    Defense Trade: Arms Export Control System in the Post-9/11
    Environment (16-FEB-05, GAO-05-234).

    The U.S. government controls arms exports by U.S. companies to
    ensure that such exports are consistent with national security
    and foreign policy interests. There have been various efforts to
    change the arms export control system, which is overseen by the
    State Department. One effort was the Defense Trade Security
    Initiative of 2000, which was intended to facilitate defense
    trade with allies in the post-Cold War environment. Given the
    September 2001 terror attacks, the U.S. government has had to
    reevaluate whether existing policies support national security
    and foreign policy goals. In light of the September 2001 attacks,
    GAO was asked to review several aspects of the arms export
    control system. Specifically, GAO is providing information on (1)
    changes in the arms export control system since September 2001
    and overall trends in arms export licensing, (2) extent of
    implementation of or revision to initiatives designed to
    streamline arms export licensing, and (3) extent of coordination
    on these initiatives between State and arms export enforcement
    agencies, as well as enforcement efforts.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-234
        ACCNO:   A17836
      TITLE:     Defense Trade: Arms Export Control System in the
    Post-9/11 Environment
         DATE:   02/16/2005
      SUBJECT:   Arms control agreements
    	     Defense industry
    	     National preparedness
    	     Export regulation
    	     Exporting
    	     Foreign military sales policies
    	     Foreign trade policies
    	     Interagency relations
    	     International trade
    	     International trade regulation
    	     Licenses
    	     National defense operations
    	     Performance measures
    	     Systems evaluation
    	     Trade regulation
    	     Homeland security
    	     DOD Defense Trade Security Initiative
    	     DOD Operation Iraqi Freedom
    	     Operation Enduring Freedom

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    GAO-05-234

    United States Government Accountability Office

    GAO	Report to the Chairman, Committee on International Relations, House of
    Representatives

    February 2005

    DEFENSE TRADE

                 Arms Export Control System in the Post9/11 Environment

                                           a

    GAO-05-234

    [IMG]

    February 2005

    DEFENSE TRADE

    Arms Export Control System in the Post9/11 Environment

                                     What GAO Found

    Since the September 2001 terror attacks, the arms export control system
    has not undergone fundamental changes. While the system essentially
    remains unchanged, new trends have emerged in the processing of arms
    export cases. The median processing time for export license applications
    and related cases began increasing in fiscal year 2003.

    Median Processing Times for Arms Export Cases Days

                                      9/11 Attacks

    1999 2000 2001 2002 2003 2004 (through 4/30)

    Fiscal year

    Source: GAO analysis of State data.

    State and Defense, which reviews export licenses, have continued to
    implement through regulations and guidance several initiatives primarily
    designed to streamline the processing of arms export licenses. According
    to State officials, they have not evaluated the effects of these
    initiatives on the export control system or revised the initiatives.
    However, applications processed under these initiatives have generally not
    been processed within the time frames established by State and Defense.
    For example, applications for Operation Iraqi Freedom are to be processed
    in 4 days if they require interagency review, but the median processing
    time for these applications in the first 7 months of fiscal year 2004 was
    22 days. Also, exporters have not widely used several of these
    initiatives.

    State has sought limited coordination with the agencies responsible for
    enforcing U.S. arms export laws-the Departments of Homeland Security and
    Justice-regarding the initiatives designed to streamline arms export
    licensing. The only exceptions have been regarding proposed export
    licensing exemptions. Enforcement officials have raised concerns regarding
    licensing exemptions, including difficulties in enforcing the proper use
    of exemptions and the increased risk of diversion. According to
    enforcement officials, they face a number of challenges associated with
    arms export enforcement efforts, such as limited resources to conduct
    inspections and investigations and other difficulties in obtaining a
    criminal conviction for export violations.

                     United States Government Accountability Office

    Contents EUR

    Letter 1EUR

    Summary 2 EURAgency Comments and Our Evaluation 4 EUR

    Appendix I GAO Briefing Slides 7 EUR

    State, Commerce, and Defense: Workload, Staffing, and Budget for

    Fiscal Year 2003 14 EURDDTC Staffing Levels 17 EURNumber of Cases Reviewed
    by DDTC and Median Processing EUR

    Times 20 EURState's Explanation for Increased Processing Times 22 EURFinal
    Actions for License Applications 24 EURElectronic Licensing: D-Trade 37
    EURArms Export Investigations, Arrests, Indictments, and Convictions 57
    EURState's Administrative Enforcement: Blue Lantern 59 EURState's
    Administrative Enforcement: Voluntary Disclosures 61 EURState's
    Administrative Enforcement: Penalties Imposed in EUR

    Administrative Cases 63 EUR

    Appendix II Scope and Methodology

    Appendix III Comments from the Department of State

    Appendix IV Comments from the Department of Defense

    Appendix V	Comments from the Department of Homeland
    Security 86 EUR

    Appendix VI GAO Contacts and Staff Acknowledgments 88 EUR

                              Related GAO Products 89 EUR

    Abbreviations

    AECA Arms Export Control Act EURAES Automated Export SystemEURBIS Bureau
    of Industry and SecurityEURCBP U.S. Customs and Border Protection EURCIA
    Central Intelligence Agency EURDCI Defense Capabilities Initiative EURDDTC
    Directorate of Defense Trade Controls EURDTSA Defense Technology Security
    AdministrationEURDTSI Defense Trade Security Initiative EURFTE full-time
    equivalent EURGPA Global Project AuthorizationEURICE U.S. Immigration and
    Customs Enforcement EURJSF Joint Strike Fighter EURNATO North Atlantic
    Treaty Organization EUROEF Operation Enduring FreedomEUROIF Operation
    Iraqi FreedomEUR

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States Government Accountability Office Washington, DC 20548

    February 16, 2005 EUR

    The Honorable Henry J. Hyde EURChairman EURCommittee on International
    Relations EURHouse of Representatives EUR

    Dear Mr. Chairman: EUR

    Exports of arms1 by U.S. companies are controlled by the U.S. government
    EURto help ensure that such exports are consistent with U.S. national
    securityEURand foreign policy interests. The Department of State oversees
    arms EURexport controls and has responsibility for licensing arms exports.
    Over the EURyears, there have been various efforts to change the arms
    export controlEURsystem. One such effort was the Defense Trade Security
    Initiative (DTSI)EURof 2000,2 which was characterized as the first major
    post-Cold War EURadjustment to the arms export control system and an
    effort to facilitateEURdefense trade with our allies. Given the terror
    attacks of September 11, EUR2001, the U.S. government has had to
    reevaluate whether existing policies EURsupport national security and
    foreign policy goals.EUR

    In light of the events of September 11, 2001, you requested that we assess
    EURseveral aspects of the arms export control system. In November 2004, we
    EURbriefed your staff on the results of our work to date. This report
    provides EURthat briefing with updates and expanded explanations (see app.
    I). EURSpecifically, we are furnishing information on (1) changes in the
    arms EURexport control system since the September 2001 terror attacks and
    overallEURtrends in arms export licensing, (2) extent of implementation of
    orEURrevision to initiatives designed to streamline arms export licensing,
    and EUR(3) extent of coordination regarding these initiatives between
    State and EURarms export enforcement agencies, as well as enforcement
    efforts. EUR

    To determine changes in the export control system and the status
    ofEURinitiatives, we interviewed State and Department of Defense
    officials, asEUR

    1 For the purposes of this report, "arms" refers to defense articles and
    services as specified in 22 U.S.C. 2778.

    2 For additional information on DTSI, see GAO, Defense Trade: Analysis of
    Support for Recent Initiatives, GAO/NSIAD-00-191 (Washington, D.C.: Aug.
    31, 2000).

      Summary

    well as reviewed applicable laws, regulations, and other guidance. We also
    analyzed State export license application data covering October 1, 1998,
    through April 30, 2004, to identify trends in licensing and evaluate the
    implementation of initiatives. To assess the reliability of the data, we
    compared randomly selected license application files to the information in
    State's licensing database. While we identified inaccuracies in the
    database, we determined that the data are sufficiently reliable for the
    purposes of this report. To determine the extent of coordination between
    State and enforcement agencies, we interviewed officials and obtained
    supporting documents from the Department of Justice, the Department of
    Homeland Security's U.S. Customs and Border Protection and U.S.
    Immigration and Customs Enforcement, State, and Defense. We also obtained
    and analyzed data from Homeland Security and State regarding enforcement
    actions. See appendix II for a more detailed discussion of our scope and
    methodology. We conducted our work from April 2004 through January 2005 in
    accordance with generally accepted government auditing standards.

    The arms export control system has not undergone fundamental changes since
    the September 2001 terror attacks. State has not made significant changes
    to its arms export control regulations or proposed statutory changes in
    response to the terror attacks. According to a senior State official, such
    changes were not needed because the system was already designed to counter
    the threats that emerged after September 2001. While the system itself
    remains basically unchanged, new trends have emerged in the processing of
    arms export cases.3 Median processing times4 for all arms export cases
    declined between fiscal years 1999 and 2002, but began increasing in
    fiscal year 2003 with this upward trend continuing into the first 7 months
    of fiscal year 2004. A senior State official informed us that median
    processing times increased in fiscal year 2004 when State licensing
    officers resumed fulfilling the requirement to screen all parties listed
    on export license applications against the department's watchlist of
    entities

    3 Cases include applications for the permanent export of arms, the
    temporary export and import of arms, and agreements between U.S. industry
    and foreign entities to provide technical assistance or manufacturing
    capability, as well as requests for amendments to existing licenses and
    jurisdiction determinations.

    4 The median processing time is the point at which 50 percent of the cases
    took more time and 50 percent less time. We are reporting the median
    processing time because the average or mean processing time can be
    significantly affected by a small number of cases that had much longer
    review times than the majority of cases.

    of concern. While the resources State devoted to arms export controls have
    generally increased since fiscal year 2000, the department has transferred
    some of its licensing resources to other functions. For example, between
    fiscal years 2003 and 2005, five licensing officer positions were
    transferred to policy and management functions.

    State and Defense5 have continued to implement, through regulation and
    guidance, initiatives primarily designed to streamline and expedite the
    processing of arms export license applications. According to State
    officials, they have not evaluated the effects of the initiatives on the
    export control system or revised these initiatives, stating that DTSI and
    related initiatives remain relevant in the aftermath of September 2001.
    However, license applications processed under the various initiatives have
    generally not been processed within the time frames established by State
    and Defense. For example, the departments established an expedited process
    for reviewing license applications in support of Operation Iraqi Freedom
    with the goals of processing nonstaffed applications within 2 days or, if
    they are staffed for interagency review, within 4 days. However, in the
    first 7 months of fiscal year 2004, the median processing times were 7
    days for nonstaffed Operation Iraqi Freedom applications and 22 days for
    staffed applications. Further, several initiatives have not been widely
    used by exporters. For example, exporters have only submitted three
    applications for the comprehensive export authorizations to provide
    advance approval for a range of exports associated with transnational
    defense efforts.

    State has sought limited coordination with the agencies responsible for
    enforcing U.S. arms export laws-Homeland Security and Justice- regarding
    initiatives designed to streamline arms export licensing. According to
    Homeland Security and Justice officials, they have only been consulted on
    how proposed export licensing exemptions might affect enforcement efforts.
    These officials told us that export licensing exemptions increase the risk
    of diversion and complicate enforcement efforts. According to enforcement
    officials, they face a number of challenges associated with arms export
    enforcement including limited resources to conduct inspections and
    investigations and other difficulties in obtaining a criminal conviction
    for export violations.

    5 State refers, or staffs, a portion of the cases it processes to Defense
    for technical and national security reviews.

      Agency Comments EURand Our Evaluation EUR

    In written comments on a draft of this report, State criticized the report
    for not reflecting various arms export control-related initiatives that
    the department, in its words, has "successfully undertaken." State
    acknowledged increased license application processing times, but cited
    several activities that it has taken to ensure that defense exports
    further foreign policy and national security objectives. Additionally,
    State characterized statements in our report as inaccurate or misleading.
    Specifically, State contends that our report implies significant changes
    to the arms export control regulations should have been made following the
    September 2001 terror attacks and that the department has been indifferent
    to those attacks. Further, State questioned the need for coordination with
    law enforcement agencies beyond the coordination that occurred regarding
    the proposed exemptions. Finally, the department concluded that our
    evaluation of the initiative to expedite Operation Enduring Freedom
    applications included cases not identified as such by State and,
    therefore, did not receive expedited processing. State's comments are
    reprinted in appendix III, along with our evaluation of them.

    We disagree with State's characterization of our report. We identified
    numerous arms export control initiatives, including those cited by State
    as being ignored, and evaluated those initiatives for which data were
    available. As we reported, license applications processed under the
    various initiatives have generally not been processed within the time
    frames established by State, and several initiatives have not been widely
    used by exporters. We are, therefore, uncertain of the basis for State's
    assertion that it has successfully undertaken initiatives, particularly
    since State has not evaluated the initiatives' effects on the arms export
    control system and has not provided data supporting its contention. Our
    report does not imply that changes should have been made following the
    September 11, 2001, terror attacks. Rather, it clearly states what has or
    has not occurred in terms of changes to the arms export control system
    since those attacks. During the course of the audit, senior State
    officials confirmed that State has not offered legislative proposals to
    change the arms export control system or made major revisions to its
    export control regulations in response to September 2001 attacks. Further,
    our report cites a senior State official's explanation as to why State did
    not think such changes were needed. Regarding State's coordination with
    law enforcement agencies, our report accurately describes the extent of
    coordination and provides State's explanation as to why it limited
    coordination to the exemption-related initiatives. Finally, State's
    conclusion about our analyses of Operation Enduring Freedom applications
    is inaccurate. As explained in our scope and methodology, we used unique
    identifiers entered into State's licensing database to identify

    applications processed under various initiatives, including the Operation
    Enduring Freedom initiative. Thus, information in this report regarding
    the number of Operation Enduring Freedom applications and their associated
    processing times is based on our analyses of applications identified by
    State as Operation Enduring Freedom.

    In its written comments on a draft of this report, Defense stated it
    generally agreed with the report. Based on an analysis of its own
    licensing data, Defense stated that its median processing times were lower
    than those presented in our report. Defense explained that the differences
    between its median processing times and ours can be attributed, in part,
    to a lag between when State decides to refer cases and when Defense begins
    its review. Additionally, Defense noted discrepancies with how State
    identified cases related to Operations Enduring Freedom and Iraqi Freedom
    for special processing when staffed to Defense. According to Defense, in
    some instances, State staffed cases to Defense for special processing, but
    those cases were not coded as Operations Enduring Freedom or Iraqi Freedom
    in State's database. In other instances, cases were coded in State's
    database as Operations Enduring Freedom or Iraqi Freedom, but were not
    processed in an expedited manner by either State or Defense. Finally,
    Defense indicated that State did not rigorously screen cases before
    staffing them to Defense for special processing under the Operations
    Enduring Freedom and Iraqi Freedom initiatives. According to Defense,
    State identified cases for special processing even though they did not
    involve material for U.S. forces and coalition partners engaged in
    operations. Defense's comments are reprinted in appendix IV, along with
    our evaluation of them.

    Processing times presented in our report are based on our analyses of
    State's licensing data for both staffed and nonstaffed cases-as
    acknowledged by Defense. Because we did not analyze Defense's data nor
    assess its reliability, we cannot verify the accuracy of the data
    presented in Defense's comments. We already acknowledged Defense's
    explanation regarding a lag between when State decided to staff cases and
    when Defense began its review. However, regardless of the reasons for
    delays, transit times add to the overall time it takes for an exporter to
    be provided with a final determination. Additionally, information
    contained in the report regarding the number of applications related to
    Operations Enduring Freedom and Iraqi Freedom staffed to Defense and their
    associated processing times is based on our analyses of applications
    identified by State as related to the two operations. We cannot validate
    the discrepancies Defense identified regarding these applications as we
    did not review Defense's files or assess their accuracy or completeness.

    However, based on comments from both State and Defense, it appears that
    there is a lack of agreement and consistency as to which applications
    should be processed under the initiatives for Operations Enduring Freedom
    and Iraqi Freedom.

    In written comments on a draft of this report, Homeland Security expressed
    appreciation for GAO's work related to enforcement challenges. Homeland
    Security also clarified information previously provided to GAO and made
    technical comments, which we have incorporated into our report.
    Additionally, the department elaborated on U.S. Customs and Border
    Protection's participation in the arms export control system. Homeland
    Security's comments are reprinted in appendix V.

    Justice also reviewed a draft of this report and had no comments.

    As we agreed with your office, unless you publicly announce the contents
    EURof this report earlier, we plan no further distribution of it until 30
    daysEURfrom the date of this letter. We will then provide copies of this
    report to EURthe Ranking Member of the House International Relations
    Committee; the EURHouse Armed Services Committee; the House Committee on
    Government EURReform; the Senate Armed Services Committee; the Senate
    Foreign EURRelations Committee; and the Senate Governmental Affairs
    Committee. EURWe also will provide copies to the Secretaries of Commerce,
    Defense,EURHomeland Security, and State; the Attorney General; the
    Director, Office ofEURManagement and Budget; and the Assistant to the
    President for National EURSecurity Affairs. In addition, this report will
    be made available at noEURcharge on the GAO Web site at
    http://www.gao.gov. EUR

    If you or your staff have questions concerning this report, please contact
    EURme at (202) 512-4841. Others making key contributions to this report
    are EURlisted in appendix VI. EUR

    Sincerely yours, EUR

    Katherine V. SchinasiEURManaging DirectorEURAcquisition and Sourcing
    ManagementEUR

                               Arms Export Control System

                  Status of the Arms Export Control System Since 9/11

    o 	A year after the 9/11 terror attacks, the White House announced the
    initiation of a "comprehensive assessment of the effectiveness of U.S.
    defense trade policies, to identify changes necessary to ensure that those
    policies continue to support U.S. national security and foreign policy
    goals."

    o 	The assessment was to include a review of the arms export control
    system, as well as an evaluation of the Defense Trade Security Initiative
    (DTSI), which was announced in 2000 and consisted of 17 measures intended
    to streamline processing of arms export license applications and increase
    mutual security with our allies.

                                           5

                           State's DDTC Commerce's BIS       Defense's DTSA
         Number of cases                               17,122 State cases 12,585
            reviewed          54,736        12,443     Commerce cases 29,707
                                                       total casesb
    Number of personnel      65           367       163 civilian and military
    Expenditures (in      $14.04a        $66.29               $26.99
    millions)

      State, Commerce, and Defense: Workload, Staffing, and Budget for Fiscal Year
      2003

    The U.S. export control system for defense-related items and technologies
    is primarily divided between two regulatory regimes. One, managed by
    State's DDTC, controls the export of arms. The other, managed by the
    Commerce Department's Bureau of Industry and Security (BIS), controls
    exports of dual-use items that have military and commercial applications.
    DTSA, which represents Defense on export control issues, provides support
    to both regulatory regimes. This support includes assisting State and
    Commerce in determining which items will be controlled and reviewing
    export license applications submitted to either department.

    In fiscal year 2003, DDTC reviewed almost 55,000 cases. These cases
    included applications for the permanent export of arms, the temporary
    export and import of arms, and agreements between U.S. industry and
    foreign entities to provide technical assistance or manufacturing
    capability, as well as requests for amendments to existing licenses and
    jurisdiction determinations.6 By comparison, BIS reported7 that it
    reviewed almost 12,500 dual-use applications in fiscal year 2003-less than
    a quarter of the cases reviewed by DDTC. Most of the cases reviewed by
    DTSA were referred by DDTC.

    DDTC, which is overseen by the Deputy Assistant Secretary of State for
    Defense Trade, was authorized 71 staff positions in fiscal year 2003 to
    carry out its arms export licensing, compliance, and other functions. Of
    these positions, 65 were filled. Under the direction of the Under
    Secretary of Commerce for Industry and Security, BIS had almost 300 more
    employees carrying out its principal activities, including dual-use
    licensing and enforcement efforts.8 DTSA, which is overseen by the Deputy
    Under Secretary of Defense for Technology Security Policy and
    Counter~proliferation, had a staff of 163, most of whom supported DDTC and
    BIS's efforts. Thirty-one DTSA personnel monitored space launch and space
    systems and were not involved in the review of license applications.

    6 Exporters can request a jurisdiction determination when they are
    uncertain which department controls exports of an item or want an item
    transferred from State to Commerce jurisdiction. For additional
    information on the commodity jurisdiction process, see GAO, Export
    Controls: Processes for Determining Proper Control of Defense-Related
    Items Need Improvement, GAO-02-996 (Washington, D.C.: Sep. 20, 2002).

    7 Department of Commerce, Bureau of Industry and Security, Annual Report
    Fiscal Year 2003 (Washington, D.C.: 2004).

    8 BIS's other principal activities include monitoring the viability of the
    defense industrial base, ensuring industry compliance with arms control
    treaties, enforcing antiboycott laws, and assisting other countries in
    developing effective export control systems.

                               Arms Export Control System

                             Table 2: DDTC Staffing Levels

                                                         Fiscal year
                                              2000  2001  2002  2003  2004  2005
    Total FTEs authorized                   65    71    71    71    71    71
              Total positions filled           40    47    59    65    65    66
    Licensing officer FTEs authorized       33    36    35    37    34    32
        Licensing officer positions filled     16    21    30    35    31    31
        Compliance officer FTEs authorized     14    16    16    16    17    16
        Compliance officer positions filled    8     10    12    13    15    14

                                Source: State officials.

                                           9

      DDTC Staffing Levels

    DDTC's 71 authorized full-time equivalents (FTE)9 are divided between
    licensing officers, compliance officers, and other staff, including
    policy, management, and support staff. DDTC's licensing officers are
    responsible for reviewing license applications and making determinations
    as to whether those applications should be approved. The number of
    authorized licensing officers increased from fiscal year 2000 through
    2003, but then decreased in fiscal years 2004 and 2005. Similarly, the
    number of licensing officers positions filled at the start of each fiscal
    year increased through fiscal year 2003, but has since decreased.
    Compliance officers carry out a range of functions to help ensure exporter
    compliance, including addressing disclosures of possible violations,
    assisting Justice in prosecuting criminal violations, and managing DDTC's
    end-use monitoring program. The number of authorized compliance officers
    remained fairly consistent over the 6-year period, with the number of
    positions filled increasing through fiscal year 2004 and then decreasing
    at the start of fiscal year 2005.

    Over the six fiscal years, DDTC has shifted some authorized FTEs to policy
    and management. For example, between fiscal years 2003 and 2005, the
    number of licensing officers authorized decreased by five positions, while
    the number of authorized FTEs for DDTC management and policy functions
    increased by five.

    DDTC personnel are supplemented by detailees from other agencies, most
    notably Defense. To assist in expediting license reviews, the Foreign
    Relations Authorization Act for Fiscal Year 2003 called for Defense to
    ensure that 10 military officers are continuously detailed to DDTC.
    However, DDTC officials informed us that only four military officers are
    currently detailed to DDTC. Additionally, contractor personnel provide
    support to all of DDTC's functions. For fiscal year 2003, DDTC officials
    informed us that they spent $4.3 million on contractor support.

    9 FTE is a measure of federal civilian employment. One FTE is equal to 1
    work-year of 2,080 hours.

                               Arms Export Control System

    Table 3: Number of Cases Reviewed by DDTC and Median Processing Times

                                               Fiscal year
                          1999    2000    2001    2002    2003    2004 (through
                                                                      4/30)
          All     Cases  43,926  45,994  50,078  50,403  54,736       33,211
                  Median 26 days 25 days 15 days 13 days 14 days          17 days
    Nonstaffed Cases  29,054  30,470  34,525  33,948  36,128       22,288
                  Median 14 days 15 days 10 days 8 days  8 days           11 days
        Staffed   Cases  14,872  15,524  15,553  16,455  18,608       10,923
                  Median 77 days 69 days 58 days 52 days 49 days          51 days
          Defense Cases  13,240  14,475  14,543  15,336  17,122       9,900
                  Median 39 days 29 days 28 days 29 days 29 days     27 days

                          Source: GAO analysis of State data.

                                           10

      Number of Cases Reviewed by DDTC and Median Processing Times

    The number of arms export cases reviewed by DDTC increased steadily from
    43,926 cases in fiscal year 1999 to 54,736 cases in fiscal year 2003,
    which is almost a 25 percent increase. For most of that time period, the
    median processing times10 declined-from 26 days in fiscal year 1999 to 13
    days in fiscal year 2002. However, in fiscal year 2003, the median
    processing time increased to 14 days and this upward trend continued
    through the first 7 months of fiscal year 2004.

    DDTC processed the majority of cases without referring-or staffing- them
    to other State offices or DTSA for additional review. DDTC has staffed
    about one-third of its cases for additional review. Defense conducts
    technical reviews and identifies national security concerns associated
    with cases, while other State offices review cases for foreign policy,
    human rights, and non-proliferation concerns.

    For staffed cases, the majority were referred to Defense's DTSA for
    review, some of which were referred to DTSA more than once for additional
    consideration. The cases referred to Defense represent a subset of staffed
    cases. Thus, of the 18,608 cases that were staffed in fiscal year 2003,
    17,122 were referred to Defense. The number of cases staffed to DTSA
    increased 29 percent from fiscal year 1999 to fiscal year 2003. DTSA
    officials informed us that despite the increase in workload, their
    resources for reviewing cases have remained constant. The Defense median
    processing time reflects the number of days between the date State
    referred the case to DTSA and the date DTSA provided DDTC with its input,
    which for fiscal year 2003 was 29 days. DTSA officials, however, noted
    that there can be a delay between the time State decides to refer a case
    and the time DTSA physically receives the case and supporting
    documentation for review.

    10 The median processing time is the point at which 50 percent of the
    cases took more time and 50 percent less time. We are reporting the median
    processing time because the average or mean processing time can be
    significantly affected by a small number of cases that had much longer
    review times than the majority of cases.

      State's Explanation for Increased Processing Times

    State's watchlist identifies entities whose appearance on an application
    should prompt closer scrutiny and, in some cases, denial of the
    application. Under the AECA,11 State is required to identify and deny
    licenses to persons convicted of violating various laws, including certain
    laws related to export controls, foreign corrupt practices, espionage, and
    improper communication of classified information, as well as persons who
    are ineligible to receive import or export licenses from any U.S.
    agencies. State may also deny licenses to persons who have been indicted
    for violating these same laws or are ineligible to contract with any U.S.
    agencies. In addition to identifying individuals who meet those criteria,
    State's watchlist includes individuals and companies under U.S. economic
    sanctions, identified by intelligence sources as suspected or known
    diverters or proliferators, or identified from negative pre-licensing or
    post~shipment checks.

    DDTC officials informed us that while they instituted measures to ensure
    that all parties on applications are screened against the watchlist, they
    have not retroactively reviewed all applications submitted between June
    2002 and December 2003, to determine if any of the parties to those
    applications appear on the watchlist. As a result, they do not know
    whether any applications involving parties on the watchlist were approved.
    Further, DDTC officials do not know how many applications were not
    screened against the watchlist.

    The manual entry of parties into the licensing database does not fully
    account for the increased processing times. The median processing time for
    all cases began increasing in fiscal year 2003, which predates when DDTC
    took action to ensure that all parties are screened against the watchlist.

    11 22 U.S.C. 2778.

      Final Actions for License Applications

    In its final disposition of an export license application,12 DDTC
    essentially has four options. It can approve the application, approve the
    application with provisos-conditions that limit the use of the exported
    items and technologies, deny the application, or return it without action.
    DDTC returns applications without action when it determines that the
    applications either do not meet regulatory requirements or do not provide
    adequate documentation and details.

    Both prior to and after the events of September 2001, DDTC approved more
    than half of the license applications without placing conditions on the
    use of the items and technologies. However, the percentage of applications
    approved with provisos increased after September 2001, which coincided
    with an increase in the number of nonstaffed applications approved with
    provisos by DDTC.

    The percentage of applications returned without action has remained
    constant since September 2001. Likewise, the percentage of applications
    denied remained at 1 percent. Other final actions, such as an application
    being lost or withdrawn by the exporter, represented less than 1 percent.

    12 License applications include applications for the permanent export of
    arms, the temporary export and import of arms, agreements between U.S.
    industry and foreign entities to provide technical assistance or
    manufacturing capability, and amendments to existing licenses.

                                Arms Export Initiatives

      State's Explanation for Operation Enduring Freedom and Operation Iraqi
      Freedom Processing Times

    o 	According to DDTC officials, applications for Operations Enduring
    Freedom and Iraqi Freedom are their highest priority.

    o 	Officials explained that processing times exceeded the goals, in part,
    because

    o  the applications were frequently incomplete and

    o 	licensing officers kept the cases open so that applicants could submit
    required information, instead of returning incomplete applications without
    action.

                                           15

                                                         Fiscal year
                                              2002     2003   2004 (through 4/30)
                              Applications     94      182            64
    Nonstaffed 2-day goal     Median      2 days   6 days        8 days
                              Applications     70      116            30
         Staffed 4-day goal      Median     12 days  14 days        11 days
              Defense         Applications     76      116            20
                                 Median      5 days   7 days        6 days

                                                                Fiscal year
                                                            2003    2004 (through
                                                                        4/30)
                                         Applications        14          66
    Staffed 4-day goal Nonstaffed  Applications Median 13 6 days   25 7 days
             2-day goal Defense       Median Applications 7 days 8   22 days 18
                                            Median        1.5 days     6 days

      Electronic Licensing: D-Trade

    DDTC's D-Trade is a Web-based license application submission and review
    system, which allows companies to electronically submit export
    authorization requests and supporting documentation for review. The system
    officially went on-line in January 2004. DDTC officials expected that
    D-Trade would be more efficient than the existing system that permitted
    electronic submissions of requests but required hardcopy submissions of
    supporting documentation, which could be voluminous. However, from January
    through April 2004, few applications were submitted via D-Trade. Based on
    an analysis of State's data, none of the applications processed via
    D-Trade during this time frame was staffed outside of DDTC for review.

    DDTC is now reporting increased use of the D-Trade system as well as
    reduced median processing times. According to the DDTC website, D-Trade
    processed 154 nonstaffed applications and 146 staffed applications in
    November 2004. Median processing times for applications submitted via
    D-Trade in November 2004 were 9 days for nonstaffed applications and 18
    days for staffed applications. DDTC officials said that processing times
    should improve as licensing officers and exporters become more familiar
    with the D-Trade system and enhancements make the system more
    user~friendly.

    When D-Trade came on-line in January 2004, it accepted applications for
    both permanent exports-the most common type of application DDTC
    receives-and technical assistance agreements, which allow for the export
    of controlled technical data. However, citing industry complaints
    regarding the electronic format for submitting information, DDTC suspended
    the acceptance of technical assistance agreements via D-Trade in
    mid-August 2004. DDTC officials told us that the acceptance of technical
    assistance agreements via D-Trade would be reinstated once the electronic
    form for submitting agreements has been redesigned, which is expected to
    occur by April 2005.

                                Arms Export Initiatives

                           Electronic Licensing: Capabilities

    o 	P.L. 107-228 section 1403 directed State to establish an electronic
    system for filing and reviewing export license applications and to ensure
    the system is capable of exchanging data with export control-related
    information systems maintained by Commerce, Defense, Energy, and the
    Central Intelligence Agency (CIA).

    o 	According to State information technology officials, D-Trade is
    technically capable of exchanging data with other systems as required by
    P.L. 107-228.

    o 	D-Trade is currently exchanging data on a daily basis with Defense's
    system.

    o 	State is waiting for final administrative approval to begin exchanging
    data with Commerce's system.

    o 	No discussions have occurred with Energy or CIA officials regarding
    data exchanges with their systems.

                                           26

                    Arms Export Enforcement Coordination and Efforts

                          Coordination on Initiatives (cont.)

    o 	Aircraft spare parts, even with the current export licensing
    requirements, are at risk of diversion to countries that seek to
    circumvent U.S. embargoes and increase the operational readiness of their
    military aircraft.

    o 	Since 9/11, Homeland Security has conducted multiple criminal
    investigations involving illegal exports of aircraft components. Examples
    include alleged exports of

    o  F-4 jet components to Israel with an unknown final destination and

    o 	components for F-4 jets, F-5 jets, F-14 jets, and C-130 aircraft to a
    British company procuring the equipment for the Iranian military.

    o 	U.S. Attorneys have secured convictions involving illegal exports of
    aircraft components. Examples include guilty pleas for

    o  exports of helicopter components to Iran and

    o  exports of F-4 and F-5 jet components to China.

                                           35

                    Arms Export Enforcement Coordination and Efforts

                                   AES: State Funding

    o 	Under P.L. 107-228 section 1404(a), $250,000 was "authorized to be
    available" for

    o  providing State with full access to AES,

    o  ensuring that the AES is modified to meet the needs of State, and

    o  providing operational support to AES.

    o 	Per DDTC officials, DDTC did not spend funds on AES improvements in
    fiscal year 2003. The Census official who oversees AES confirmed that
    State did not spend funds for AES operations and improvements.

                                           39

    Arms Export Enforcement Coordination and Efforts

      Customs and Border Protection: Initiatives and Resources

    o 	No new arms export enforcement initiatives introduced by CBP in
    response to the events of 9/11.

    o 	CBP has limited resources and funding for enforcement activities.
    According to Homeland Security officials, relatively more resources have
    been devoted to ensure that dangerous goods and individuals do not enter
    the country through the 317 official ports and border crossings.

    o  Prior to 9/11, 400 officers were dedicated to outbound enforcement.

    o 	Currently, 256 officers are dedicated to outbound enforcement, but can
    be pulled to fulfill inbound inspection requirements as needed.

    o  Cancellation of courses on outbound inspections in fiscal year 2004

    o 	Improvements in officers' ability in recent years to conduct outbound
    inspections at ports and borders due to

    o  AES automation enhancements and

    o 	regulatory requirement for information on a State-controlled shipment
    to be submitted via AES prior to arriving at the port or border, which
    improves targeting.

    41

                                               Fiscal year
                              2001          2002          2003          2004
           Number of          661            663           665           923
           seizures
    Total value of    $83.72 million $65.85        $105.79       $136.00
    seizures                         million       million       million

      Arms Export Investigations, Arrests, Indictments, and Convictions

    The number of investigations opened and individuals arrested by ICE agents
    for suspected arms export violations has widely fluctuated over the past 5
    fiscal years. Similarly the number of individuals indicted and convicted
    for arms export violations has also fluctuated from year to year. When ICE
    opens an investigation in response to an alleged arms export control
    violation, it may take several years for agents to build a case and
    eventually make an arrest-if one is made at all. Once an arrest is made,
    several years may pass before Justice brings the case to trial and obtains
    a conviction. For example, an investigation opened in 1999 may not result
    in an arrest until 2002. Similarly, an arrest in 2000 may not result in a
    conviction until 2003.

    According to ICE officials, the drop in arms export-related arrests and
    indictments in fiscal year 2002 may be the result of a more intensive
    focus on ensuring that dangerous goods and individuals did not enter this
    country in the immediate aftermath of the September 2001 attacks. However,
    with the passage of time, ICE became increasingly concerned with the
    defense-related items leaving this country and the threat they could pose.
    The officials explained that this prompted ICE to focus its attention on
    illegal arms exports and increase its agents' knowledge and skills as they
    relate to arms export investigations, which has resulted in increased
    arrests, indictments, and convictions. The officials also attributed the
    increases to leads obtained through its industry outreach program-Project
    Shield America-and the intelligence community.

    In addition to investigations by ICE, the Attorney General clarified the
    Federal Bureau of Investigation's (FBI) jurisdiction in November 2004 to
    specify that it has the lead in investigating potential AECA violations
    relating to foreign counterintelligence matters.13 While the table does
    not include FBI investigations, Justice officials informed us that the FBI
    has initiated a number of AECA-related investigations. ICE officials
    informed us that there has been some initial uncertainty regarding which
    agency will have the lead in investigating potential AECA violations, but
    Homeland Security and Justice officials have been working together to
    resolve jurisdictional issues.

    13 See 69 FR 65542 (Nov. 15, 2004).

                                                     Fiscal year
                                      1999    2000    2001    2002   2003   2004
            Blue Lantern checks       360+     218     410    428    413    530
        Unfavorable determinations     34      35      71      50     76     93

      State's Administrative Enforcement: Blue Lantern

    State's end-use monitoring program, known as Blue Lantern, consists of
    pre-license and post-shipment verification checks of the parties to and
    the end-use of defense exports. From fiscal year 1999 through 2004, the
    number of end-use monitoring checks performed under the Blue Lantern
    program remained relatively constant, averaging about 400 checks per year.
    One exception to this average occurred in fiscal year 2000 when State
    targeted higher value exports in its Blue Lantern checks, which resulted
    in only 218 checks for the year.

    Blue Lantern checks may result in unfavorable determinations by State
    based on evidence uncovered during the checks, such as illegitimate
    end~users or the possible diversion of defense exports. Unfavorable
    determinations result in the denial of a license or are turned over for
    investigation by law enforcement and compliance entities. According to
    State's fiscal year 2003 end-use monitoring report, 49 percent of the 76
    unfavorable determinations involved firearms and ammunition. Also,
    unfavorable determinations involving aircraft spare parts increased from
    18 percent in fiscal year 2002 to 24 percent in fiscal year 2003.

                                                   Fiscal year
                                   1999    2000    2001    2002    2003    2004
         Voluntary disclosures     216      255     316     256     339     394

      State's Administrative Enforcement: Voluntary Disclosures

    Voluntary disclosures are disclosures to DDTC by companies or individuals
    that believe they may have violated the AECA, arms export control
    regulations, or terms of a license. Upon reviewing the circumstances of
    the disclosure, DDTC may take administrative action against the
    responsible party or refer the matter to Justice for appropriate action.

    According to DDTC officials, the increase in disclosures from fiscal year
    1999 through 2004 was due to increased industry education and outreach
    efforts on the part of DDTC to encourage companies to self-report export
    control violations. These officials explained that the submission of
    voluntary disclosures is an indication of a robust compliance effort on
    the part of industry. Further, voluntary disclosures may be considered a
    mitigating factor in determining what administrative penalties, if any,
    should be imposed upon a company.

      State's Administrative Enforcement: Penalties Imposed in Administrative Cases

    State can pursue administrative penalties against companies for violations
    of the AECA. These administrative penalties can consist of debarment from
    participation in defense exports and/or civil penalties in the form of
    monetary damages. In some cases, State has suspended a portion of the
    civil penalty, provided the funds are invested in a company's export
    compliance program. For example, in calendar year 2003, there were five
    settlements for AECA violations resulting in $43.48 million in
    administrative penalties. However, $16.5 million of that amount was
    suspended on the condition that companies invest the money in their
    compliance efforts.

    According to DDTC compliance officials, when a portion of an
    administrative penalty is suspended, the company is required to provide
    DDTC with an accounting of how those funds were spent. DDTC officials then
    review the information provided to ensure that funds were spent in
    accordance with the settlement agreement. However, DDTC does not conduct a
    formal financial audit to verify the information provided. These officials
    also informed us that Defense auditors previously found that some
    companies have attempted to bill Defense for the required improvements to
    their compliance programs. After learning of this, DDTC compliance
    officials met with company officials to address the issue. According to
    DDTC compliance officials, all but one of the companies have agreed that
    the U.S. government should not pay for the compliance penalties imposed as
    part of the settlement agreements and to change their billing practices.
    Additionally, DDTC compliance officials have included standard language in
    settlement documents to explicitly preclude such charges in the future.

    Five of the 13 settlements imposed in 2000 through 2004 involved
    satellite~related exports. However, the majority of administrative
    penalties imposed in those years were associated with the
    satellite-related settlements. For example, all $26.1 million of the
    administrative penalties in 2002 was for satellite-related settlements.

                         Appendix II: Scope and Methodology EUR

    To identify changes to the arms export system since September 11, 2001, we
    interviewed officials at the State Department's Directorate of Defense
    Trade Controls (DDTC) and the Defense Department's Defense Technology
    Security Administration (DTSA). We also reviewed the Arms Export Control
    Act;14 the International Traffic in Arms Regulations;15 the Foreign
    Relations Authorization Act, Fiscal Year 2003;16 and other relevant agency
    guidance, policies, and documents including those related to each agency's
    budget and staffing levels. To assess overall trends in arms export
    licensing, we analyzed DDTC's export license application data covering
    October 1, 1998 through April 30, 2004. The data were extracted by DDTC
    officials based on the final action date for each case. We analyzed the
    data to determine trends in processing times and license application final
    actions. The processing time represents the number of calendar days
    between the receipt of a case and the final action date entered into
    State's database. Defense's processing time represents the number of
    calendar days between the date State decided to refer the case to DTSA and
    the date DTSA provided its recommendation for final action. Median
    processing times rather than average (mean) processing times are reported
    because average values can be significantly affected by a small number of
    cases that had much longer review times than the majority of cases. Our
    analysis did not include licenses that were approved and then subsequently
    suspended or revoked during this period.

    To evaluate the implementation of initiatives designed to streamline and
    expedite the arms export licensing process, we reviewed State and
    Defense-issued guidance and consulted with State and Defense officials to
    identify the initiatives and their goals. We then analyzed State export
    license application data for October 1, 1998 through April 30, 2004 to
    determine the number of license applications received for each initiative
    and associated processing times, which we then compared to the processing
    time goals established by State and Defense. State assigned unique
    identifiers to each initiative, which we used to identify applications
    processed under each initiative.

    State has not assessed the reliability of its license application database
    nor does it have a data dictionary explaining its data, which prompted us
    to

    14 22 U.S.C. 2751 et. seq. 15 22 CFR pts. 120-130. 16 P.L. 107-228.

    assess the reliability of the database for the purposes of this report. We
    randomly selected 98 license applications from our data set that were
    stored on-site at State and then compared the original hardcopy
    application files to the corresponding information in the database. The
    data in the application database matched the information in the original
    hardcopy files for 89 percent of the fields we checked. Therefore, we are
    95 percent certain that the accuracy rate of the fields we checked is
    between 87 percent and 90 percent, which we have determined to be
    sufficiently reliable for the purposes of this report. Our reliability
    assessment was designed to measure whether data used in our analyses
    matched information in State's files and did not include every field in
    the database. Our results may not be generalizable to the entire database
    or to all uses of the data within the database. Additionally, we discussed
    key elements of the database with State officials to ensure that we
    accurately interpreted the data. Because we had partial data for fiscal
    year 2004, we cannot provide median processing times for the entire fiscal
    year. However, based on our review of monthly median processing times
    posted on DDTC's website for the last 5 months of fiscal year 2004, the
    upward trend in median processing times continued through the remainder of
    the fiscal year. While the data presented on DDTC's website for the last 5
    months of fiscal year 2004 were not included in our data reliability
    assessment, the monthly median processing times on DDTC's website for the
    first 7 months of fiscal year 2004 correspond with our analyses of that
    time period.

    To determine the extent of coordination between State and enforcement
    agencies regarding the implementation of initiatives, we interviewed
    officials and obtained supporting documents from the Justice Department
    and the Homeland Security Department's U.S. Customs and Border Protection
    (CBP) and U.S. Immigration and Customs Enforcement (ICE). We also
    discussed coordination efforts with Defense and State officials. To
    identify enforcement challenges, we interviewed CBP, ICE, and Justice
    officials. We also met with CBP officials responsible for export
    enforcement at two ports in Maryland and Virginia to obtain their
    perspectives. Additionally, we obtained and analyzed data from Homeland
    Security and State regarding enforcement actions such as the number of
    arms export control investigations opened and administrative penalties.

    Appendix III: Comments from the Department of State

    Note: GAO's comments supplementing those in the report's text appear at
    the end of this appendix.

                                     See comment 1.

                                     See comment 2.

                                     See comment 3.

                                     See comment 4.

    See comment 5.

    See comment 6.

    See comment 7. Now on pp. 46-47.

    Now on p. 26. See comment 8.

    See comment 9.

    Now on p. 15. See comment 10.

    Now on p. 22.

    See comment 11.

    Now on p. 27. See comment 12.

      GAO Comments

    1. DEGOur report identifies various arms export control initiatives
    implemented by State, as well as discusses State's compliance efforts.
    Initiatives identified include DTSI, expedited processing for Operations
    Enduring Freedom and Iraqi Freedom applications, electronic licensing, and
    organizational realignment. We evaluated those initiatives for which data
    were available. As we reported, license applications processed under
    various initiatives have generally not been processed within the time
    frames established by State and several initiatives have not been widely
    used by exporters. Senior State officials also informed us that they have
    not evaluated the initiatives' effects on the arms export control system.
    We are, therefore, uncertain what the basis is for State's conclusion that
    it has successfully undertaken these initiatives, particularly since State
    did not provide any additional data to support its contention.

    2. DEGIt is not clear from existing data why carrying out activities
    integral to the arms export license process would contribute to increased
    processing times, particularly since State has received increased
    resources over the years to carry out these activities. State suggested
    that ensuring a thorough license review has contributed to increased
    processing times. However, as noted in the report, processing times began
    increasing during the period State was not screening all parties against
    the watchlist as required by law. State also suggested that more referrals
    of increasingly complex cases have contributed to increased processing
    times. Yet our analyses of State's data clearly show that the relative
    number of cases referred, or staffed, remained fairly constant from fiscal
    year 1999 through the first 7 months of fiscal year 2004. Further, this
    would not explain why processing times have increased for nonstaffed
    cases. Also during the course of our audit, State officials only provided
    anecdotal support for their assertion that cases have become more complex.

    3. DEGOur report does not imply whether changes to the arms export control
    system were needed following the September 2001 terror attacks. Rather, it
    clearly states what has or has not occurred in terms of changes to the
    system after the attacks. During the audit, senior State officials
    acknowledged that State has not proposed statutory or regulatory changes
    in response to the September 2001 attacks. Our report already includes a
    senior State official's explanation of why such changes were not needed.
    We also note that beyond describing what the arms export control system is
    intended to do, State does not provide support for its comments regarding
    the effectiveness of its arms export controls in the post-9/11
    environment.

    4. DEGOur report already notes that while State reviewed the status of
    implementation, it did not evaluate the effects of various initiatives on
    the arms export control system. Further, GAO has previously reported17
    that DTSI was launched in 2000 without a demonstration of how the measures
    would achieve identified goals or an analysis of existing problems. At
    that time, there was little assurance that any underlying problems with
    the U.S. export control system had been sufficiently analyzed to determine
    what the causes of the problems were and whether the DTSI measures would
    remedy any existing problems. Given this continued lack of evaluation, we
    are uncertain as to the basis for State's conclusion that the initiatives
    do not need to be changed in the aftermath of the September 2001 terror
    attacks.

    Our report refers to the White House-directed comprehensive assessment of
    the effectiveness of U.S. defense trade policies, which is commonly known
    as NSPD-19. However, because the NSPD-19 assessment was ongoing during the
    time of our audit and its results have not been released, we were unable
    to evaluate it. Further, State did not brief us on the NSPD-19 assessment
    or any resulting proposals.

    5. DEGDuring the course of our audit, State, Homeland Security, and
    Justice officials characterized coordination with law enforcement
    regarding the implementation of initiatives as limited. The only
    exceptions identified were the proposed licensing exemptions. Our report
    already cites State's explanation, which is consistent with that offered
    in State's comments, as to why coordination was limited to the proposed
    exceptions. Therefore, our report does not need to be revised.

    6. DEGAs explained in our report, Homeland Security and Justice officials
    generally oppose licensing exemptions because exemptions increase the risk
    of diversion and complicate enforcement efforts. Our report also
    acknowledges that the two departments have officially stated that they do
    not object to the agreements reached with the governments of Australia and
    the United Kingdom to allow for license-free exports to those countries.
    However, in the letters cited in State's comments, both departments noted
    that there are risks associated with the proposed exemptions.

    17 See GAO, Defense Trade: Analysis of Support for Recent Initiatives,
    GAO/NSAID-00-191. (Washington, D.C.: Aug. 31, 2000).

    7. DEGState's comments do not address the strong concerns raised in CBP's
    letter regarding the proposed aircraft-related exemptions. As we noted in
    our report, CBP warned it would not be able to enforce the proper use of
    the exemptions. State's comments also do not address Homeland Security and
    Justice officials' general comments regarding the risks and enforcement
    difficulties associated with licensing exemptions.

    8. DEGDuring the course of our audit, State export licensing officials
    informed us that the quality of applications submitted under this
    initiative remained constant. Thus, the quality of applications does not
    explain the increased processing times from fiscal year 2003 through the
    first part of fiscal year 2004 for Operation Iraqi Freedom applications.

    9. DEGState's comment that the number of authorized licensing officers has
    consistently increased contradicts information State provided during the
    course of our audit. According to the information provided by State, the
    number of authorized licensing officer positions decreased from 37 in
    fiscal year 2003 to 32 in fiscal year 2005. Because State did not provide
    revised figures in its comments, we have no basis to change the
    information contained in the report. Further, in analyzing the information
    provided by State, authorized positions clearly shifted from licensing
    officers to other positions within DDTC's management and policy functions.
    While this may have been part of DDTC's realignment efforts, it
    nevertheless has resulted in fewer authorized licensing officer positions
    and coincides with a decrease in the number of licensing officer positions
    filled.

    10. State officials repeatedly informed us that they do not track average
    weekly caseloads and did not know whether they were meeting the required
    weekly average of 40 cases for each licensing officer. Further, State's
    comments provide a theoretical average that appears based on the number of
    cases closed by licensing officers during a given year. This is not an
    accurate reflection of licensing officer caseloads because it does not
    include open cases being processed. For example, State officials informed
    us that on June 21, 2004, there were 5,343 open cases. Given that State
    had 31 licensing officers in fiscal year 2004, that averages to 172 cases
    per licensing officer on that date.

    11. Our report does not need to be revised because it accurately conveys
    information provided to us during the course of our audit. We are
    uncertain as to the basis for State's comment that the majority of cases
    were screened against the watchlist given that State acknowledged it

    does not know how many applications had parties that were not fully
    screened against the watchlist as required by law. Also, given that State
    has not completed its retroactive review of applications submitted between
    June 2002 and December 2003, it is not clear how State concluded that the
    vast majority of the parties to those applications were screened by other
    means. Finally, in light of the risks posed by not screening all parties
    against the watchlist, it is not clear why available resources have not
    been dedicated to completing the retroactive review.

    12. State's comment that our analyses of Operation Enduring Freedom
    applications included cases not identified by State is inaccurate. As
    explained in our scope and methodology, we used the unique identifiers
    entered into State's licensing database to identify applications processed
    under various initiatives, including the Operation Enduring Freedom
    initiative. Thus, the information in the report regarding the number of
    Operation Enduring Freedom applications and their associated processing
    times is based on our analyses of applications coded by State. As part of
    our data reliability analysis, we assessed whether information contained
    in State's database matched State's hardcopy files and found it to be
    reliable for the purposes of our report. It is not clear from State's
    comments how or why it has since determined only certain cases coded in
    its database are "truly" related to Operation Enduring Freedom. We cannot
    verify State's assertion about possibly lower Operation Enduring Freedom
    processing times because State did not provide us with information
    regarding which cases it now considers "truly" related to Operation
    Enduring Freedom. We also note that State did not conduct its own analysis
    despite having all available data. Further, State's comments, along with
    those provided by Defense, indicate inconsistencies in the identification
    of cases for special processing. It appears that State coded cases in the
    database as related to Operation Enduring Freedom, but, for reasons that
    are not clear in State's comments, did not expedite the processing of
    those cases.

    Appendix IV: Comments from the Department of Defense

    Note: GAO's comments supplementing those in the report's text appear at
    the end of this appendix.

                                     Now on p. 13.

                                     See comment 1.

                                     See comment 2.

    Now on p. 24. See comment 3.

    Now on p. 25.

    See comment 4.

                                     Now on p. 27.

                                     Now on p. 29.

    Now on p. 37. See comment 5.

    Now on p. 42. See comment 6.

    Now on p. 43. See comment 7.

    Now on p. 61.

                                     See comment 8.

                                    GAO CommentsEUR

    1. DEGWe have revised our report to reflect that a portion of DTSA's
    resources were not involved in the review of license applications.

    2. DEGAs explained in our scope and methodology, and as acknowledged by
    Defense, median processing times in our report are based on our analyses
    of State's licensing data. Because we did not analyze Defense's data or
    assess its reliability, we cannot verify the accuracy of the data provided
    in Defense's comments. However, our report acknowledges Defense's
    observation regarding the lag between when State decides to refer cases
    and when Defense begins its review. Regardless of the reasons for delays,
    transit time contributes to the overall time it takes the government to
    process a case and provide its final determination to the exporter.

    3. DEGWe have clarified the report language regarding the overall increase
    in the number of cases approved with provisos following the events of
    September 2001.

    4. DEGAs discussed in our scope and methodology and Defense's comments,
    the information provided in our report regarding the number of Operation
    Enduring Freedom and Operation Iraqi Freedom cases and their associated
    processing times is based on our analyses of applications identified in
    State's database as related to the two operations. As part of our data
    reliability analysis, we assessed whether information contained in State's
    database matched State's hardcopy files and found it to be reliable for
    the purposes of our report. While Defense identified discrepancies between
    its files and the corresponding records in State's database, we cannot
    validate these discrepancies or their frequency as we did not review or
    assess the accuracy or completeness of Defense's files. Nevertheless,
    Defense's comments, along with those provided by State, suggest a lack of
    agreement and inconsistencies in the process for identifying cases for
    expedited review.

    5. DEGOur report reflects information provided by State during the course
    of our audit and our analysis of State's licensing database. We have
    revised the report to indicate the basis for our statement that
    applications processed via D-Trade during the 4-month period were not
    staffed outside DDTC for review.

    6. DEGThe use of the term "self-imposed conditions" is a reflection of
    State's characterization of the proviso reform initiative and State's
    concerns with that initiative's possible effects on enforcement efforts.
    Defense's comments, along with information provided to us by State,
    indicate

    that there is a fundamental disagreement between the two departments
    regarding the appropriate use of provisos and the ability to enforce
    limitations contained in license applications.

    7. We have revised our report based on Defense's comment.

    8. DEGWe did not evaluate the factors that prompted companies to submit
    specific disclosures. Therefore, we cannot comment on the validity of
    Defense's comment and whether it is applicable to the majority of
    disclosures, which were not reviewed by Defense. However, according to a
    State compliance official, the number of disclosures presented in our
    report only includes disclosures of potential violations voluntarily
    submitted by companies and not disclosures submitted at the direction of
    the U.S. government.

                                     Now on p. 14.

                                     Now on p. 57.

                                     Now on p. 59.

                            Page 86 GAO-05-234 Defense Trade

                                     Now on p. 61.

                                     Now on p. 63.

                            Page 87 GAO-05-234 Defense Trade

    Appendix VI: GAO Contacts and Staff Acknowledgments

    GAO Contacts DEGKatherine V. Schinasi (202) 512-4841 Anne-Marie Lasowski
    (202) 512-4146

    Acknowledgments DEGIn addition to those named above, Johana R. Ayers; E.
    Brandon Booth; Richard K. Geiger; Arthur James, Jr.; Masha
    Pastuhov-Pastein; and Lisa Simon made key contributions to this report.

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