State Department Needs to Resolve Data Reliability Problems that 
Led to Inaccurate Reporting to Congress on Foreign Arms Sales	 
(28-JAN-05, GAO-05-156R).					 
                                                                 
Under Section 655 of the Foreign Assistance Act, as amended, the 
Department of State reports annually to Congress on the aggregate
dollar value and quantity of all defense articles and services	 
that State licensed for direct commercial sale to each country.  
State's report is intended to be an accurate record to ensure	 
that Congress and the public are informed regarding foreign arms 
sales by U.S. industry. In the course of a previous GAO review on
the proliferation of man-portable air defense systems		 
(MANPADS),we found that State reported to Congress that it had	 
approved licenses for the commercial sale of Stinger missiles to 
foreign countries in five instances during fiscal years 2000 and 
2002. However, U.S. government policy precludes the commercial	 
sale of Stinger missiles, and State had not approved licenses for
the commercial sale of Stinger missiles. State officials stated  
in May 2004 that the information the department had reported in  
its fiscal years 2000 and 2002 reports was incorrect. In response
to our ongoing review, State submitted an amended 2002 report to 
Congress in September 2004 and posted corrected 2000 and 2002	 
reports to its Web site. Under the authority of the Comptroller  
General, we assessed the reasons for State's misreporting of	 
Stinger missile sales authorizations in its fiscal years 2000 and
2002 Section 655 reports.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-156R					        
    ACCNO:   A16458						        
  TITLE:     State Department Needs to Resolve Data Reliability       
Problems that Led to Inaccurate Reporting to Congress on Foreign 
Arms Sales							 
     DATE:   01/28/2005 
  SUBJECT:   Data integrity					 
	     Foreign military arms sales			 
	     Foreign military sales policies			 
	     Internal controls					 
	     Licenses						 
	     Missiles						 
	     Reporting requirements				 
	     Foreign Military Sales Program			 
	     Man-Portable Air Defense System			 
	     Stinger Missile					 

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GAO-05-156R

United States Government Accountability Office Washington, DC 20548

January 28, 2005

The Honorable Condoleezza Rice The Secretary of State

Subject: State Department Needs to Resolve Data Reliability Problems that
Led to Inaccurate Reporting to Congress on Foreign Arms Sales

Dear Madam Secretary:

Under Section 655 of the Foreign Assistance Act, as amended, the
Department of State reports annually to Congress on the aggregate dollar
value and quantity of all defense articles and services that State
licensed for direct commercial sale to each country.1 State's report is
intended to be an accurate record to ensure that Congress and the public
are informed regarding foreign arms sales by U.S. industry. In the course
of a previous GAO review on the proliferation of man-portable air defense
systems (MANPADS),2 we found that State reported to Congress that it had
approved licenses for the commercial sale of Stinger missiles to foreign
countries in five instances during fiscal years 2000 and 2002. However,
U.S. government policy precludes the commercial sale of Stinger missiles,
and State had not approved licenses for the commercial sale of Stinger
missiles. State officials stated in May 2004 that the information the
department had reported in its fiscal years 2000 and 2002 reports was
incorrect. In response to our ongoing review, State submitted an amended
2002 report to Congress in September 2004 and posted corrected 2000 and
2002 reports to its Web site.

Under the authority of the Comptroller General, we assessed the reasons
for State's misreporting of Stinger missile sales authorizations in its
fiscal years 2000 and 2002 Section 655 reports. To address this objective,
we reviewed licensing data on the commercial sale of Stinger-related
commodities from the Department of Defense (DOD), the Department of State,
and Raytheon Corporation-the company that produces Stinger missile
systems. We met with officials at the Departments of Defense and State. We
interviewed Raytheon officials in Washington, D.C., and Tucson, Arizona.
We performed our work from June 2004 to November 2004 in accordance with
generally accepted government auditing standards. For additional
information on our scope and methodology, see enclosure I.

122 USC 2415.

2GAO, Nonproliferation: Further Improvements Needed in U.S. Efforts to
Counter Threats from Man-Portable Air Defense Systems, GAO-04-519
(Washington, D.C.: May 13, 2004).

                         GAO-05-156R Foreign Arms Sales

Summary

State officials attributed State's inaccurate reporting on the licensing
of Stinger missiles for commercial sale to errors in the license data
entry process. In addition, State's multioffice review of the draft
Section 655 reports failed to discover the inaccurate reporting.
Furthermore, we found data reliability problems that raise additional
questions about the accuracy and reliability of data in State's Section
655 reports to Congress. Although State's report is intended to ensure
that Congress and the public are informed about foreign arms sales by U.S.
industry, deficiencies in State's processes for preparing its Section 655
report inhibit the ability of Congress to obtain accurate information
needed to provide effective oversight of these weapons sales programs.

To ensure that Congress obtains accurate information on foreign arms sales
by U.S. industry, we recommend that the Secretary of State establish and
implement procedures to resolve data reliability problems that affect
direct commercial sales information in State's Section 655 report,
including the review of data entered and database-design limitations.

State did not comment on the recommendation in this report. State and DOD
provided technical comments that we incorporated as appropriate.

State concurred with our finding that it had incorrectly reported to
Congress on the commercial sale of Stinger missiles but said that such
instances were limited and do not call into question the overall
reliability of its Section 655 report. However, the data reliability
concerns we identified are not limited to Stinger-related items but apply
to all commercial license application data used by State to compile its
Section 655 report. In addition, State asserted that the introduction of
its new licensing database, D-Trade, will address several data reliability
concerns raised in the report. However, DDTC officials were uncertain when
D-Trade would be fully implemented and have full industry participation.

Background

Section 655 of the Foreign Assistance Act requires the President to report
annually on the dollar value and quantity of defense articles, defense
services, and military training transferred to each foreign country and
international organization during the previous fiscal year. The Section
655 report is intended to ensure transparency, accountability, and
effective oversight of U.S. arms transfers. The report is specifically
intended to ensure that Congress and the public are correctly informed
about the volume and the costs of U.S. military assistance and exports, as
well as foreign arms sales by U.S. private industry. The report covers
defense articles and services licensed for export and must specify whether
the defense articles were furnished under the foreign military sales (FMS)
program or licensed for direct commercial sale.

Through the FMS program, DOD manages the sale of weapons systems and
technologies from the U.S. government to foreign governments. According to
DOD officials, the FMS program is intended to provide additional scrutiny
to weapons systems and technologies

Page 2 GAO-05-156R Foreign Arm Sales

deemed sensitive for export. As such, the U.S. government designates
specific weapons and technologies that must be sold exclusively through
FMS. For example, Stinger missile systems and Stinger missiles are sold to
foreign governments only through the FMS program. If the U.S. government
does not require that a weapon or technology be sold through the FMS
program, U.S. companies may sell to private or government customers
overseas. For example, Stinger missile spare parts are sold through direct
commercial sales. The State Department's Directorate of Defense Trade
Controls (DDTC) reviews and approves licenses for the direct commercial
sale of weapons

3

systems and technologies from U.S. companies to foreign companies or
governments. As part of its review process, DDTC sends some commercial
licenses to DOD for review when DTTC deems it appropriate.

The United States government requires that U.S.-produced MANPADS be sold
through the FMS program, rather than commercially,4 because the
U.S.-produced version of MANPADS-the Stinger missile system (see fig.
1)-is among the most advanced of all MANPADS produced worldwide. Since
1982, the United States government has sold more than 20,000 Stinger
missiles to 17 foreign countries and Taiwan. In addition, the United
States has licensed Raytheon and several subcontractors to sell spare
parts for Stinger missile systems to these same countries and to foreign
companies.

Figure 1: Components of Stinger MANPADS

3Section 38 of the Arms Export Control Act (AECA) authorizes the President
to control the import and export of defense articles and services and to
implement regulations for the import and export of such items. Executive
Order 11958, as amended, delegates the President's defense export
authorities to the Secretary of State. The Secretary of State delegates
these responsibilities to State's Bureau of Political-Military Affairs,
Directorate of Defense Trade Controls (DDTC).

4The U.S. National Disclosure Policy (NDP) #1 requires the United States
to authorize the sale of MANPADS through DOD's foreign military sales
(FMS) program. According to DOD and State, the U.S. National Disclosure
Policy Committee, made up primarily of agencies and offices within DOD and
State, decides U.S. policy on the release of classified weapons
technology, including MANPADS.

Page 3 GAO-05-156R Foreign Arm Sales

Data Reliability Problems Have Resulted in Inaccurate and Incomplete
Section 655 Reports to Congress

State inaccurately reported in Section 655 reports to Congress that it had
authorized licenses for the direct commercial sale of Stinger missiles in
fiscal year 2000 to the United Kingdom and in fiscal year 2002 to Finland,
Sweden, Turkey, and the United Kingdom. We reviewed Stinger-related
licensing documentation provided by State for fiscal years 1999 to 2003.
In documentation for more than 250 Stinger-related licenses authorized
over that period, we found no instances in which State authorized licenses
for the commercial sale of Stinger missiles; licenses were for Stinger
spare parts and

                                       5

technical data or Stinger-related defense services. We also reviewed
Stinger-related licensing documentation for fiscal years 1999 to 2003 that
DOD and Raytheon provided

6

and found no evidence of direct commercial sales of Stinger missiles. In
addition, senior DOD, DDTC, and Raytheon officials said that they had no
knowledge of Stinger missiles' being sold commercially.

DDTC officials said that the misreporting was due to coding errors by its
data entry employees during the license data entry process. Specifically,
DDTC officials said that the military commodities "Missile Stinger Spare
Parts and Supplemental Equipment" and "Missile AMRAAM"7 were miscoded as
the commodity "Missile Stinger" in its Defense Trade Application (DETRA)
licensing database. DETRA is DDTC's database for storing and processing
the information on license applications submitted by companies. DDTC
officials said that data entry employees manually enter codes into DETRA
from a hardcopy list of codes for weapons systems, spare parts, and
technical data. Included on this list are commodities, such as Stinger
missiles, that are not permitted to be sold commercially. It was from this
list that Stinger missile codes were obtained and then used. DDTC did not
have any specific guidance to prevent data entry employees from entering
codes for commodities not permitted for commercial sale. In addition,
DETRA does not have automatic checks that alert data entry employees if
they are entering license information for commodities not permitted for
commercial sale.

DDTC officials said that the department has an internal, multioffice
review process to ensure the accuracy of State's annual Section 655 report
to Congress. The review involves DDTC; the Office of Regional Security and
Arms Transfers (RSAT); the regional bureaus; the Bureau of Democracy,
Human Rights and Labor (DRL); the Office of Legislative Affairs; and the
Office of the Undersecretary for Arms Control and International Security.
However, DDTC officials said that the reviewers failed to identify

5In addition, State has occasionally licensed Stinger components for
commercial sale. For example, Stinger launch tubes and gripstock halves
were sold to Greece in 2001; the Stinger Standard Vehicle Mounted Launcher
and the Air-to-Air Stinger launcher systems were sold to Turkey in 2002;
Stinger battery kits were sold to Greece in 2002; and Stinger launch tubes
were sold to Greece in 2003.

6DOD had Stinger-related documentation because it reviews some
Stinger-related commercial license applications when referred by State.

7AMRAAM stands for Advanced Medium Range Air-to-Air Missile.

Page 4 GAO-05-156R Foreign Arm Sales

the inaccurate reporting of commercial sales authorizations for Stinger
missiles in the Section 655 reports for fiscal years 2000 and 2002.

Based on our inquiries, State revised its fiscal year 2002 Section 655
report on its Web site in May 2004. In September 2004, State submitted an
amended 2002 report to Congress. In response to our review, State also
revised the fiscal year 2000 report on its Web site in September 2004 to
reflect corrections.

In the course of reviewing State's Stinger missile coding errors, we
discovered other data reliability problems that have resulted in
inaccuracies and incompleteness in State's annual Section 655 reports to
Congress. First, we identified a limitation in the design of the licensing
database. DDTC's data entry employees can only enter one commodity and one
country code into DDTC's DETRA licensing database per license application
regardless of how many commodities and countries appear on a license
application. As a result, State's Section 655 report does not include the
additional commodities or countries listed on some license applications.
DDTC officials stated that their data entry employees code licenses for
multiple commodities according to the one commodity on the license that
appears to best represent the total set of commodities on the license
application.For example, DDTC coded a license application in fiscal year
2003 as being for spare parts for an aircraft when the application was for
spare parts for five different systems, including the Stinger. In
addition, DDTC officials stated that their data entry employees typically
enter a code for "various" if multiple countries are listed on a license
application; however, in some instances, data entry employees single out
one of the countries on the application and enter only that country's
code. For example, in fiscal year 2002, DDTC data entry employees coded a
license application for the commercial sale of Stinger spare parts only to
Greece when the license application included Germany, the Netherlands, and
Turkey. DDTC officials said that they have no written criteria for such
coding decisions regarding multiple commodities and countries and that
data entry employees use their discretion when coding these licenses.

Second, we identified inaccurate reporting practices. Specifically, State
incorrectly reports the provision of some defense articles, such as
weapons systems, as defense services, which generally applies to the
provision of technical assistance and training. This results in inaccurate
information to Congress on the actual value of defense articles licensed
to foreign countries. For example, in the fiscal year 2002 report, State
reported that Raytheon provided nearly $33.8 million in defense services
to the Government of Turkey. However, approximately $33.3 million of the
transaction was for a commitment for the future sale of Stinger missile
launchers, and only $493,000 was for defense services to be provided by
Raytheon. DDTC officials stated that this transaction was part of a
Technical Assistance Agreement (TAA) and that State reports the total
value of the TAA as defense services in the Section 655 report regardless
of whether the TAA is primarily for defense articles or defense services.
In addition, DDTC officials stated that after a TAA is approved, DDTC
authorizes licenses for the commercial sale of the defense articles that
are part of the TAA. For example, State later approved licenses for the
direct commercial sale of the Stinger missile launchers included in the
original TAA with Turkey and reported the value of these licenses as
defense articles in the Section 655 report. As a result, State reports
defense articles associated with TAAs twice. First,

Page 5 GAO-05-156R Foreign Arm Sales

they are reported in the Section 655 report as defense services; second,
the value of licenses for the commercial sale of these articles is
reported in the Section 655 report as defense articles.

Finally, we identified State miscoding practices. DDTC officials stated
that DDTC has specific codes for most commodities for which license
applications are received, and when specific codes are not available, its
data entry employees use generic codes. However, we found that in many
instances DDTC data entry employees assigned generic codes when specific
codes were available. We reviewed documentation for more than 250 license
applications in DDTC's DETRA licensing database in which the text
"Stinger" appeared and found 126 instances in which Stinger parts were
licensed by DDTC. In 41 of the 126 instances, DDTC's data entry employees
used generic codes for Stinger commodities when specific Stinger codes
were available, and in 37 instances data entry employees used other
non-Stinger commodity codes when specific Stinger codes were available.
For example:

o  	A license for the sale of Stinger launch tubes and Stinger gripstock
and other spare parts to the Government of Greece was coded in DETRA as
"Missile Launcher Spare Parts and Supplemental Equipment," despite the
availability of the specific commodity code "Missile Stinger Spare Parts
and Supplemental Equipment."

o  	A license for the sale of Stinger missile motor spare parts to the
Government of the Netherlands was coded in DETRA as "Missile Spare Parts
(Non-specific Type)," despite the availability of the specific commodity
code "Missile Stinger Spare Parts and Supplemental Equipment."

Because of such miscoding practices, State's Section 655 report does not
provide an accurate and complete record of all instances when
Stinger-related parts were sold through direct commercial sales.

DDTC officials stated that they were aware that these problems resulted in
inaccuracies and incompleteness in State's Section 655 reports to
Congress; however, they said that they did not know the extent to which
these problems occurred. DDTC officials stated that DDTC performs no
regular data reliability checks and has not corrected these data
reliability problems in its DETRA licensing database.

DDTC officials stated that they have launched a new licensing database,
D-Trade, that will address some of these data reliability problems.
D-Trade eliminates State's role in entering license application data by
allowing companies that have chosen to participate to submit license
applications electronically. However, almost all of the more than 50,000
license applications submitted in fiscal year 2004, including all Stinger
applications, were handled through DDTC's older system because, according
to DDTC officials, many companies submitting license applications do not
use the electronic D-Trade system. For example, Raytheon does not use the
D-Trade system for the Stingerrelated license applications it sends to
DDTC. DDTC officials could not provide the date by which Stinger-related
license applications would be submitted under D-Trade. In

Page 6 GAO-05-156R Foreign Arm Sales

addition, D-Trade currently addresses only problems caused by the design
limitations of the older database, DETRA, and not those caused by TAA
reporting and generic coding practices. DDTC officials envision D-Trade
eventually addressing these data reliability issues; however, they could
not determine when DDTC would be able to offer these capabilities in
D-Trade. To improve coding practices, DDTC officials stated that they are
working with DOD to create an updated list of commodity codes that will
contain more specific codes for use in D-trade. However, DDTC officials
could not provide the date when the new codes would be ready for use, and
senior DOD officials stated that the updated codes might not be in use for
years.

Conclusion

The magnitude of DDTC's commercial sales licensing data reliability
problems is not known; however, reporting and coding practices,
limitations in the design of DDTC's licensing database, a lack of
reliability checks performed on the database, and the specific
inaccuracies we found raise questions about the accuracy and reliability
of the data that State uses to compile its annual Section 655 report to
Congress. Improvements to State's review process and data reliability
checks and adjustments to its licensing database could reduce the
potential for further reporting errors, thus enhancing the ability of
Congress to obtain the accurate information it needs to provide effective
oversight of these weapons sales programs.

Recommendations for Executive Action

We recommend that the Secretary of State establish and implement
procedures to resolve data reliability problems that affect direct
commercial sales information in State's Section 655 report, including the
review of data entered and database-design limitations.

Agency Comments and Our Evaluation

We provided a draft of this report to the Secretaries of Defense and State
for their review and comment.

The State Department did not comment on our recommendation. State
concurred with our finding that it had incorrectly reported commercial
arms sale information to Congress and provided additional written
comments, which are reprinted in enclosure II. In its comments, State said
that our findings were limited to relatively few instances of misreporting
on Stinger-related items that do not call into question the overall
reliability of its Section 655 report. In addition, State asserted that
the introduction of D-Trade will address a number of reliability concerns
raised in the report. However, we believe that the data reliability
concerns we identified are not specific to Stinger-related items and call
into question the overall reliability of the commercial licensing data in
the Section 655 report. DDTC officials indicated to us that the more than
200,000 commercial license applications that they received between fiscal
years 1999 and 2003 were processed with the same coding and reporting
practices as those for Stinger-related items, resulting in the same
opportunity for miscoding and misreporting. In addition, while D-Trade,

Page 7 GAO-05-156R Foreign Arm Sales

DDTC's new electronic licensing system, may address several data
reliability concerns,
DDTC officials were uncertain when it would be fully implemented and have
full industry
participation.

The Department of Defense also provided technical comments, which we
incorporated
as appropriate.

We are sending copies of this report to interested congressional
committees and other
parties. Copies will be made available to others on request. In addition,
this report will
be available at no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at
202-512-8979 or at
[email protected]. Another GAO contact and staff acknowledgments are
listed in
enclosure III of this report.

Sincerely yours,

Joseph A. Christoff
Director, International Affairs and Trade

Enclosures

Page 8 GAO-05-156R Foreign Arm Sales

Enclosure I

                             Scope and Methodology

To assess the basis for the State Department's misreporting of Stinger
missile commercial sales authorizations in its Section 655 reports to
Congress for fiscal years 2000 and 2002, we obtained and analyzed
documents from the Departments of Defense and State and from Raytheon
Corporation. We also met with officials at the Departments of Defense and
State and interviewed Raytheon officials in Washington, D.C., and Tucson,
Arizona. We reviewed State, DOD, and Raytheon Corporation licensing data
from 1999 to 2003. Specifically, we reviewed license applications and
supporting documentation submitted by companies to determine that State's
reporting of the commercial sales authorization of Stinger missiles for
fiscal years 2000 and 2002 was inaccurate. In testing the reliability of
relevant Stinger data in State's licensing database, we identified other
problems, as detailed in our report, that raised questions about the
reliability of data used in the Section 655 reports. We performed our work
from June 2004 to November 2004 in accordance with generally accepted
government auditing standards.

Page 9 GAO-05-156R Foreign Arm Sales

Enclosure II

                     Comments from the Department of State

                                  Enclosure II

                                 See comment 1.

                                  Enclosure II

                                 See comment 2.

                                  Enclosure II

                                 See comment 3.

                                 See comment 4.

                                  Enclosure II

Enclosure II

GAO Comments

1. State said that the instances of Stinger missiles miscoded and reported
to Congress as commercially licensed were not numerically significant
enough to undermine overall data reliability in the Section 655 report.
Although State's inaccurate reporting on the commercial sale of Stinger
missiles represented five instances in the Section 655 reports from 1999
to 2003, DDTC officials told us that the more than 200,000 license
applications for commercial sales received for those years were subject to
the same processes for coding and reporting license information. These
license applications, therefore, are subject to the same opportunity for
miscoding and misreporting, calling into question the overall reliability
of the commercial licensing data in the Section 655 report.

2. As we noted in the draft report, because of limitations in the design
of DDTC's DETRA database, only one commodity and one country from a
license application can be entered into the database. In its comments,
State highlighted only one instance in which DDTC coded a license
application for multiple commodities as being for a single commodity.
However, during our review we found that of the 126 license applications
for Stinger parts approved by DDTC in fiscal years 1999 to 2003, more than
67 licenses, or 53 percent, were coded by DDTC as being for a single
commodity when the license application listed multiple commodities.

State incorrectly noted in its comments that two license applications for
Stinger parts from 1999 to 2003 had the country of ultimate destination
coded as "various" when multiple countries were listed on the application.
State did not believe that these two instances were significant enough to
call into question the reliability of data in its Section 655 reports to
Congress. However, we found eight instances in which license applications
for Stinger parts were coded by DDTC as "various." In addition, DDTC
officials told us that their practice of coding license applications as
"various" in their DETRA database applies to all license applications with
multiple countries, not only to Stinger-related license applications. This
practice calls into question the reliability of the commercial licensing
data in the Section 655 report.

3. State commented that its practice of reporting defense articles as
defense services when they are associated with a Technical Assistance
Agreement (TAA) does not account for significant inflation of data in the
Section 655 report. As we noted in the draft report, we reviewed one
Stinger-related TAA and found that State reported in its Section 655
report for fiscal year 2002 that approximately $33.8 million in
Stingerrelated defense services would be provided to the Government of
Turkey through that TAA; however, only $493,000 was actually estimated in
the TAA for defense services and $33.3 million was estimated for defense
articles. Thus, the Section 655 report inflated the cost of defense
services associated with a single TAA by approximately $33.3 million. In
addition, State then reported the value of the defense articles associated
with the same TAA a second time, in its Section 655 report for fiscal year
2003. Furthermore, DDTC officials told us that it is standard practice to
report defense articles as defense services for all TAAs, not only for
Stinger-related TAAs.

Page 15 GAO-05-156R Foreign Arm Sales

Enclosure II These reporting practices for TAAs raise questions about the
reliability of data in State's Section 655 report to Congress.

4. State concurred that in examples noted by GAO, DDTC had coded Stinger
licenses as generic missile spare parts rather than placing them in a
Stinger-specific category. State also said that its data entry personnel
may have entered non-Stinger codes that may have reflected the nature of
the exported item as accurately as a Stinger-specific code. However, DDTC
officials said that in practice it sometimes codes the same items
differently, using either specific or generic codes. This inconsistent use
of the codes creates inaccurate and unreliable data in the Section 655
report to Congress.

State said that D-Trade, its new electronic licensing system, will
substantively address the data reliability problems with DDTC's DETRA
licensing database. We acknowledged in our draft report D-Trade's value in
addressing certain data reliability problems with DETRA. However, D-Trade
does not currently address problems caused by TAA reporting practices or
the use of generic codes. In addition, although State and DOD officials
said they are developing new commodity codes for use in D-Trade that they
believe will address data coding issues, DOD officials said that the
commodity codes may not be available for use for years. Furthermore, DDTC
officials told us that they were unsure when D-Trade would be fully used
by industry or when any Stinger licensing would be handled through
D-Trade.

Page 16 GAO-05-156R Foreign Arm Sales

Enclosure III

GAO Contact and Staff Acknowledgments GAO Contact David Maurer, (202)
512-9627 Acknowledgments In addition to the individual named above,
Addison Ricks, Jonathan Ban, Martin de Alteriis, Ernie Jackson, and Lynn
Cothern made major contributions to this report.

(320285)

                     Page 17 GAO-05-156R Foreign Arm Sales

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