical training for enforcement personnel conducting PSV
checks,
o ensure that personnel conducting PSV checks assess compliance with
license conditions, and
o require that the exporter inform the end user in writing of the
license conditions.
The Department of Commerce generally agreed with our recommendations and
indicated it had taken steps to strengthen the PSV process.
www.gao.gov/cgi-bin/getrpt?GAO-04-357.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Joseph A. Christoff at (202)
512-8979 or [email protected].
Department of Commerce Approved Dual-Use Export Licenses and PSVs, Fiscal
Years 2000-2002
We identified three key weaknesses in the PSV process that reduce the
effectiveness of this important activity. First, PSVs do not confirm
compliance with license conditions because U.S. officials frequently do
not check license conditions, they often lack the technical training to
assess compliance, and end users may not be aware of the license
conditions by which they are to abide. Second, some countries of concern,
most notably China, limit the U.S. government's access to facilities where
dual-use items are shipped, making it difficult to conduct a PSV. Third,
PSV results have only a limited impact on future licensing decisions.
Companies receiving an unfavorable PSV may receive greater scrutiny in
future license applications, but they can still receive an export license.
In addition, according to Commerce officials, past PSV results play only a
minor role in future enforcement actions.
Contents
Letter
Results in Brief
Background
Few Dual-Use Exports to Countries of Concern Are Subject to PSV
Checks PSVs Provide Limited Assurance That Dual-Use Items Are Not
Diverted or Misused Conclusion Recommendations Agency Comments and Our
Evaluation
1 2 3
5
10 16 17 17
Appendixes
Appendix I:
Appendix II:
Appendix III:
Appendix IV:
Scope and Methodology
Department of Commerce's Statutory Framework and Enforcement Activities
Comments from the Department of Commerce
GAO Comments
GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
19
21
24 28
29 29 29
Tables Table 1: Export Licenses to Countries of Concern, Fiscal Years
2000
to 2002 6
Table 2: Maximum Penalties under EAA and IEEPA 23
Figures Figure 1: Department of Commerce Approved Dual-Use Export
Licenses and PSVs, Fiscal Years 2000-2002 8
Figure 2: Results of PSV Checks in Countries of Concern, Fiscal
Years 2000-2002 9
Contents
Abbreviations
EAA Export Administration Act
ECASS Export Control Automated Support System
FCS U.S. Foreign Commercial Service
FOUO For Official Use Only
HPC High Performance Computer
IEEPA International Emergency Economic Powers Act
PSV Post Shipment Verification
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A
United States General Accounting Office Washington, D.C. 20548
January 12, 2004
The Honorable Jon Kyl United States Senate
Dear Senator Kyl:
The U.S. government seeks to control the export of dual-use technologies1
to prevent countries of concern2 and terrorists from using them to bolster
their military capabilities. The Department of Commerce (Commerce) is
responsible for licensing dual-use exports and relies on post-shipment
verification (PSV) checks to confirm that exported items are not misused
or diverted. To conduct a PSV check, Commerce personnel visit foreign
companies to verify the use and location of the item. According to
Commerce, a PSV check strengthens assurances that exporters, importers,
and end users comply with the terms of export licenses and licensing
conditions.
Because of your concerns about the current PSV process in countries of
concern such as China and India, you asked that we (1) assess the number
of dual-use export licenses approved and subject to PSV and (2) evaluate
how the PSV process ensures that sensitive exports are used as intended.
To address these objectives, we reviewed laws and procedures governing
export licensing, analyzed export licensing data, and reviewed the
enforcement outcomes of Commerce's PSV activities, including the penalties
levied and their deterrent value. We also interviewed Commerce officials
in Washington, D.C., surveyed export enforcement personnel in Commerce's
field offices, met with Commerce export enforcement attaches in Russia and
China, and observed a Commerce-led team conducting PSV checks in Russia.
In addition, we met with officials from the Department of State (State);
Department of Homeland Security;
1"Dual-use" items are those that have both commercial and military uses
and can be used in the development or production of advanced conventional
weapons or weapons of mass destruction.
2For the purposes of this report, we use "countries of concern" to
describe those countries the United States believes may support terrorism
or contribute to the proliferation of weapons of mass destruction. Our
list includes Azerbaijan, Belarus, China, Egypt, India, Iran, Iraq,
Israel, Kazakhstan, North Korea, Pakistan, Russia, Syria, and Ukraine. We
developed this list by selecting those countries that appeared on at least
5 of 12 different U.S. government lists of countries of concern.
Department of Defense (Defense), including the Defense Security and Threat
Agency and Defense Intelligence Agency; Department of Justice; Central
Intelligence Agency; National Ground Intelligence Center; and private
firms in Hong Kong, India, and Russia that were the subject of Commerce's
PSV checks. Finally, we interviewed officials from the governments of
China, Hong Kong, and India about their views on the PSV process. For more
on our scope and methodology, see appendix I.
Results in Brief During 2000 to 2002, Commerce approved 70 percent of the
licenses it received for exporting dual-use items to countries of concern.
The vast majority of these approved licenses-99 percent-had conditions
attached during the interagency process to alleviate concerns about
potential diversion or misuse. However, few dual-use export licenses were
subject to PSV checks, Commerce's primary mechanism for checking that
dual-use items arrive at their proper location and are used in compliance
with the conditions of the export license. Our analysis of Commerce's
export licensing data found that during fiscal years 2000 to 2002,
Commerce completed PSV checks on 428 (6 percent) of the 7680 dual-use
licenses it approved for countries of concern.
We found three key challenges to the PSV process that reduce the
effectiveness of this important activity. First, the process of conducting
the checks has several weaknesses. U.S. officials do not always verify
compliance with license conditions. As a result, 36 percent of the
companies we visited or company representatives we spoke with in China,
Hong Kong, India, and Russia reported that U.S. officials did not ask them
about compliance or attempt to verify compliance with license conditions.
In addition, in response to our survey, three-fourths of the U.S.
officials who conducted checks between 2000 to 2002 reported that they
lacked technical training in key technologies such as electronics,
telecommunications, and information security systems. These technologies
accounted for 89 percent of the checks conducted in countries of concern
during fiscal years 2000 through 2002. Furthermore, end users of dual-use
technology may not be aware of the license conditions they are supposed to
abide by because Commerce does not require exporters to inform end users
in writing of the license conditions. Only 5 of the 25 companies we
visited had a copy of the license conditions. Second, some countries of
concern, most notably China, limit the U.S. government's access to
facilities where dual-use items are shipped, making it difficult to verify
whether exported items are being used as intended. Third, PSV results have
only a limited impact on future licensing decisions.
Companies receiving an unfavorable PSV will be scrutinized more carefully
in the future, but they can still obtain an export license. In addition,
past PSV results play only a minor role in future enforcement actions.
We are recommending that the Secretary of Commerce (1) improve technical
training for enforcement personnel conducting PSV checks, (2) ensure that
personnel conducting PSV checks assess compliance with license conditions,
and (3) require that the exporter inform the end user in writing of the
license conditions. In commenting on our report, the Department of
Commerce generally agreed with our recommendations and stated that it has
already taken significant steps to strengthen the PSV process along the
lines we recommended.
Background Commerce's authority to conduct PSV checks is established in
the Export Administration Act of 1979, which provides the legal and
administrative basis for U.S. controls on dual-use exports and is
supplemented by the Export Administration Regulations. Commerce's Control
List, which is included in the regulations, specifies the items and
technologies to be controlled.3 The United States uses export controls to
prevent sensitive items from reaching persons, entities, or countries
involved in terrorism or the proliferation of weapons of mass destruction
and the vehicles to deliver them.
Commerce seeks to ensure that exports from the United States and reexports
of U.S.-origin items to other countries are consistent with U.S. national
security and foreign policy objectives. At the same time, Commerce works
to avoid impeding the flow of legitimate trade. PSV checks are Commerce's
primary method to detect and prevent illegal transfer of controlled
U.S.-origin goods and technology already shipped overseas. Commerce may
conduct a PSV check on any controlled item it licenses that is exported
from the United States. According to Commerce, PSV checks strengthen
assurances that exporters, shippers, importers, and end users comply with
the terms of export license and licensing conditions.
3The Commerce Control List includes certain nuclear materials, facilities,
and equipment; chemicals, microorganisms, and toxins; materials
processing; electronics; computers; telecommunications and information
security; lasers and sensors; navigation and avionics; marine systems; and
propulsion systems and space vehicles.
U.S. exporters submit license applications to Commerce. The applications
include information on (1) the importer who takes delivery of the item,
(2) the end user who will use the item, and (3) the item's intended use.
The importer and end user may or may not be the same company. An importer
may use, sell, or distribute the item to other companies for their use.
For example, a U.S. company could export thermal imaging cameras to an
Indian company. The Indian company, also known as the importer, might then
sell the cameras to other Indian companies, the end users.
Several agencies review license applications for the national security,
domestic, or foreign policy implications of exporting dual-use items.
After the U.S. exporter submits a license application to Commerce, an
interagency team comprised of officials from Commerce, Defense, State, and
the Department of Energy determines whether the application should be
approved for a license, denied, or returned without action.4 If potential
concerns are raised about the end user or the end use, a prelicense check
may be conducted to verify the legitimacy of the importing company that
seeks to purchase U.S. items or technology. If concerns about the end user
or end use persist, conditions may be added to the license application
before approval. Once approved, Commerce issues the license, including
conditions, to the U.S. exporter.
Commerce conducts PSV checks to confirm that the dual-use item arrived at
its destination and is being used as intended. Commerce special agents or
other U.S. government personnel visit companies overseas to meet with
importers or end users in an attempt to verify the use and location of
these items. These checks are usually conducted by Commerce special
agents, Commerce export control attache posted at select U.S. embassies
overseas,5 or by Foreign Commercial Service (FCS) or State officials in
country. The majority of PSVs are conducted by Commerce's special agents;
these U.S.-based officials conduct investigations of potential violations
of export controls. Special agents have traditional police powers,
including the authority to make arrests and execute warrants domestically.
Agents may also issue administrative subpoenas and detain and seize goods
4An application is generally returned without action when there is
insufficient information to make a licensing decision.
5Commerce's Office of Export Enforcement assigns special agents to
selected U.S. embassies overseas as export enforcement attaches.
Currently, attaches are posted in China and the United Arab Emirates.
Commerce plans to place attaches in Hong Kong, India, and Russia in fiscal
year 2004.
to be illegally exported. They cannot, however, conduct investigations
while performing PSVs overseas.
Commerce guidelines for conducting PSV checks state that an on-site visit
to the company is mandatory. These guidelines also indicate that the
agents' most important responsibility is physically inspecting the goods
or the records that detail their disposition. The guidelines also require
Commerce officials conducting the PSV to determine if (1) the goods are
located at the facility, (2) the entire shipment can be accounted for, (3)
the equipment is being used as stated in the license, (4) indications of
impropriety exist, and (5) the company's answers are evasive.
Few Dual-Use Exports to Countries of Concern Are Subject to PSV Checks
Commerce approves the majority of all export license applications. During
fiscal years 2000 to 2002, Commerce approved 70 percent of the license
applications it received for exports of dual-use items to countries of
concern. The vast majority-99 percent-of approved licenses had conditions
attached during the interagency license review to deter misuse or
diversion. However, only 6 percent of licenses to countries of concern
were subject to PSV checks. During fiscal years 2000 to 2002, Commerce
conducted 428 PSVs on the 7,680 dual-use export licenses it approved for
countries of concern.
Commerce Approves Most Between 2000 and 2002, Commerce approved 70 percent
of dual-use export Dual-Use Export Licenses to licenses to countries of
concern-a total of 7,680 licenses for exports to Countries of Concern
China, India, Israel, Russia, and others. As table 1 shows, China and
India
received more dual-use licenses than all other countries of concern. These
two countries accounted for almost 62 percent of dual-use licenses
approved to countries of concern during fiscal years 2000 to 2002.
Table 1: Export Licenses to Countries of Concern, Fiscal Years 2000 to
2002
Country Licenses approved
People's Republic of China 2,644
India 2,110
Israel 1,456
Russia
Syria
Egypt
Ukraine
Pakistan
Iran
North Korea
Kazakhstan
Belarus
Azerbaijan
Iraq
Total 7,680
Source: GAO analysis of Commerce data.
Most U.S. exports of dual-use items go to countries other than countries
of concern. Our analysis of Commerce data found that Commerce was less
likely to approve exports of dual-use items to countries of concern than
to other countries. Whereas the approval rate for countries of concern was
70 percent, the approval rate for other countries was 86 percent.
Commerce Attaches Conditions to Most Licenses
Between fiscal years 2000 and 2002, 99 percent of all approved dual-use
export licenses to countries of concern contained conditions requiring the
exporter to provide certain documentation and reports, such as a shipper's
export declaration or encryption licensing information, and to restrict
the item's use. Commerce, Defense, and State develop conditions during an
interagency licensing approval process to alleviate concerns that the
items might be misused or might contribute to proliferation activities.
According to the Undersecretary for Commerce, in a speech at the annual
Update 2002 Export Control and Policy Conference, these conditions
alleviate agency concerns that might otherwise result in a denial of the
export. Once a license is issued, the departments rely on Commerce to
ensure compliance with the conditions.
Commerce has 54 standard conditions that establish requirements exporters
and end users must follow, including how an item may be used and who may
have access to it. Conditions are placed on a license according to the
particular item's intended use and final destination. A standard condition
might state that no wide-area network connectivity is allowed without
specific U.S. government authorization or that military end users or end
uses are prohibited. In addition to the 54 standard conditions, Commerce
sometimes uses customized conditions to restrict specific end uses and/or
end users of an item. For example, a license for semiconductor
manufacturing equipment might contain a condition stipulating the
characteristics, such as the feature size of the integrated circuits, that
could be produced using the equipment. A license for a chemical might have
a condition specifically written for that item stating that the item could
only be used in the manufacture of pharmaceutical products.
Few Licenses Are Subject to Although 99 percent of licenses worldwide have
conditions placed on
PSV them, few dual-use export licenses issued to countries of concern are
subjected to PSV checks. Between fiscal years 2000 and 2002, Commerce
approved 26,340 dual-use export licenses worldwide, including 7,680
licenses to countries of concern. However, during this same time period,
Commerce conducted PSVs on approximately 6 percent (428) of approved
licenses to countries of concern (see fig. 1).
Figure 1: Department of Commerce Approved Dual-Use Export Licenses and
PSVs, Fiscal Years 2000-2002
Commerce officials stated that it would be impossible to conduct checks on
every exported item because of the vast number of licenses. Because of
this, Commerce developed guidance for selecting the licenses on which to
conduct PSVs. These selection criteria are based on the destination, item,
end use, and parties to the transaction. Commerce primarily targets PSVs
on items it refers to as "choke-point" technologies. These are items and
technologies that would significantly advance the development of
soughtafter weapons systems or are on the "shopping lists" of terrorists
or countries seeking to develop weapons of mass destruction. Commerce also
targets PSVs on items destined for countries it has identified as having
the potential to divert or misuse dual-use items. Commerce also stated
that it has revised its priorities for future PSVs to focus on several
countries including Hong Kong, Russia, India, Israel, and the United Arab
Emirates. Commerce is also posting new export control attaches in Moscow,
New Delhi, and Hong Kong (in addition to the ones in Beijing and Dubai) to
conduct end-use verification visits and educate local industry on U.S.
export controls.
We reviewed 428 Commerce reports on PSV checks for countries of concern
that were completed between fiscal years 2000 and 2002. Of these PSV
checks, 72 percent checks included items identified as choke-point
technologies. Commerce targeted the remaining 27 percent on other items
and technologies controlled for export but that are not seen to be as
critical
to proliferation activities as are choke-point technologies. Commerce
conducted some of these PSV checks on items exported with no license
required or without an export control classification number. These checks
allow Commerce to determine if exporters are appropriately classifying
items on export licenses and if the items are being used properly.
Between fiscal years 2000 and 2002, most PSV checks in countries of
concern that we reviewed were favorable. We examined trip reports and
cables of 428 PSV checks completed during this period in eight countries
of concern, including China, Egypt, India, Israel, Pakistan, Syria,
Russia, and Ukraine.6 Eighty-two percent of PSV checks in countries of
concern were rated favorable by the U.S. officials conducting the PSV (see
fig. 2).
Figure 2: Results of PSV Checks in Countries of Concern, Fiscal Years
2000-2002
6This figure represents both PSVs conducted by Commerce enforcement
personnel and PSVs conducted in country by State Department staff or an
export enforcement attache.
According to Commerce's program guidance, a favorable PSV check indicates
that U.S. officials found (1) no discrepancies between the actual and
stated end use of the item and (2) that the item was at the location
indicated on the license. An unfavorable PSV result indicates that U.S.
officials found discrepancies between the actual and stated end use. In
one case, special agents conducting a PSV found no business location for
the end user at the address on the license. According to Commerce
officials, an inconclusive check indicates that U.S. officials were unable
to complete the check. For example, the serial number obtained from a
manufacturer might not match the end-user's item, the agents may have been
denied access to a facility, or the importer might not have responded to
the agents' request to meet while they were in the country. According to
Commerce officials, a limited check indicates that U.S. officials were
unable to account for the entire shipment. In India, for example, a
computer shipped to a company in one city had been sent to the company's
office in a different city. The agents were thus unable to inspect the
entire shipment.
PSVs Provide Limited Assurance That Dual-Use Items Are Not Diverted or
Misused
The PSV process has several weaknesses that call into question Commerce's
ability to ensure dual-use items are not diverted or misused. First, PSVs
do not confirm compliance with license conditions because U.S. officials
frequently do not check license conditions; they often lack the technical
training to assess compliance; and end users may not be aware of the
license conditions by which they are to abide. Second, some countries of
concern, most notably China, limit the U.S. government's access to
facilities where dual-use items are shipped, making it difficult to verify
whether exported items are being used as intended. Third, PSV results have
only a limited impact on future licensing decisions. Companies receiving
an unfavorable PSV will be subject to greater scrutiny in the future but
can still obtain an export license. Additionally, according to Commerce
officials, past PSV results play only a minor role in future enforcement
actions.
PSVs Do Not Always The PSV process has several weaknesses. U.S. officials
frequently do not Confirm Compliance with check compliance with license
conditions. In addition, officials conducting License Conditions PSV
checks often lack the technical training necessary to verify compliance
with some license conditions. Furthermore, foreign end users are often
unaware of the license conditions with which they are to comply.
U.S. Officials Frequently Do Not Check Compliance with Export License
Conditions or Inspect Dual-Use Items
According to Commerce guidance, the objective of PSV checks is to ensure
that dual-use items reach the intended user and are being used properly.
Commerce's guidelines require officials to visit the end user, and they
strongly recommend that officials physically inspect the exported items.
These guidelines help ensure that the sensitive technology is being used
as intended under the terms of the license and that the conditions of the
license are being followed. However, U.S. officials frequently do not
check compliance with license conditions.
Based on our review of PSV trip reports and our observations and
discussions with companies where PSVs were conducted, we found that
special agents frequently only asked end users if they complied with
license conditions rather than physically verifying their compliance with
them. In some instances, officials did not attempt to ask about license
conditions. For example, 36 percent of the companies (9 of 25) we visited
or company representatives we spoke with in China, Hong Kong, India, and
Russia reported that U.S. officials did not ask them about compliance or
attempt to verify compliance with license conditions.
U.S. officials also frequently do not physically inspect the dual-use item
subject to the PSV because they conduct the PSV at the company that
imported the item rather than the company using the item. For example, an
Indian company imported thermal cameras and sold them to other Indian
companies. Since Commerce conducted its PSV at the importing company's
headquarters, it had to rely on the statements of the company
representatives that the end users were using the cameras in compliance
with license conditions. Our review of PSV trip reports and cables,
between fiscal years 2000 and 2002, found that 104 of 428 (24 percent) PSV
checks were performed at the importer's rather than the end user's office.
The agents rated 57 (55 percent) of these checks favorable; that is, the
item had arrived at its intended destination and was being used for the
purposes stated in the license, although the agents did not visit the end
user.
Also, on several occasions, officials rated PSVs as favorable without
physically inspecting the item or observing its use. Of the 428 PSV checks
we reviewed, Commerce special agents rated 62 PSV checks favorable,
although the item was not inspected or seen by an agent. Based on PSV trip
reports, agents may not have seen an item because (1) the item was at a
location other than the one stated on the license, (2) the item had been
integrated into another product or was a consumable item, or (3) the item
was portable. For example, in January 2003, special agents visited a
company in Russia that imported thermal imaging cameras.7 The company
purchased the cameras for sales promotion and demonstration purposes
across Russia. Consequently, during the PSV check, all but one of the
cameras were in the field. Agents were unable to physically inspect the
cameras or determine if they were being used in compliance with the
license conditions. The agents had to rely on the company's word rather
than personally verifying adherence to the condition. The agents gave the
PSV a favorable rating based on discussions with company officials.
Commerce's Special Agents Lack Commerce agents frequently do not have the
training needed to assess an the Training to Help Assess end-user's
compliance with license conditions on a wide range of sensitive Compliance
with License technologies. We surveyed all 35 special agents who
participated in PSV
Conditions
checks between fiscal years 2000 and 2002. Our survey focused on the
training and guidance that agents had received to conduct PSVs and the
ease or difficulty of assessing compliance with license conditions on
certain dual-use items. We received replies from 26 agents (74 percent).
According to the agents who conduct PSVs, the license conditions of some
items are easier to assess than others. About two-thirds of the agents
surveyed reported that it was very easy or generally easy for them to
assess compliance with license conditions in digital computers,
general-purpose electrical equipment, and machine tools. However, about
three-fourths of the agents reported that it was difficult or as easy as
difficult for them to assess compliance with conditions related to toxic
chemicals, information systems (including software), and biological
pathogens.
The agents conducting the PSVs have limited training in many technologies
that are subject to PSVs. Although most agents responding to our survey
stated that they received Commerce training in key technologies-namely
biological, chemical, and nuclear weapons-over three-fourths reported
7A thermal imaging camera can be used to check transmission lines at
civilian power plants or it may be used for surveillance or reconnaissance
of enemy troop movements.
that they had not received any training in electronics, telecommunications
systems, information security systems, sensors and lasers, marine systems,
or propulsion systems for space vehicles. These technologies accounted for
89 percent of the PSVs conducted in countries of concern during fiscal
years 2000 through 2002. Our survey also found that training in these
technologies would be helpful. Twenty-two of the 26 agents (85 percent)
reported that more training on key technologies such as computers,
telecommunications systems, and electronics would improve their ability to
conduct PSV checks.
Commerce officials recognize that special agents do not always have the
skills and training necessary to verify compliance with some license
conditions. For example, to verify compliance with a license for
semiconductor manufacturing tools, Commerce brought together a team of DOD
and Commerce engineers for training on these tools. In February 2003, the
engineers spent a day learning about the items on the license and ways to
determine if the exported equipment was being used in compliance with the
license conditions. The engineers then examined the exported item in China
and determined that the company had complied with the license conditions.
In October 2003, Commerce released new guidelines to improve technical
training for special agents. This 1-day training is designed to provide
agents with additional technical expertise about the dual-use items they
are to check during upcoming PSVs. Commerce expects that this training
will allow agents to ensure that the items they check are the actual items
in question and that they are being used in compliance with license
conditions. Commerce officials stated that they planned to initiate this
training in November 2003.
End Users May Not Be Aware of End users of dual-use technology may not be
aware of the license
License Conditions conditions by which they are to abide. Only 5 of the 25
companies we visited had a copy of the license conditions. According to
Commerce, it is the U.S. exporter's responsibility to ensure that end
users are aware of the terms of the license, including the conditions that
apply to them. However, Commerce does not require exporters to provide a
copy of the export license containing the conditions either to importers
taking delivery of an item or end users that use the item. Although
Commerce requires the exporter to convey license conditions to its
"customer" or other parties to whom the license conditions apply, the
department does not specify whether the conditions should be conveyed
verbally or in writing. Unless there is a condition in the license that
requires the exporter to inform the
end user of the conditions placed on the license, there is no guarantee
that the exporter will convey the conditions to the end user. In 24
percent of the PSVs we reviewed, the checks were conducted at the site of
the importer rather than the end user; therefore, the end user may not
have been aware of the license conditions.
During our visits to China, Hong Kong, India, and Russia, we found that
only 5 (20 percent) of the 25 companies we visited had a copy of the
license, which included the conditions. Representatives from 13 other
companies stated that they were aware of the conditions but did not have a
copy of the license or any document outlining the conditions. At nine
companies we found that the agents conducting the PSV did not raise the
topic of conditions. In at least one case in Russia, a company had signed
a document indicating that it was aware of the conditions but did not have
a copy of the license or any other documentation describing the
conditions; it was unclear how the conditions were conveyed to the
company. In India when we requested that a company produce a copy of the
license conditions that the exporter was required to provide, the company
produced a copy of the sales contract describing the terms and financial
conditions of the sale. The company representative believed that the sales
contract listed the license conditions. Indian companies we visited were
frequently confused about the term "conditions," associating it with the
sale of the item as opposed to the conditions imposed by Commerce on the
item's use.
Some Countries of Concern Limit the U.S.'s Ability to Conduct PSV Checks
To successfully conduct a PSV, Commerce needs the cooperation of host
governments and the companies it must visit. In some countries, Commerce
can conduct PSVs without notifying the host government. However, in other
countries, Commerce's ability to conduct PSVs is more limited. China,
India, Russia, and Hong Kong8 offer the United States varying levels of
access. A discussion of the four countries follows.
o The Chinese government requires that Commerce follow a set of protocols
for arranging and conducting PSVs. Commerce officials stated that the
Chinese government limits the number of checks each year. A Chinese
Ministry of Commerce official we met with in September 2003 stated that
the scope of items that can be subject to PSVs will be
8Hong Kong is not a country of concern; however, it is a transshipment
point and has been a conduit for illegal reexports of U.S. controlled
technology.
expanded under the terms of an end-use arrangement currently under
negotiation with the United States.
o India restricts Commerce from conducting PSVs to a limited extent.
According to our review of trip reports from India, India denied Commerce
access to some facilities and items for PSV checks through 2003; however,
U.S. access to Indian facilities improved during 2003. In May 2003, the
Indian government allowed PSVs and gave Commerce's special agents access
to all the facilities they requested.
o The Russian government does not require the United States to notify it
of plans to conduct PSVs or limit the types of items on which the United
States may conduct checks. Based on our review of trip reports and
documentation from Russian companies, Commerce was always allowed access
to conduct PSVs, although government entities sometimes required advanced
clearance.
o Hong Kong authorities allow U.S. enforcement personnel to conduct PSVs
on whatever items are of interest to the United States. Based on a review
of safeguard trip reports and a meeting with Hong Kong officials in
September 2003, we found that Hong Kong does not require Commerce to
inform it about pending PSV checks.
Additional discussion of U.S. access to conduct PSVs in these four
countries is contained in an "Official Use Only" version of this report. 9
PSVs Have Limited Role in Future Licensing Decisions and Enforcement
Actions
Commerce places all companies that receive unfavorable PSVs on its Watch
List. Commerce placed 53 companies on its Watch List in response to 81
unfavorable PSV checks worldwide, between fiscal years 2000 and 2002.10
However, the list is not public, and end users and potential U.S.
exporters would not know if a company had been placed on the list. To help
ensure that companies that get unfavorable PSVs receive greater scrutiny
in the future, Commerce screens new license applications against
9See Export Controls: Post-Shipment Verification Provides Limited
Assurance That Dual-Use Items Are Being Properly Used, GAO-04-199
(Washington D.C.: December 22, 2003).
10We asked Commerce to determine if any of the companies that had received
unfavorable PSV checks had received licenses in the past or been granted
licenses after the check. Commerce was unable to provide us this
information.
the Watch List. Licensing officers at Commerce use this information when
making subsequent licensing decisions.
According to Commerce officials, however, the results of PSVs play a less
important role in approving a license than do other sources of
information. Commerce considers other information sources when making
licensing decisions, including industry leads, self-disclosure, visa
referrals, and information sharing from other agencies. PSV results play a
minor role relative to these other sources. According to a senior Commerce
official, an unfavorable PSV check is the opinion of two individuals and
does not represent a vetted and approved interagency position, which a
licensing decision does.
In addition, unfavorable PSV checks cannot be linked to enforcement
actions. Commerce views an unfavorable PSV as one of many leads in a
potential criminal case, but an unfavorable alone does not provide
sufficient evidence to take enforcement action against an end user. An
unfavorable PSV check is only an initial step in the investigation and
enforcement process. Before taking action against a criminal activity,
Commerce must review leads, open an investigation, and collect evidence.
If Commerce believes that it has enough evidence for a criminal case, it
must convince the Department of Justice to prosecute. If the criminal
court finds the defendant guilty, it can levy penalties (see app. II for
additional information on Commerce's enforcement activities). If Commerce
lacks sufficient evidence to prosecute the case in a criminal court, it
may seek administrative penalties.
Commerce cannot identify enforcement cases generated as the result of an
unfavorable PSV check because its database does not identify the source of
an investigation. Commerce officials stated that they would have to
conduct a manual search of the files to determine whether an enforcement
action started with a PSV. However, Commerce officials also stated that no
closed enforcement cases began as PSV leads. Commerce officials recognized
that their database had limitations and stated that they have instituted
the Investigative Management System, which will track the total number of
leads, their sources (such as a PSV), and the significant actions
resulting from them.
Conclusion Commerce currently lacks an effective way to ensure that
dual-use items are being used as required under the terms of export
licenses. PSV checks are Commerce's primary means to verify the end use of
an item after it has
been exported. The fact that Commerce conducts PSVs may have some
deterrent value. However, during fiscal years 2000 to 2002, Commerce only
checked 6 percent of dual-use licenses for countries of concern. In
addition, deficiencies in Commerce's implementation of this important
process limit its overall effectiveness in ensuring that dual-use items
are not misused or diverted. Most significantly, although 99 percent of
dual-use exports to countries of concern have license conditions, the U.S.
officials who carry out PSVs do not always verify that these conditions
are met. Even if agents wanted to check license compliance, they may lack
the necessary technical expertise to determine whether a license condition
is being met. In addition, the foreign end users of the dual-item may not
be aware of the license conditions they are to comply with. Finally, some
countries limit Commerce's access to conduct PSVs. As a result, Commerce
cannot ensure that dual-use items exported to countries of concern are not
misused or diverted.
Recommendations To improve the PSV process, we recommend that the
Secretary of Commerce
o improve technical training for enforcement personnel conducting PSV
checks to ensure they are able to verify compliance with license
conditions,
o ensure that personnel conducting PSV checks assess compliance with
license conditions, and
o require that the exporter inform the end user in writing of the license
conditions.
Agency Comments and Our Evaluation
The Department of Commerce provided written comments on a draft of this
report, which are reproduced in appendix III. Commerce generally agreed
with our recommendations. However, Commerce disagreed with our conclusion
that PSVs provide limited assurances that dual-use items are being used as
intended. Commerce stated that we assumed PSVs play a greater role in
ensuring compliance with the terms and conditions of export licenses than
they actually play. However, Commerce's June 2000 program guidance on how
to conduct PSVs states that PSVs are the first line of defense in
preventing illegal technology transfer after dual-use items have been
exported. Commerce documents show that PSVs are
Commerce's primary mechanism to verify that dual-use items are used as
intended after they have been exported. Commerce also stated that we
underestimated the value of PSVs for informing future licensing decisions.
However, during the course of our review, Commerce officials stated that
PSVs played a less important role in future licensing decisions than other
sources of information, such as industry leads and information from other
agencies, that were more highly valued. Accordingly, we have not modified
our conclusions or recommendations.
As arranged with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days after
the date of this letter. At that time we will send copies of this report
to appropriate congressional committees and to the Secretary of Commerce.
Copies will be made available to others upon request. In addition, this
report will be available at no charge on the GAO Web site at
http://www.gao.gov.
Please contact me at (202) 512-8979 if you or your staff has any questions
concerning this report. A GAO contact and staff acknowledgments are listed
in appendix IV.
Sincerely yours,
Joseph A. Christoff, Director International Affairs and Trade
Appendix I
Scope and Methodology
We were asked to (1) assess the number of dual-use export licenses
approved and subject to post-shipment verification (PSV), and (2) evaluate
how the PSV process ensures that sensitive exports are used as intended.
To address these objectives, we reviewed laws and regulations governing
export licensing, analyzed export licensing data, and reviewed the
activities and outcomes of the Department of Commerce's (Commerce) Export
Enforcement Office. We also interviewed Commerce officials in Washington,
D.C.; surveyed Commerce's special agents who conduct PSV reviews; met with
Commerce enforcement attaches in Russia and China; and observed a
Commerce-led team conducting PSV checks in Russia. In addition, we met
with officials from the Department of State; Department of Homeland
Security; Department of Defense, including the Defense Technology Security
Administration and Defense Intelligence Agency; Department of Justice;
Central Intelligence Agency; National Ground Intelligence Center; and
private firms in Hong Kong, India, and Russia that were the subject of
Commerce's PSV reviews. Finally, we interviewed government officials from
China, Hong Kong, and India about their views on U.S. export controls.
To assess the number of dual-use export licenses approved and subject to
PSV, we reviewed Commerce documentation on how the licensing process works
and how it determines which items will be subject to PSV checks. We
interviewed knowledgeable Commerce officials about the licensing process
and the role of PSV checks in that process. Additionally, we obtained
statistical data from Commerce, including portions the Export Control
Automated Support System (ECASS), to analyze data on licenses selected for
PSVs. We assessed the reliability of the ECASS data by performing
electronic testing of required data elements and by interviewing agency
officials knowledgeable about the data. We determined that the data were
sufficiently reliable for the statistical purposes of this report. We also
obtained PSV trip reports and cables for fiscal years 2000 through 2002
for countries of concern where PSVs were conducted.
To evaluate how the PSV process ensures that sensitive exports are used as
intended, we reviewed Commerce's Special Agent Manual, guidance on
conducting PSV checks, trip reports, and cables for countries of concern.
We identified key countries of concern by performing a content analysis of
12 lists used by U.S. government agencies to designate countries they
believe may support terrorism or contribute to proliferation of weapons of
mass destruction. Any country that appeared on 5 or more of the 12 lists
was selected as a country of concern for the purposes of this report. The
Appendix I
Scope and Methodology
resulting list includes Azerbaijan, Belarus, China, Egypt, India, Iran,
Iraq, Israel, Kazakhstan, North Korea, Pakistan, Russia, Syria, and
Ukraine.
As part of our audit work, we traveled to Russia and observed a team
conduct a PSV check. We also traveled to China, Hong Kong, and India to
determine the host governments' requirements for conducting PSV checks and
to conduct follow-up meetings with companies and persons subject to
previous PSV checks. We surveyed special agents at Commerce field offices
who had participated in PSV trips during 2000, 2001, and 2002, and from
January to April in 2003. We identified 35 active agents who conducted PSV
trips during this time frame, based on reports Commerce provided to us. We
did not survey six agents who had conducted PSVs and had left the
department or had been temporarily reassigned. We developed and pretested
a questionnaire that we administered by e-mail and fax. We received
responses from 26 officers, or 74 percent of the active agents. Finally,
we interviewed Commerce officials and asked Commerce to provide us with
data to determine how the results of PSVs are used in future licensing and
enforcement actions. We initially planned to use the ECASS data to
determine if companies that had received an unfavorable PSV obtained a
subsequent license. Due to limitations in Commerce's database, however,
this could not be done. We therefore relied on Commerce officials'
testimony about how unfavorable PSVs are used in the licensing process.
We conducted our review from October 2002 through October 2003 in
accordance with generally accepted government auditing standards.
Appendix II
Department of Commerce's Statutory Framework and Enforcement Activities
Commerce undertakes a number of enforcement activities to deter violations
of export control laws and regulations, including prosecuting both
civil-administrative and criminal cases. If U.S. exporters or foreign
importers are not following U.S. export law and regulations, they may face
penalties including fines, denial of export privileges, or imprisonment.
In accordance with the governing authority, when Commerce identifies a
potential dual-use violation, it may seek criminal or civil administrative
action, or both, against the U.S. company that exported the product,
employees at the U.S. exporting company, or foreign companies and persons
involved in importing the product.
When Commerce obtains an unfavorable PSV or other indication that a
dual-use export control violation may have occurred, Commerce may engage
in an investigation.1 After an investigation, if Commerce determines the
violator acted with full knowledge and willful intent of breaking the law,
Commerce develops a criminal case and seeks an attorney in the Department
of Justice (Justice) to prosecute the violation. If Justice accepts the
case, they assign an assistant U.S. attorney for criminal prosecution. If
the criminal court finds a defendant guilty of dual-use violations, then
sanctions for criminal conduct are imposed; companies may be fined while
individuals may be fined and or imprisoned. In addition to or in lieu of
criminal penalties, Commerce may pursue civil administrative action.
Civil-administrative penalties are issued directly by Commerce. Attorneys
working at Commerce handle these cases, which are heard by an
administrative law judge. Civil-administrative penalties may be issued to
either an individual or to companies and may include:
o Denial of export privileges - This denies the violator the right to
export or to participate in the export of goods from the United States.
o Civil-administrative fines - Commerce charges the violator(s) monetary
penalties.
In addition to civil-administrative penalties, Commerce may use the
following as preventative measures in response to export control law
violations:
1Commerce lacks authority to lead overseas investigations but may request
Customs' assistance to conduct investigatory activity for Commerce leads.
Appendix II
Department of Commerce's Statutory
Framework and Enforcement Activities
o Warning letter - A warning letter is an informal notification Commerce
issues to a company or person who may have violated the law. It describes
the alleged violations and possible sanctions, but does not impose fines
or restrictions on export privileges due to a lack of evidence. Commerce
considers any future violations in light of the warning.
o Placement of an entity or individual on the Watch List - The Watch List
lists individuals and companies that Commerce has determined warrant
increased scrutiny for export licensing purposes.
In fiscal year 2001 and 2002, Commerce closed 9 cases yielding criminal
convictions and issued 340 warning letters. During that same time period,
Commerce approved 17,500 licenses for dual-use exports.
Commerce's authority to enforce dual-use export controls was originally
authorized by the Export Administration Act (EAA) of 1979. Since August
20, 1994, when the EAA first expired, temporary statutory extensions and
executive orders continued the application of this act. Most recently, the
application of the act has been extended under an executive order issued
pursuant to the International Emergency Economic Powers Act (IEEPA).2
While the executive order gives Commerce authority to enforce dual-use
export controls, IEEPA provides for maximum penalties that are
significantly lower than those permitted under the EAA, both for criminal
and civil administrative fines. For example, criminal penalties for
companies that willfully violate dual-use export control laws under IEEPA
are limited to a $50,000-per-violation fine. Under the EAA, offenders were
subject to a fine of either $1 million per violation or five times the
value of the exports, whichever was greater. A violation is constituted as
the intentional export of a good in violation of export control law. For a
comparison of fines under the EAA and IEEPA, see table 3.3
2Executive Order 13222, August 7, 2003 (66 Reg. 47833).
3IEEPA violations constitute a felony. Higher fines may therefore be
imposed under the authority of 18 U.S.C. 3571, a criminal code provision
that establishes a maximum criminal fine for a felony that is the greatest
of (1) the amount provided by the statute that was violated; (2) an amount
not more than $250,000 for an individual or not more than $500,000 for an
organization; or (3) an amount based on a dollar value of the offense. The
maximum fine amounts are subject to inflation adjustments made pursuant to
the Federal Civil Penalties Inflation Adjustment Act of 1990 (Pub. L
101-410 as amended, codified as a note to 28 U.S.C. 2461).
Appendix II
Department of Commerce's Statutory
Framework and Enforcement Activities
Table 2: Maximum Penalties under EAA and IEEPA
Criminal Penaltiesa EAAb IEEPAb
Individual fine Not to exceed $250,000 per Not to exceed $50,000 per
violation violation
Corporate fine Not to exceed $1,000,000 Not to exceed $50,000
per
per violation, or five times violation
the value of the exports,
whichever is greater
Individual imprisonment Not to exceed 10 years per Not to exceed 10 years
per violation violation
Civil administrative
penalties EAAb IEEPAb
Individual and corporate Not to exceed $11,000 per Not to exceed $11,000
per violation, ($120,000 per violation violation may be imposed for each
violation involving national security controls)
Sources: Export Administration Act: 50 U.S.C. app. 2410; International
Emergency Economic Powers Act, 50 U.S.C. 1705.
Note: The goods involved in any violation may be subject to seizure.
aThe penalties listed for violations of the EAA are for willful violations
of the act with knowledge that the exports involved will be used for the
benefit of, or that the destination of the goods or technology involved
is, any country to which exports are controlled for national security or
foreign policy purposes. Other violations of the act are subject to lesser
penalties.
bThe EAA has lapsed several times since it was originally enacted, with
the first lapse occurring before 1990. Between August 1993 and November
2000, the President continued the regulations in effect under the
authority of IEEPA. In November 2000, Congress reauthorized the IEEPA, and
it remained in effect through August 2001. Executive Order 13222, which
has been extended by several Presidential Notices, continues the
regulations in effect.
Appendix III
Comments from the Department of Commerce
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
See comment 1.
Appendix III
Comments from the Department of
Commerce
See comment 2.
Appendix III
Comments from the Department of
Commerce
See comment 3.
Appendix III
Comments from the Department of
Commerce
See comment 4.
Appendix III
Comments from the Department of
Commerce
GAO Comments"The following are GAO's comments on the Department of
Commerce letter, dated December 3, 2003.
Commerce states that we overemphasized the use of PSVs as a method for
ensuring license compliance and underestimated their value for informing
future licensing decisions. We disagree. Commerce's June 2000 guidance on
how to conduct PSVs states that PSVs are the first line of defense in
preventing illegal technology transfer after dual-use items have been
exported. We also found that PSVs play a less important role in future
licensing decisions than other sources of information. As noted in the
report, Commerce officials stated that industry leads, information from
other agencies, self-disclosures, and visa referrals are more highly
valued in licensing decisions than information gathered during a PSV.
Commerce stated that the effectiveness of PSVs cannot be assessed in
isolation from other enforcement and compliance efforts of Commerce. We
agree. Our report includes discussions of several of these mechanisms,
including prelicense checks (p. 4), screening against its Watch List (p.
15), and using information on export transactions from industry and other
agencies (p. 16). We also discuss the deterrent effect of prosecuting
criminal and administrative enforcement cases (pp. 21-23, app. II).
Commerce notes that its new safeguards protocol requires training for all
safeguards trip team members prior to their departure. However, as of
December 2003, two agents had received this training.
Commerce noted that it had undertaken to revise the priority of license
checks in countries of concern, by focusing on Hong Kong, Russia, India,
Israel, and the United Arab Emirates. We have added information in the
report to reflect the new efforts.
Appendix IV#
GAO Contact and Staff Acknowledgments#
GAO Contact David Maurer (202) 512-9627#
Staff "In addition, Julie Hirshen, Eugene Beye, Joseph Brown, Lynn
Cothern, Jeanine Lavender, Steve Lord, and Minette Richardson made
significant
Acknowledgments contributions to this report.
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