    Export Controls: Improvements to Commerce's Dual-Use System
    Needed to Ensure Protection of U.S. Interests in the Post-9/11
    Environment (26-JUN-06, GAO-06-638).

    In regulating exports of dual-use items, which have both
    commercial and military applications, the Department of
    Commerce's Bureau of Industry and Security (BIS) seeks to allow
    U.S. companies to compete globally while minimizing the risk of
    items falling into the wrong hands. In so doing, BIS faces the
    challenge of weighing U.S. national security and economic
    interests, which at times can be divergent or even competing. In
    light of the September 2001 terror attacks, GAO was asked to
    examine BIS's dual-use export control system. In response, GAO is
    reporting on BIS's (1) evaluations of and changes to the system,
    (2) screening of export license applications against its
    watchlist, and (3) actions to correct weaknesses previously
    identified by GAO.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-638
        ACCNO:   A55943
      TITLE:     Export Controls: Improvements to Commerce's Dual-Use
    System Needed to Ensure Protection of U.S. Interests in the
    Post-9/11 Environment
         DATE:   06/26/2006
      SUBJECT:   Dual-use technologies
    	     Export regulation
    	     Licenses
    	     Systems evaluation
    	     Technology transfer

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    GAO-06-638

         * Results in Brief
         * Background
         * BIS Has Not Systematically Evaluated the Dual-Use Export Con
              * BIS's Assessment of the Dual-Use Export Control System Has B
         * Omissions and Weaknesses Undermine BIS's Screening of Applic
              * BIS's Watchlist Is Incomplete
              * BIS's Process Does Not Ensure That All Parties Are Screened
         * BIS Has Not Corrected Some Weaknesses Identified In Prior GA
         * Conclusions
         * Recommendations for Executive Action
         * Agency Comments and Our Evaluation
         * Scope and Methodology
         * GAO Comments
         * GAO Contacts
         * Staff Acknowledgments
         * GAO's Mission
         * Obtaining Copies of GAO Reports and Testimony
              * Order by Mail or Phone
         * To Report Fraud, Waste, and Abuse in Federal Programs
         * Congressional Relations
         * Public Affairs

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

    United States Government Accountability Office

    GAO

    June 2006

    EXPORT CONTROLS

    Improvements to Commerce's Dual-Use System Needed to Ensure Protection of
    U.S. Interests in the Post-9/11 Environment

    GAO-06-638

    Contents

    Letter 1

    Results in Brief 3
    Background 4
    BIS Has Not Systematically Evaluated the Dual-Use Export Control System to
    Ensure Its Effectiveness and Efficiency 8
    Omissions and Weaknesses Undermine BIS's Screening of Applications against
    the Watchlist 12
    BIS Has Not Corrected Some Weaknesses Identified In Prior GAO Reports 15
    Conclusions 16
    Recommendations for Executive Action 17
    Agency Comments and Our Evaluation 18
    Scope and Methodology 20
    Appendix I Trends in Dual-Use Export Licensing 23
    Appendix II Prior GAO Reports on the Dual-Use Export Control System and
    the Status of Recommendations (Fiscal Years 2001-2004) 31
    Appendix III Comments from the Department of Commerce 41
    GAO Comments 67
    Appendix IV GAO Contact and Staff Acknowledgments 73
    Related GAO Products 74

    Tables

    Table 1: Changes in Top Five Countries of Destination for Approved and
    Rejected License Applications, Fiscal Years 1998 and 2005 27

    Figures

    Figure 1: Overview of BIS's Export Licensing Process and Time Frames 6
    Figure 2: Total Number of Dual-Use License Applications Processed, Fiscal
    Years 1998 to 2005 23
    Figure 3: Percent of Applications Referred to Other Agencies, Fiscal Years
    1998 to 2001 and 2002 to 2005 24
    Figure 4: Percent of Applications Approved, Returned without Action, and
    Rejected, Fiscal Years 1998 to 2001 and 2002 to 2005 25
    Figure 5: Median Processing Times for License Applications, Fiscal Years
    1998 to 2005 26
    Figure 6: Median Processing Times for Referred and Nonreferred License
    Applications, Fiscal Years 1998 to 2005 28
    Figure 7: Number of Commodity Classifications Processed by BIS, Fiscal
    Years 1998 to 2005 29
    Figure 8: Median Processing Times for Commodity Classifications, Fiscal
    Years 1998 to 2005 30

    Abbreviations

    BIS Bureau of Industry and Security CIA Central Intelligence Agency EAA
    Export Administration Act EAR Export Administration Regulations MTCR
    Missile Technology Control Regime OMB Office of Management and Budget PSV
    Postshipment Verification UAV Unmanned Aerial Vehicle

    This is a work of the U.S. government and is not subject to copyright
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    separately.

    United States Government Accountability Office

    Washington, DC 20548

    June 26, 2006

    The Honorable Henry J. Hyde Chairman Committee on International Relations
    House of Representatives

    Dear Mr. Chairman:

    Each year companies in the United States export billions of dollars worth
    of dual-use items that have both commercial and military applications. For
    example, dual-use materials can be incorporated into golf clubs but can
    also help missiles evade radar detection. The Department of Commerce's
    Bureau of Industry and Security (BIS) is responsible for regulating the
    export of thousands of dual-use items. In so doing, BIS faces the
    challenge of weighing U.S. national security, foreign policy, and economic
    interests, which at times are divergent or even competing, to achieve an
    appropriate balance that allows U.S. companies to compete globally while
    minimizing the risk that exported items could be used against U.S.
    interests. This challenge has been heightened by shifts in the security
    and economic environment since the late 1970s, when the current statutory
    framework for dual-use export controls was put in place. Perhaps most
    notably, in the aftermath of the September 2001 terror attacks, the
    threats facing the United States have been redefined. Also, over the
    decades, trade in rapidly advancing technologies has increased as the
    economy has become more globalized.

    BIS administers the dual-use export control system through the
    requirements contained in the Export Administration Regulations (EAR).1
    Under these regulations, exporters are to either obtain prior government
    authorization in the form of a license from BIS or determine that a
    license is not needed before exporting dual-use items.2 Multiple factors
    govern whether an exporter needs a license, including the item to be
    exported and the country of ultimate destination. Within the dual-use
    export control system, BIS heads an interagency process for reviewing
    export license applications. The decision to approve an application is
    based, in part, on how the exported item is to be used and who plans to
    use it. During the license application review process, BIS screens
    applications against its own watchlist of individuals and companies to
    identify applications involving parties that are either ineligible or
    warrant additional scrutiny to minimize the risk of dual-use items being
    used against U.S. interests.

    115 C.F.R. S:S: 730-774.

    2BIS controls exports of dual-use commodities, software, and technology,
    which are collectively referred to as "items" in this report.

    In light of the September 2001 terror attacks, you requested that we
    examine BIS's dual-use export control system and whether BIS has made
    changes to the system. In response, we (1) assessed whether BIS has
    evaluated the dual-use export control system and made changes to the
    system, (2) evaluated BIS's screening of export license applications
    against its watchlist, and (3) determined the extent to which BIS has
    taken corrective actions in response to weaknesses previously identified
    by GAO.

    In assessing BIS's evaluations of the system's effectiveness and
    efficiency, we compared BIS's annual reports, performance plans, and
    budget submissions with performance management and internal control
    standards.3 Through discussions with BIS officials and reviews of
    regulatory notices, we identified evaluations conducted by BIS and
    resulting changes to the system after the events of September 2001. We
    also analyzed data on export license applications, which we determined to
    be sufficiently reliable for our purposes. To evaluate BIS's watchlist
    screening process, we compared BIS's watchlist with government documents
    to assess the list's completeness, reviewed BIS's internal guidance for
    adding parties to the watchlist and screening applications, and discussed
    with BIS officials reasons parties were not included on the list and BIS's
    screening process. To determine what actions BIS has taken during the last
    5 years in response to previously identified weaknesses, we reviewed
    regulatory changes and information provided by BIS and other agency
    officials. We performed our review from July 2005 through May 2006 in
    accordance with generally accepted government auditing standards.

    3For additional information regarding GAO's work on improving government
    performance, see GAO, Executive Guide: Effectively Implementing the
    Government Performance and Results Act , GAO/GGD-96-118 (Washington,
    D.C.:, June 1996); GAO, Managing for Results: Enhancing Agency Use of
    Performance Information for Management Decision Making, GAO-05-927
    (Washington, D.C.: Sept. 9, 2005); and GAO, Standards for Internal Control
    in the Federal Government, GAO/AIMD-00-21 .3.1 (Washington, D.C.: November
    1999).

                                    Results in Brief

    BIS has not systematically evaluated the dual-use export control system to
    determine whether it is achieving its goal of protecting U.S. national
    security and economic interests. In managing the dual-use export control
    system, BIS has not comprehensively analyzed available data to determine
    what dual-use items have actually been exported. Further, BIS has not
    established performance measures to assess how effectively the system is
    achieving its goal, as called for under government performance management
    standards. Instead it relies on limited measures of efficiency to
    determine whether its goal is being achieved. Specifically, BIS measures
    the timeliness of the initial steps in the license application review
    process and has reported meeting its licensing time frames. However, BIS
    does not measure the efficiency of other aspects of the system, such as
    commodity classifications4 that represent a significant part of its
    workload. Absent systematic evaluations, BIS relies on intelligence
    reports and anecdotal information to gauge how the system is operating.
    After the events of September 2001, senior BIS officials told us they
    conducted an ad hoc review of the system and determined that no
    fundamental changes were needed. The officials, however, identified the
    review as the impetus for some regulatory adjustments, such as increased
    restrictions on exports related to chemical and biological agents. We were
    unable to assess the sufficiency of the review or resulting changes
    because BIS did not document how it conducted the review or reached its
    conclusions.

    The effectiveness of BIS's watchlist screening process is questionable.
    BIS has not ensured that certain parties of concern appear on its list of
    approximately 50,000 names and that all parties on license applications
    are screened. We found that the BIS watchlist does not include 147 parties
    that have committed export control violations or are known terrorists,
    which are reasons cited by BIS for adding parties to its watchlist. Of
    these, five are barred by BIS from exporting dual-use items. These
    omissions in the watchlist are attributable to a lack of specific criteria
    as to who should be on the watchlist and BIS's lack of regular reviews to
    determine whether parties are missing from the list. Further, a technical
    limitation in BIS's computer system results in some parties on license
    applications not being screened against the watchlist. We identified at
    least 1,187 license applications with parties that would not have been
    automatically screened against the watchlist over the last 8 years. Though
    aware of the screening limitation, BIS officials have not conducted their
    own analyses to determine the extent of the problem.

    4If an exporter has determined that the item it wishes to export is
    Commerce-controlled, but is uncertain of export licensing requirements,
    the exporter can request a commodity classification determination from
    BIS. For additional information on the commodity classification process,
    see GAO, Export Controls: Processes for Determining Proper Control of
    Defense-Related Items Need Improvement, GAO-02-996 (Washington, D.C.:
    Sept. 20, 2002).

    While BIS has implemented several GAO recommendations made over the last 5
    years, it has not implemented others. BIS has not addressed
    recommendations related to ensuring that export controls on sensitive
    items protect U.S. interests and are consistent with U.S. law. For
    example, BIS has not taken recommended steps to ensure that items are
    properly classified to guard against the improper export of
    defense-related items.

    We are making four recommendations to the Secretary of Commerce to use
    available data and develop performance measures in consultation with other
    agencies to systematically evaluate the effectiveness and efficiency of
    the dual-use export control system in achieving the goal of protecting
    U.S. interests. We are making three additional recommendations to the
    Secretary of Commerce to correct omissions in the watchlist and weaknesses
    in the screening process. We are also recommending that the Secretary of
    Commerce take action to address our prior unimplemented recommendations.
    In commenting on a draft of this report, the Commerce Department did not
    address our recommendations and disagreed with the report's findings and
    characterizations of the dual-use export control system. The Departments
    of Defense, Energy, and State had no comments on the draft report. After
    considering the Commerce Department's comments, we stand by our findings
    and recommendations.

                                       Background

    In regulating dual-use exports, the Commerce Department's BIS faces the
    challenge of weighing various U.S. interests, which can be divergent or
    even competing, so U.S. companies can compete globally while minimizing
    the risk of controlled dual-use items falling into the wrong hands. Under
    the authority granted in the Export Administration Act (EAA),5 BIS
    administers the EAR that require exporters to either obtain a license from
    BIS or determine government authorization is not needed before exporting
    controlled items. Even when a license is not required, exporters are
    required to adhere to the provisions of the EAR when exporting controlled
    dual-use items. Whether an export license is required depends on multiple
    factors including the

    550 U.S.C. App. S:S: 2401-2420. The EAA is not permanent legislation.
    Authority granted under the act lapsed in August 2001. However, Executive
    Order 13222, Continuation of Export Control Regulations, which was issued
    in August 2001 under the authority provided by the International Emergency
    Economic Powers Act (50 U.S.C. S: 1702), continues the controls
    established under the act and the implementing EAR.

               o  item being exported,
               o  country of ultimate destination,
               o  individual parties involved in the export,
               o  parties' involvement in proliferation activities, and
               o  planned end use of the item.

    Dual-use items specified in the EAR's Commerce Control List are controlled
    for a variety of reasons, including restricting exports that could
    significantly enhance a country's military potential, preventing exports
    to countries that sponsor terrorism, and limiting the proliferation of
    chemical, biological, and nuclear weapons and their delivery systems. The
    U.S. government controls many of these items under its commitments to
    multilateral export control regimes, which are voluntary agreements among
    supplier countries that seek to restrict trade in sensitive technologies
    to peaceful purposes.6

    For those exports requiring a license, Executive Order 129817 governs the
    dual-use license application review process and establishes time frames
    for each step in the review process (see fig. 1).

    6The four principal export control regimes are the Australia Group, which
    focuses on trade in chemical and biological items; the Missile Technology
    Control Regime; the Nuclear Suppliers Group; and the Wassenaar
    Arrangement, which focuses on trade in conventional weapons and related
    dual-use items. The United States is a member of all four regimes. For
    additional information on the multilateral regimes, see GAO,
    Nonproliferation: Strategy Needed to Strengthen Multilateral Export
    Control Regimes, GAO-03-43 (Washington, D.C.: Oct. 25, 2002).

    7Exec. Order No. 12,981, 15 C.F.R. S: 750.4.

    Figure 1: Overview of BIS's Export Licensing Process and Time Frames

    Note: Under the executive order, the entire license application review
    process-including escalation-is to be completed within 90 days, unless an
    agency appeals the decision to the President who is not given a time
    limit. However, few applications are escalated through the interagency
    dispute resolution process. For example, in fiscal year 2005, of the
    almost 17,000 applications processed by BIS, only 143 were escalated and
    none reached the President for final resolution.

    One of the first steps in the license application review process is the
    screening of parties on the application, such as the planned exporter or
    end user, against BIS's internal watchlist to identify ineligible parties
    or parties that warrant closer scrutiny. Neither the EAA nor the EAR
    provide specific criteria as to which parties are to be included on the
    watchlist. However, under the EAR, BIS may deny export privileges to
    persons convicted of export violations, and the watchlist serves as a
    mechanism for identifying parties that have been denied exporting
    privileges. This screening process can also serve as a tool for
    identifying proposed end users sanctioned for terrorist activities and,
    therefore, ineligible to receive certain dual-use items. BIS has the
    discretion to add other parties to the watchlist. A match between the
    watchlist and a party on an application does not necessarily mean that the
    application will be denied, but it can trigger additional scrutiny by BIS
    officials, including BIS enforcement officials, during the license
    application review process.

    While BIS is responsible for administering the dual-use export control
    system and licensing dual-use exports, other federal agencies play active
    roles. As provided for under Executive Order 12981, the Departments of
    Defense, Energy, and State have the authority to review any export license
    applications submitted to BIS.8 These departments specify through
    delegations of authority to BIS the categories of applications that they
    want to review based, for example, on the item to be exported. License
    applications can also be referred to the Central Intelligence Agency (CIA)
    for review. After reviewing an application, the agencies are to provide
    the BIS licensing officer with a recommendation to approve or deny the
    application.9 In addition to reviewing license applications, the Defense,
    Energy, and State Departments are also involved in the regulatory process.
    Before changes are made to the EAR and the Commerce Control List, such as
    the addition of an item to the list, proposals are reviewed through an
    interagency review process. BIS is responsible for issuing the regulatory
    changes related to dual-use exports.

    For fiscal year 2005, BIS had a budget of $67.5 million, of which $33.9
    million was for the administration of the export control system.10 Of the
    414 positions at BIS in fiscal year 2005, 48 were licensing officers.
    These officers are responsible for developing the Commerce Department
    position as to whether an application should be approved and responding to
    exporter requests for commodity classifications as well as performing
    other duties related to administering the dual-use export control system.

    8Executive Order 12981 also provides that BIS may refer applications to
    other departments or agencies as appropriate. For example, license
    applications involving encryption technology are referred to the
    Department of Justice.

    9If agencies do not provide their recommendations within 30 days after the
    application is referred by BIS to them, it is deemed that they concur with
    BIS's recommendation. While the CIA reviews applications, it does not
    provide recommendations on whether they should be approved or denied.

    10In addition to administering the dual-use export control system, BIS is
    responsible for enforcing dual-use export control regulations and law,
    along with the Departments of Homeland Security and Justice. BIS is also
    responsible for 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.

    BIS Has Not Systematically Evaluated the Dual-Use Export Control System to
                        Ensure Its Effectiveness and Efficiency

    BIS has not systematically evaluated the overall effectiveness and
    efficiency of the system to determine whether its stated goal of
    protecting U.S. national security and economic interests is being
    achieved. Specifically, it has not comprehensively analyzed key data on
    actual dual-use exports, including unlicensed exports that represent the
    majority of exports subject to its controls. Further, contrary to what is
    called for under government management standards, BIS has not established
    performance measures to assess how effectively the system is protecting
    U.S. interests in the existing security and economic environment. While
    BIS has established some measures related to the system's efficiency,
    those measures focus on narrow aspects of the licensing process. BIS
    officials also rely on intelligence reports and meetings with industry
    officials to provide insight into how the system is operating. After the
    events of September 2001, BIS conducted an ad hoc review of the system to
    determine if changes were needed. According to BIS officials, no
    fundamental changes to the system were needed, but they cited the review
    as the basis for some adjustments-primarily related to controls on
    chemical and biological agents. However, because BIS did not document its
    review, we could not assess the sufficiency of the review and the
    resulting changes.

    BIS's Assessment of the Dual-Use Export Control System Has Been Limited

    In managing the dual-use export control system, BIS has not conducted
    comprehensive analyses of available data on items under its control that
    have been exported. 11 According to BIS officials, they recently began
    conducting limited analyses of export data to evaluate the potential
    effects of proposed regulatory changes on U.S. industry. While BIS is
    cognizant of dual-use exports authorized through the license application
    review process, it has not analyzed export data to determine the extent to
    which approved licenses resulted in actual exports. BIS also does not
    routinely analyze data on the items and destinations for unlicensed
    exports, which represent the majority of exports subject to BIS's
    controls.

    BIS has not established measures to assess whether it is effectively
    achieving its goal of protecting national security and economic interests.
    Under the performance management framework established by the Government
    Performance and Results Act of 1993,12 federal agencies are to develop
    objective performance measures for assessing how well they are achieving
    their goals over time. These measures should focus on an agency's outcomes
    as opposed to its processes. BIS's lack of effectiveness measures was
    noted in a 2005 review by the Office of Management and Budget (OMB). In
    response to OMB's review, BIS indicated plans for developing measures to
    assess the system's effects on national security and economic interests in
    consultation with the other agencies involved in the export control
    system. BIS officials informed us that their attempt to devise
    effectiveness measures did not succeed due to a lack of cooperation and
    that they opted not to independently pursue the development of
    effectiveness measures.

    11Data on actual licensed and unlicensed dual-use exports are maintained
    by the Commerce Department's Bureau of the Census. The Census Bureau
    collects data on U.S. foreign trade under the authority provided in 13
    U.S.C. S:S: 301-307.

    Without measures of effectiveness to assess it performance, BIS relies on
    measures related to the efficiency of the dual-use export control system.
    These efficiency-related measures generally focus on the first steps in
    the license application review process-how long it takes to review a
    license application internally and refer an application to another
    agency.13 Over the last 3 fiscal years, BIS has reported meeting its
    licensing-related time frames. However, BIS does not have
    efficiency-related measures for other steps in the license application
    review process, such as how quickly a license should be issued or denied
    once other agencies provide their input, or for the review process as a
    whole. BIS also does not evaluate the efficiency of other aspects of the
    system. Most notably, it does not measure whether it is meeting the
    regulatory time frame for the processing of commodity classification
    requests, of which there were 5,370 in fiscal year 2005 or about 24
    percent of licensing officers' workload (see app. I for additional
    information on BIS's processing times).14

    BIS officials acknowledged that they have not systematically evaluated the
    dual-use export control system. Instead, BIS officials informed us that
    they regularly review intelligence reports and meet with industry
    officials to gauge how well the system is working. A senior BIS official
    stated there are no anecdotal indications that the system is not
    effective. The official added that "it stands to reason" that BIS's
    controls have limited various parties' access to U.S. dual-use
    technologies but that it is difficult to determine how controls are
    affecting U.S. industry. Also, as evidence of how the system is operating,
    BIS officials referred us to BIS's annual report on its foreign
    policy-based controls.15 This report summarizes various regulatory changes
    from the previous year and what the newly imposed controls were intended
    to achieve. However, this report does not contain an assessment of the
    impact these controls have had on U.S. interests. To address its lack of
    evaluations, BIS officials informed us that they are in the process of
    establishing an Office of Technology Evaluation. BIS is hiring analysts to
    evaluate topics including how dual-use items should be controlled and how
    export controls have affected industry.

    12The Government Performance and Results Act of 1993, Pub. L. No. 103-62,
    107 Stat. 285, was enacted to help resolve long-standing management
    problems that undermine the government's effectiveness and efficiency and
    provide greater accountability for results.

    13BIS's other measure of efficiency addresses the amount of time BIS takes
    to issue draft regulations.

    14Per 15 C.F.R. S: 750.2, BIS is to complete commodity classifications
    within 14 calendar days.

    Absent systematic evaluations, BIS conducted an ad hoc review after the
    September 2001 attacks to determine what changes, if any, needed to be
    made to the system in light of the new security environment. However,
    according to BIS officials, they did not produce a report or other
    documentation regarding their review. Therefore, we could not assess the
    validity or sufficiency of BIS's review and the resulting changes. BIS
    officials told us they determined that, other than some adjustments to its
    controls, no fundamental changes to the system were needed because they
    already had controls and procedures in place to deny terrorists access to
    dual-use technologies. Of the hundreds of regulatory changes made since
    September 2001, BIS officials identified the following specific changes as
    stemming from their ad hoc review

               o  establishing a worldwide licensing requirement for exports of
               biological agents;
               o  changing the licensing requirement for biological agent
               fermenters from fermenters larger than 100 liters to those larger
               than 20 liters;
               o  controlling components that can be used in the manufacture of
               chemical agents;
               o  including additional precursors for the development of chemical
               agents on the Commerce Control List;
               o  revising licensing requirements to further restrict U.S.
               persons from designing, developing, producing, stockpiling, or
               using chemical or biological weapons;
               o  requiring licenses for exports of equipment related to the
               production of chemical or biological agents to countries that are
               not members of the Australia Group;16
               o  imposing controls on exports of unmanned aerial vehicles
               capable of dispersing more than 20 liters of chemical or
               biological agents; and
               o  adding amorphous silicon plane arrays, which can be used in
               night vision or thermal imaging equipment, to the Commerce Control
               List.

    15BIS controls some dual-use items to further U.S. foreign policy or
    fulfill its international obligations. Items controlled for foreign policy
    reasons include crime control and detection equipment, missile technology,
    and chemical and biological agents and related equipment. Exports to
    designated terrorist states and embargoed countries are also controlled
    for foreign policy reasons. Pursuant to the International Emergency
    Economic Powers Act (50 U.S.C. S:S: 1701-1706), the President has
    authorized the system of controls established under the EAA, including
    export controls maintained for foreign policy purposes that require annual
    extensions made through reports to Congress.

    According to BIS officials, their review did not result in changes to the
    license application review process after the events of September 2001.
    However, decisions by other agencies-namely the Energy Department and the
    CIA-have resulted in BIS referring more license applications to them.
    Specifically, in response to Energy's request, BIS began referring
    applications related to missile technologies and chemical or biological
    agents, in addition to the nuclear-related applications Energy was already
    reviewing. Similarly, based on discussions between BIS and the CIA, the
    decision was made to refer more applications to the CIA for review to
    determine whether foreign parties of concern may be involved in the
    proposed export (see app. I for information on BIS referral rates).

    Additionally, in response to the changing security environment after
    September 2001, BIS reprioritized its enforcement activities.17
    Specifically, BIS enforcement officials are to give highest priority to
    dual-use export control violations involving the proliferation of weapons
    of mass destruction, terrorist organizations, and exports for unauthorized
    military or government uses. Further, senior BIS officials noted that they
    have made regulatory changes to reflect the dynamic geopolitical
    environment, such as changing licensing requirements for exports to India,
    Iraq, Libya, and Syria.

    16There are currently 40 members of the Australia Group.

    17GAO is currently conducting a separate review of export control
    enforcement efforts.

     Omissions and Weaknesses Undermine BIS's Screening of Applications against the
                                       Watchlist

    BIS's watchlist is intended to facilitate the identification of license
    applications involving individuals and companies representing an export
    control concern. However, BIS's watchlist is incomplete, as numerous
    export control violators and terrorists are not included on the list.
    Further, BIS's process for screening applications does not ensure that all
    parties on all applications are screened against the watchlist. As a
    result, the watchlist's utility in the license application review process
    is undermined, which increases the risk of dual-use items falling into the
    wrong hands.

    BIS's Watchlist Is Incomplete

    BIS's watchlist does not include certain companies, organizations, and
    individuals that are known entities of export control concern and,
    therefore, warrant inclusion on the watchlist. Based on our comparison of
    the watchlist to publicly available U.S. government documents, including
    ones available through BIS's Web site, we identified 147 parties that had
    either violated U.S. export control requirements, been determined to be
    suspicious end users, or committed acts of terror but were not on BIS's
    watchlist. BIS officials confirmed that, at the time of our review, the
    parties we identified were not on BIS's watchlist. Specifically, we
    identified

               o  5 export control violators that have been denied dual-use
               export privileges by BIS;
               o  60 companies and individuals that had committed export control
               violations and were, therefore, barred by the State Department
               from being involved in the export of defense items;
               o  52 additional companies and individuals that have been
               investigated, charged, and, in most cases, convicted of export
               control violations;
               o  2 overseas companies whose legitimacy as end users could not be
               established by BIS; and
               o  28 organizations identified by the State Department as
               committing acts of terror.

    The above individuals and companies we identified as not being on the BIS
    watchlist include those that have exported or attempted to export weapons
    to terrorist organizations, night vision technologies to embargoed
    countries, and materials that can be used in biological and missile
    programs. The terrorist organizations include one that has staged attacks
    against U.S. and coalition forces in Afghanistan and another that has
    attacked and abducted large numbers of civilians, including children.

    BIS's standard for including a party on its watchlist is that the party
    represents an export control concern. BIS does not have an official
    definition or explanation as to what constitutes an export control
    concern. As a result, the decision as to whether a party should be added
    to the watchlist is left to the judgment of the BIS personnel responsible
    for maintaining the watchlist. The only specific guidance BIS provides is
    that parties under investigation by BIS enforcement officials must be
    added to the watchlist. BIS officials told us that the reasons a company,
    organization, or individual should be added to the watchlist include
    previous violations of U.S. export control regulations, inability to
    determine a party's legitimacy, possible support of international
    terrorism, and possible involvement with missile programs of concern. The
    147 parties we identified fall within these categories. In addition, BIS
    officials do not regularly review the watchlist to ensure its
    completeness. BIS officials said they do not conduct periodic checks as to
    whether particular parties have been added to the list. They also do not
    compare the BIS watchlist to other federal agencies' lists or databases
    used for similar purposes to determine whether the BIS watchlist is
    missing pertinent parties.

    BIS officials offered several explanations for why the 147 parties were
    not on the watchlist. First, they acknowledged it was an oversight on
    their part not to include several of the parties on the watchlist. For
    example, at least two parties were not added to the watchlist because the
    BIS personnel involved thought they had been added by someone else.
    Second, for some of the parties, BIS did not receive information from
    another agency about export control-related investigations. However, these
    parties could have been identified through publicly available reports.
    Third, BIS relies on limited sources to identify parties involved in
    terrorist activities. The officials explained that their primary source
    for identifying terrorist organizations is the Treasury Department's
    public listing of designated terrorists.18 While Treasury maintains a list
    of terrorists, its list is not exhaustive and therefore, does not include
    all known terrorist organizations. Finally, BIS officials noted that many
    of the parties we identified were individuals and that they do not
    typically add individuals to the watchlist because applications generally
    contain names of companies. However, we found numerous individuals
    included on the watchlist and individuals can and do appear on license
    applications.

    18The Treasury Department maintains a list of individuals and companies
    owned or controlled by, or acting for or on behalf of, targeted countries,
    such as Cuba and North Korea. It also lists individuals, groups, and
    entities, such as terrorists and narcotics traffickers designated under
    programs that are not country-specific. Collectively, such individuals and
    companies are called "Specially Designated Nationals," whose assets are
    blocked and U.S. persons are generally prohibited from dealing with them.

    BIS's Process Does Not Ensure That All Parties Are Screened against the
    Watchlist

    BIS's process for screening applications does not ensure that all parties
    are screened against the watchlist. To screen parties on applications
    against the watchlist, BIS relies on a computerized process. The computer
    system recognizes parties that are identified in one of five specified
    fields and automatically screens the parties identified in those fields
    against the watchlist. If there are multiple parties, BIS's regulations
    direct the applicant to list the additional parties in the "Additional
    Information" field. However, the computer system does not recognize the
    parties listed in that field, which means the parties are not
    automatically screened against the watchlist. While BIS officials told us
    that they may identify applications involving multiple parties and
    manually screen them against the watchlist, they do not have a systematic
    means of identifying applications involving parties listed in the
    "Additional Information" field. As a result, BIS cannot ensure that all
    parties on all applications have been screened. Based on our review of
    licensing data for the past 8 years, we identified at least 1,187
    applications involving multiple parties that would not have been
    automatically screened. BIS officials informed us that they are aware of
    this limitation, but have not conducted reviews to determine the number of
    applications affected.

    According to BIS officials, since most applications are reviewed by other
    agencies, the risk of not screening all parties is lessened. However, a
    senior BIS official acknowledged that by not screening all applications
    against the BIS watchlist, applications involving parties that are the
    subject of BIS enforcement investigations would not be identified as that
    information only resides on the BIS watchlist. Defense and State
    officials, to whom most license applications are referred, stated that
    they do not maintain watchlists for the screening of dual-use export
    license applications and expect BIS to have already screened all parties
    before referring applications to them. BIS officials informed us of their
    plans to develop a new computerized screening system to ensure that all
    parties on applications are screened against the watchlist. However, the
    new system will not be operational for several years.

         BIS Has Not Corrected Some Weaknesses Identified In Prior GAO Reports

    In the years since the September 2001 terror attacks, GAO has issued a
    number of reports identifying weaknesses in the dual-use export control
    system. The weaknesses identified in many of the prior reports relate to
    ensuring that export controls on sensitive items protect U.S. interests
    and are consistent with U.S. law. Some of our recommendations to correct
    those weaknesses remain unimplemented (see app. II for more detailed
    information on these reports and the status of recommendations).

    Among the weaknesses identified in prior GAO reports is the lack of
    clarity as to which items are controlled and whether they are controlled
    by the Commerce Department or the State Department. A lack of clarity as
    to whether an item is Commerce-controlled or State-controlled19 increases
    the risk that defense-related items will be improperly exported and U.S.
    interests will be harmed as a result. In most cases, State's controls over
    arms exports are more restrictive than Commerce's controls over dual-use
    items. 20 For example, a State-issued license is generally required for
    arms exports, whereas many dual-use items do not require licenses for
    export to most destinations. Further, most arms exports to China are
    prohibited, while dual-use items may be exported to China.

    In 2002, we reported that BIS had improperly informed exporters through
    the commodity classification process that their items were subject to
    Commerce's export control requirements, when in fact the items were
    subject to State's requirements.21 BIS made improper determinations
    because it rarely obtained input from the Departments of State or Defense
    during the commodity classification process on which department had
    jurisdiction over the items in question. We recommended that the Commerce
    Department, together with the Departments of State and Defense, develop
    agreed-upon criteria for determining which classification requests should
    be referred to the other departments, which would minimize the risk of
    improper determinations. However, BIS has not implemented our
    recommendation and continues to refer only a few commodity classifications
    to the Departments of State and Defense. In fiscal year 2005, BIS
    processed 5,370 commodity classification requests and referred only 10 to
    State and Defense. Additionally, in 2001, we reported that export control
    jurisdiction between the Departments of State and Commerce had not been
    clearly established for almost 25 percent of the items the U.S. government
    has agreed to control as part of its commitments to the multilateral
    Missile Technology Control Regime.22 The two departments have yet to take
    action to clarify which department has jurisdiction over these sensitive
    missile technology items. As a result, the U.S. government has left the
    determination of jurisdiction to the exporter, who by default can then
    determine which national policy interests are to be considered and acted
    upon when defense-related items are exported.

    19The State Department regulates arms exports under the authority of the
    Arms Export Control Act (22 U.S.C. S:S: 2751-2799aa-2).

    20For additional information on the arms export control system, including
    processing times for arms export license applications, see GAO, Defense
    Trade: Arms Export Control Vulnerabilities and Inefficiencies in the
    Post-9/11 Security Environment, GAO-05-468R (Washington, D.C.: Apr. 7,
    2005) and GAO, Defense Trade: Arms Export Control System in the Post-9/11
    Environment, GAO-05-234 (Washington, D.C., Feb. 16, 2005).

    21GAO, Export Controls: Processes for Determining Proper Control of
    Defense-Related Items Need Improvement, GAO-02-996 (Washington, D.C.:
    Sept. 20, 2002)

    BIS has taken actions to address other weaknesses identified in GAO
    reports. For example, in response to a 2004 GAO report, BIS expanded its
    licensing requirements for the export of missile technology items to
    address missile proliferation by nonstate actors.23 Similarly, BIS
    implemented GAO's recommendation to require exporters to inform end users
    in writing of any conditions placed on licenses to help ensure that the
    end users abide by those restrictions.24

                                      Conclusions

    Exports of dual-use items are important to a strong U.S. economy, but in
    the wrong hands, they could pose a threat to U.S. security and foreign
    policy interests. However, BIS has not demonstrated whether the dual-use
    export control system is achieving its goal of protecting national
    security and economic interests in the post-September 2001 environment.
    Without systematic evaluations, BIS cannot readily identify weaknesses in
    the system and implement corrective measures that allow U.S. companies to
    compete in the global marketplace while minimizing the risk to other U.S.
    interests. Further, the absence of known parties of concern on the BIS
    watchlist and limitations in the screening process create vulnerabilities
    and are illustrative of what can happen when there is not an emphasis on
    evaluating how well a system is operating and taking corrective action to
    address known deficiencies. Also, the weaknesses and associated risks
    identified in prior GAO reports will persist until the remaining
    recommendations are implemented. Until corrective actions are taken, the
    United States will continue to rely on BIS's management of the dual-use
    export control system with known vulnerabilities and little assurance that
    U.S. interests are being protected.

    22GAO, Export Controls: Clarification of Jurisdiction for Missile
    Technology Items Needed, GAO-02-120 (Washington, D.C.: Oct. 9, 2001).

    23GAO, Nonproliferation: Improvements Needed to Better Control Technology
    Exports for Cruise Missiles and Unmanned Aerial Vehicles, GAO-04-175
    (Washington, D.C.: Jan. 23, 2004).

    24GAO, Export Controls: Post-Shipment Verification Provides Limited
    Assurance That Dual-Use Items Are Being Properly Used, GAO-04-357
    (Washington, D.C.: Jan. 12, 2004).

                          Recommendations for Executive Action

    To ensure that the dual-use export control system is effective as well as
    efficient in protecting U.S. interests, we recommend that the Secretary of
    Commerce direct the Under Secretary for Industry and Security to take the
    following four actions

               o  identify and obtain data needed to evaluate the system;
               o  review existing measures of efficiency to determine their
               appropriateness and develop measures that address commodity
               classifications;
               o  develop, in consultation with other agencies that participate
               in the system, measures of effectiveness that provide an objective
               basis for assessing whether progress is being made in achieving
               the goal of protecting U.S. interests; and
               o  implement a plan for conducting regular assessments of the
               dual-use export control system to identify weaknesses in the
               system and corrective actions.

    To ensure that BIS has a process that effectively identifies parties of
    concern during the export license application review process, we recommend
    that the Secretary of Commerce direct the Under Secretary for Industry and
    Security to take the following three actions

               o  develop criteria for determining which parties should be on the
               watchlist;
               o  implement regular reviews of the watchlist to help ensure its
               completeness; and
               o  establish interim measures for screening all parties until the
               planned upgrade of the computerized screening system eliminates
               current technical limitations.

    To mitigate the risks identified in prior GAO reports related to the
    dual-use export control system, we recommend that the Secretary of
    Commerce direct the Under Secretary for Industry and Security to report to
    Congress on the status of GAO recommendations, the reasons why
    recommendations have not been implemented, and what other actions, if any,
    are being taken to address the identified weaknesses.

                           Agency Comments and Our Evaluation

    We provided a draft of this report to the Departments of Commerce,
    Defense, and State. In its comments on the draft, the Commerce Department
    did not respond to any of our recommendations and disagreed with our
    findings and characterizations of the U.S. dual-use export control system
    following the September 2001 terror attacks. The Departments of Defense
    and State had no comments on the draft report. The Energy Department
    declined the opportunity to review and comment on the draft report.

    In introducing its overall comments, the Commerce Department raises
    concerns regarding the report's scope. Commerce states that we expanded
    the initial scope of our audit from narrowly looking at BIS's response to
    the September 2001 terror attacks to the three issues we address in our
    report. In fact, the scope of our audit has remained the same. To examine
    BIS's dual-use export control system and whether changes to the system
    were made, we focused on three specific issues related to how well the
    system is operating in the post-September 2001 environment. Based on our
    examination of these issues, we concluded that there are vulnerabilities
    in the dual-use export control system and that BIS can provide few
    assurances that the system is protecting U.S. interests in the current
    environment. After considering the Commerce Department's extensive
    comments, our report's findings, conclusions, and resulting
    recommendations remain unchanged.

    In commenting on our findings, the Commerce Department states that our
    report presumes BIS must develop a national security strategy to
    administer the dual-use export control system. Our report does not presume
    this as our recommendations address the need for BIS to develop
    performance measures and conduct systematic evaluations for determining
    the extent to which the system is meeting its stated goal of protecting
    both national security and economic interests. The Commerce Department
    further states that BIS represents the "gold standard" for its rigorous
    process of defining priorities, implementing plans, and measuring success.
    To support this statement, Commerce lists several actions that BIS has
    taken since September 2001 and cites BIS's "Game Plan" as identifying
    BIS's priorities and providing a basis for measuring BIS's performance.
    However, BIS has not evaluated what effects these actions have had on U.S.
    interests. Also, the "Game Plan" provided to us at the end of our review
    did not contain performance measures for assessing how dual-use export
    controls affect national security or economic interests. Further, OMB
    determined in its 2005 Program Assessment Rating Tool that BIS lacked
    measures related to its fundamental purpose. Absent performance measures
    and systematic evaluations, it is unclear what the basis was for the
    various actions taken by BIS, what the impact of these actions has been on
    national security and economic interests, whether these actions are
    sufficient to protect U.S. interests in the current environment, or how
    BIS represents the gold standard.

    The Commerce Department also comments that our report is misleading and
    does not provide sufficient context for our findings related to BIS's
    watchlist. According to Commerce, the 147 parties we identified as not
    being on the list should be placed in the context of the approximately
    50,000 names that are on BIS's watchlist, and no licenses were issued to
    the 147 parties. Commerce's comment does not address our basic point. It
    was not our intent to identify every party that should be on BIS's
    watchlist. Nor did we seek to determine whether licenses were issued to
    parties not on the watchlist, in part, because BIS's regulations permit
    the approval of license applications involving parties on the watchlist.
    Instead, the point of our finding and our related recommendations is that
    BIS does not have mechanisms for ensuring a robust watchlist and screening
    process. To provide additional context, we adjusted the text to reflect
    the number of names on the watchlist. The Commerce Department also notes
    that the watchlist is only one check during the license application review
    process and that there are multiple layers and agencies involved-a fact we
    address in our report. According to Commerce, the built-in redundancies in
    the review process minimize the possibility of a party slipping through
    the cracks. We agree that having multiple layers of review can create an
    effective system of checks and balances, but only if each agency is
    fulfilling its responsibilities at each stage in the review. The other
    agencies involved in the process clearly expect BIS to have a robust
    watchlist screening process. BIS's stated reliance on others to compensate
    for weaknesses in its watchlist creates gaps in the review process and,
    therefore, undermines the ability of the system to effectively protect
    U.S. interests. While the Commerce Department cites some measures BIS has
    taken recently to refine the watchlist, these measures do not address the
    weaknesses created by the lack of criteria and reviews of who should be on
    the watchlist or the technical limitations that result in some parties not
    being screened against the watchlist.

    Regarding its implementation of GAO's prior recommendations, the Commerce
    Department states that BIS has met most of the recommendations and
    maintains that none of the outstanding recommendations puts BIS's mission
    at risk. We disagree since BIS has not implemented recommendations that
    address the most basic aspects of the export control system. Specifically,
    BIS's failure to implement recommendations that would provide for clear,
    transparent decisions about export control jurisdiction increases the risk
    that sensitive defense-related items will be improperly exported and that
    some exporters will be placed at a competitive disadvantage-undermining
    BIS's goal of protecting national security and economic interests.

    The Commerce Department also provided technical comments, which we
    incorporated into our report as appropriate. Commerce's comments are
    reprinted in appendix III, along with our supplemental responses.

                                 Scope and Methodology

    To assess BIS's evaluations of the dual-use export control system's
    efficiency and effectiveness after the events of September 2001, we
    compared BIS's annual reports, performance plans, and budget submissions
    with performance management and internal control standards. These
    standards call for federal agencies to develop results-oriented goals,
    measure progress toward achieving those goals, and have procedures that
    provide reasonable assurances about the agency's effectiveness and
    efficiency. We also spoke with senior BIS officials to identify
    evaluations they conducted of the system, particularly those conducted
    after the 2001 terror attacks, and discussed how those evaluations were
    conducted. To identify changes made to the system, we interviewed BIS
    officials and reviewed BIS regulatory notices issued since September 2001.
    Additionally, we interviewed officials from the CIA and the Departments of
    Defense, Energy, and State to determine changes to the system based on
    their participation in the dual-use licensing and regulatory processes. We
    also examined existing data on the system. Specifically, we analyzed data
    from BIS's Export Control Automated Support System on applications and
    commodity classification requests closed between fiscal years 1998 and
    2005. To assess data reliability, we performed electronic testing of
    relevant data elements, interviewed knowledgeable agency officials, and
    reviewed system documentation. We determined the data were sufficiently
    reliable for the purposes of our review.

    In examining the BIS watchlist, we reviewed BIS's internal guidance for
    adding parties to the watchlist and discussed with BIS officials the
    various sources and reasons they use to add parties to the watchlist.
    Using the reasons they identified, we compared BIS's watchlist, dated
    January 2006, to documents publicly available through U.S. government Web
    sites to assess the list's completeness. These documents included BIS's
    Denied Persons List, Unverified List, and Major Cases List;25 the State
    Department's Debarred Parties List and Patterns of Global Terrorism
    report;26 and the Homeland Security Department's fact sheet on arms and
    strategic technologies investigations.27 We confirmed with BIS officials
    that the parties we identified were not on the watchlist and discussed
    reasons they were excluded. We also discussed BIS's process for screening
    applications with BIS officials and reviewed BIS's internal guidance.

    To determine the status of GAO's prior recommendations to correct
    weaknesses in the system, we identified reports issued between fiscal
    years 2001 and 2005 regarding the dual-use export control system and their
    recommendations. We reviewed BIS's regulatory notices to determine whether
    BIS made regulatory changes in response to GAO's recommendations. We also
    followed up on the status of recommendations through interviews with
    Commerce, Defense, and State officials and reviews of supporting
    documentation they provided.

    We requested data for fiscal years 2004 and 2005 on actual exports of
    dual-use items from the Bureau of the Census. As discussed with your
    staff, we requested the data in October 2005 and did not receive the data
    in time for inclusion in this report after multiple attempts to obtain the
    data. The delays from Census prevented us from reporting on actual
    dual-use exports as planned.

    As agreed with your office, unless you publicly announce the contents of
    this report earlier, we plan no further distribution of it until 30 days
    from the date of this letter. We will then send copies of this report to
    interested congressional committees as well as the Secretaries of
    Commerce, Defense, Energy, and State; the Director, Central Intelligence
    Agency; the Director, Office of Management and Budget; and the Assistant
    to the President for National Security Affairs. In addition, this report
    will be made available at no charge on the GAO Web site at
    http://www.gao.gov .

    25The Denied Persons List identifies parties that have been denied
    exporting privileges by BIS. The Unverified List identifies parties in
    foreign countries that were parties in past transactions for which a
    prelicense check or a postshipment verification could not be conducted for
    reasons outside the control of the U.S. government. The Major Cases List
    highlights BIS enforcement activities.

    26The Debarred List identifies parties that have been convicted of
    violating or conspiracy to violate the Arms Export Control Act and,
    therefore, denied exporting privileges by the State Department. The
    Patterns on Global Terrorism report, which was last issued in 2003,
    identifies terrorist organizations and groups that have committed acts of
    terrorism in the United States and other countries.

    27The Homeland Security Department, which enforces both arms and dual-use
    export control laws, maintains a listing of its major export control
    investigations.

    Please contact me at (202) 512-4841 or calvaresibarra@gao.gov if you or
    your staff have any questions concerning this report. Contact points for
    our Offices of Congressional Relations and Public Affairs may be found on
    the last page of this report. GAO staff who made major contributions to
    this report are listed in appendix IV.

    Sincerely yours,

    Ann Calvaresi-Barr Director Acquisition and Sourcing Management

    Appendix I: Trends in Dual-Use Export Licensing

    The number of dual-use export license applications processed by the
    Department of Commerce's Bureau of Industry and Security (BIS) has
    increased over the last several years. These applications were generally
    for the export of items in the following categories: materials, chemicals,
    microorganisms, and toxins; nuclear materials, facilities and equipment
    and miscellaneous items; telecommunications and information security; and
    other items subject to BIS's controls but not specified on the Commerce
    Control List.28 As shown in figure 2, from fiscal years 1998 through 2005,
    the number of applications processed increased by over 50 percent.

    Figure 2: Total Number of Dual-Use License Applications Processed, Fiscal
    Years 1998 to 2005

    28The Commerce Control List is divided into 10 categories. In addition,
    items subject to BIS's controls but not specified on the control list are
    designated "EAR99."

    Additionally, BIS has been referring a larger percentage of applications
    to other agencies for their review. From fiscal year 1998 to 2005, the
    total percentage of applications referred to other agencies increased from
    about 85 percent to about 92 percent. As shown in figure 3, the greatest
    increases were in the percent of applications referred to the Department
    of Energy and the Central Intelligence Agency (CIA).

    Figure 3: Percent of Applications Referred to Other Agencies, Fiscal Years
    1998 to 2001 and 2002 to 2005

    Note: An application can be referred to more than one agency.

    After the license application review process is completed, BIS can approve
    an application, return it without action, or reject it. The majority of
    applications processed since fiscal year 1998 have been approved, as shown
    in figure 4.

    Figure 4: Percent of Applications Approved, Returned without Action, and
    Rejected, Fiscal Years 1998 to 2001 and 2002 to 2005

    Although the number of applications processed by BIS increased over the
    last several years, the overall median processing times have remained
    relatively stable and consistent with time frames established by executive
    order,29 as shown in figure 5.

    Figure 5: Median Processing Times for License Applications, Fiscal Years
    1998 to 2005

    29Exec. Order No. 12,981, 15 C.F.R. S: 750.4.

    As shown in table 1, there have been changes over the years in the top
    countries of destination for approved and rejected license applications.
    However, applications for dual-use exports to China have consistently
    represented a significant portion of BIS's licensing workload.

    Table 1: Changes in Top Five Countries of Destination for Approved and
    Rejected License Applications, Fiscal Years 1998 and 2005

          Approved license applications               Rejected license applications
      Fiscal year 1998     Fiscal year 2005      Fiscal year 1998      Fiscal year 2005
               Number of            Number of              Number of             Number of
            applications         applications           applications          applications
    Country     approved Country     approved  Country      rejected Country      rejected
    China            638 China          1,303  India             213 India              69
    India            476 Japan          1,187  China              37 China              44
    Russia           426 Canada           938  Israel              9 Cuba               36
    Mexico           418 Taiwan           725  Pakistan            8 Syria              32
    Taiwan           398 India            694  Russia              6 Pakistan           18

    Source: BIS (data); GAO (analysis).

    As shown in figure 6, referring applications to other agencies increases
    the time it takes to process license applications. Between fiscal years
    1998 and 2005, referred license applications took about 24 more days to
    process than those applications that were processed solely by BIS.

    Figure 6: Median Processing Times for Referred and Nonreferred License
    Applications, Fiscal Years 1998 to 2005

    BIS's workload related to commodity classifications has also increased in
    recent years. As shown in figure 7, the number of commodity
    classifications almost doubled from fiscal year 1998 to 2005.

    Figure 7: Number of Commodity Classifications Processed by BIS, Fiscal
    Years 1998 to 2005

    BIS continues to exceed the 14-day time frame established in the Export
    Administration Regulations30 for processing commodity classifications, as
    shown in figure 8.

    Figure 8: Median Processing Times for Commodity Classifications, Fiscal
    Years 1998 to 2005

    3015 C.F.R. S: 750.2

    Appendix II: Prior GAO Reports on the Dual-Use Export Control System and
    the Status of Recommendations (Fiscal Years 2001-2004) Appendix II: Prior
    GAO Reports on the Dual-Use Export Control System and the Status of
    Recommendations (Fiscal Years 2001-2004)

    Export Controls: System for Controlling Exports of High Performance Computing Is
    Ineffective (Dec. 18, 2000, GAO-01-10 )
    Background: Exports       GAO recommendations          Action taken
    of high performance
    computers exceeding a     Commerce Department          The Commerce Department
    defined performance                                    has implemented our
    threshold require an         o  in consultation with   recommendation.
    export license from          other relevant agencies,
    the Commerce                 convene a panel of        The Defense Department
    Department. As               experts to                has not implemented our
    technological                comprehensively assess    recommendation.
    advances in high             and report to Congress on
    performance computing        ways of addressing the
    occur, it may become         shortcomings of computer
    necessary to explore         export controls.
    other options to
    maintain the U.S.         Defense Department
    lead in
    defense-related              o  determine what
    technology. As a step        countermeasures are
    in this direction,           necessary, if any, to
    the National Defense         respond to enhancements
    Authorization Act for        of the military or
    Fiscal Year 1998a            proliferation
    required the                 capabilities of countries
    Secretary of Defense         of concern derived from
    to assess the                both licensed and
    cumulative effect of         unlicensed high
    U.S.-granted licenses        performance computing.
    for exports of
    computing
    technologies to
    countries and
    entities of concern.
    It also required
    information on
    measures that may be
    necessary to counter
    the use of such
    technologies by
    entities of concern.

    Main issues: The
    current system for
    controlling exports
    of high performance
    computers is
    ineffective because
    it focuses on the
    performance level of
    individual computers
    and does not address
    the linking or
    "clustering" of many
    lower performance
    computers that can
    collectively perform
    at higher levels than
    current export
    controls allow.
    However, the act does
    not require an
    assessment of the
    cumulative effect of
    exports of unlicensed
    computers, such as
    those that can be
    clustered.

    The current control
    system is also
    ineffective because
    it uses millions of
    theoretical
    operations per second
    as the measure to
    classify and control
    high performance
    computers meant for
    export. This measure
    is not a valid means
    for controlling
    computing
    capabilities.
    Export Controls: State and Commerce Department License Review Times Are Similar
    (June 1, 2001, GAO-01-528 )
    Background: The U.S.      GAO recommendations          Action taken
    defense industry and
    some U.S. and allied      No recommendations.          Not applicable.
    government officials
    have expressed
    concerns about the
    amount of time
    required to process
    export license
    applications.

    Main issues: In
    fiscal year 2000,
    State's average
    review time for
    license applications
    was 46 days while
    Commerce's average
    was 50 days.
    Variables identified
    as affecting
    application
    processing times
    include the commodity
    to be exported and
    the extent of
    interagency
    coordination. Both
    departments approved
    more than 80 percent
    of license
    applications during
    fiscal year 2000.
    Export Controls: Regulatory Change Needed to Comply with Missile Technology
    Licensing Requirements (May 31, 2001, GAO-01-530 )
    Background: Concerned     GAO recommendations          Action taken
    about missile
    proliferation, the        Commerce Department          Our recommendations have
    United States and                                      not been implemented.
    several major trading        o  revise the Export      However, the Commerce
    partners in 1987             Administration            Department has a
    created an                   Regulations to comply     regulatory change pending
    international                with the MTCR export      that, once implemented,
    voluntary agreement,         licensing requirements    will require licenses for
    the Missile                  contained in the National the export of dual-use
    Technology Control           Defense Authorization Act missile technologies to
    Regime (MTCR), to            for Fiscal Year 1991, or  Canada.
    control the spread of        o  seek a statutory
    missiles and their           change from Congress to
    related technologies.        specifically permit MTCR
    Congress passed the          items to be exempted from
    National Defense             licensing requirements.
    Authorization Act for        o  if Commerce seeks a
    Fiscal Year 1991 to          statutory change, revise
    fulfill the U.S.             the Export Administration
    government's MTCR            Regulations to comply
    commitments. This act        with the current statute
    amended the Export           until such time as a
    Administration Act of        statutory change occurs.
    1979, which regulates
    the export of
    dual-use items, by
    requiring a license
    for all exports of
    controlled dual-use
    missile technologies
    to all countries. The
    National Defense
    Authorization Act
    also amended the Arms
    Export Control Act,
    which regulates the
    export of military
    items, by providing
    the State Department
    the discretion to
    require licenses or
    provide licensing
    exemptions for
    missile technology
    exports.

    Main issues: The
    State Department's
    regulations require
    licenses for the
    exports of missile
    technology items to
    all
    countries-including
    Canada, which is
    consistent with the
    National Defense
    Authorization Act.
    However, the Commerce
    Department's export
    regulations are not
    consistent with the
    act as they do not
    require licenses for
    the export of
    controlled missile
    equipment and
    technology to Canada.
    Export Controls: Clarification of Jurisdiction for Missile Technology Items
    Needed (Oct. 9, 2001, GAO-02-120 )
    Background: The           GAO recommendations          Action taken
    United States has
    committed to work         Commerce and State           The Departments of
    with other countries      Departments                  Commerce and State have
    through the MTCR to                                    not implemented our
    control the export of        o  jointly review the     recommendations despite
    missile-related              listing of items included initially agreeing to do
    items. The regime is         on the MTCR list,         so.
    a voluntary agreement        determine the appropriate
    among member                 jurisdiction for those
    countries to limit           items, and revise their
    missile proliferation        respective export control
    and consists of              lists to ensure that
    common export policy         proposed exports of
    guidelines and a list        regime items are subject
    of items to be               to the appropriate review
    controlled. In 1990,         process.
    Congress amended
    existing export
    control statutes to
    strengthen
    missile-related
    export controls
    consistent with U.S.
    commitments to the
    regime. Under the
    amended statutes, the
    Commerce Department
    is required to place
    regime items that are
    dual-use on its list
    of controlled items.
    All other regime
    items are to appear
    on the State
    Department's list of
    controlled items.

    Main issues: The
    Departments of
    Commerce and State
    have not clearly
    determined which
    department has
    jurisdiction over
    almost 25 percent of
    the items that the
    U.S. government
    agreed to control as
    part of its regime
    commitments. The lack
    of clarity as to
    which department has
    jurisdiction over
    some regime items may
    lead an exporter to
    seek a Commerce
    license for a
    militarily sensitive
    item controlled by
    the State.
    Conversely, an
    exporter could seek a
    State license for a
    Commerce-controlled
    item. Either way,
    exporters are left to
    decide which
    department should
    review their exports
    of missile items and,
    by default, which
    policy interests are
    to be considered in
    the license review
    process.
    Export Controls: Issues to Consider in Authorizing a New Export Administration
    Act (Feb. 28, 2002, GAO-02-468T )
    Export Controls: Department of Commerce Controls over Transfers of Technology to
    Foreign Nationals Need Improvement (Sept. 6, 2002, GAO-02-972 )
    Background: To work with  GAO recommendation                  Action taken
    controlled dual-use
    technologies in the       Commerce Department                 Our
    United States, foreign                                        recommendations
    nationals and the firms      o  use available Immigration and have been
    that employ them must        Naturalization Service data to   implemented.
    comply with U.S. export      identify foreign nationals
    control and visa             potentially subject to deemed
    regulations. U.S. firms      export licensing requirements.
    may be required to           o  establish, with the Defense,
    obtain what is known as      Energy, and State Departments, a
    a deemed export license      risk-based program to monitor
    from the Commerce            compliance with deemed export
    Department before            license conditions. If the
    transferring controlled      departments conclude that
    technologies to foreign      certain security conditions are
    nationals in the United      impractical to enforce, they
    States. Commerce issues      should jointly develop
    deemed export licenses       conditions or alternatives to
    after consulting with        ensure that deemed exports do
    the Defense, Energy, and     not place U.S. national security
    State Departments. In        interests at risk.
    addition, foreign
    nationals who are
    employed by U.S. firms
    should have an
    appropriate visa
    classification, such as
    an H-1B specialized
    employment
    classification. H-1B
    visas to foreign
    nationals residing
    outside of the United
    States are issued by the
    State Department, while
    the Immigration and
    Naturalization Servicec
    approves requests from
    foreign nationals in the
    United States to change
    their immigration status
    to H-1B.

    Main Issues: In fiscal
    year 2001, Commerce
    approved 822 deemed
    export license
    applications and
    rejected 3. Most of the
    approved deemed export
    licenses allowed foreign
    nationals from countries
    of concern to work with
    advanced computer,
    electronic, or
    telecommunication and
    information security
    technologies in the
    United States. To better
    direct its efforts to
    detect possible
    unlicensed deemed
    exports, in fiscal year
    2001 Commerce screened
    thousands of
    applications for H-1B
    and other types of visas
    submitted by foreign
    nationals overseas. From
    these applications, it
    developed 160 potential
    cases for follow-up by
    enforcement staff in the
    field. However, Commerce
    did not screen thousands
    of H-1B change-of-status
    applications submitted
    domestically to the
    Immigration and
    Naturalization Service
    for foreign nationals
    already in the United
    States. In addition,
    Commerce could not
    readily track the
    disposition of the 160
    cases referred to field
    offices for follow-up
    because it lacks a
    system for doing so.

    Commerce attaches
    security conditions to
    almost all licenses to
    mitigate the risk of
    providing foreign
    nationals with
    controlled dual-use
    technologies. However,
    according to senior
    Commerce officials,
    their staff do not
    regularly visit firms to
    determine whether these
    conditions are being
    implemented because of
    competing priorities,
    resource constraints,
    and inherent
    difficulties in
    enforcing several
    conditions.
    Export Controls: Processes for Determining Proper Control of Defense-Related
    Items Need Improvement (Sept. 20, 2002, GAO-02-996 )
    Background: Companies     GAO recommendations                 Action taken
    seeking to export
    defense-related items     Commerce Department                 With a limited
    are responsible for                                           exception, our
    determining whether          o  promptly review existing      recommendations
    those items are              guidance and develop criteria    have not been
    regulated by the             with concurrence from the State  implemented. In
    Commerce Department or       and Defense Departments for      responding to our
    the State Department and     referring commodity              report, the State
    what the applicable          classification requests to those Department
    export requirements are.     departments.                     indicated it
    If in doubt about            o  work with State to develop    partially agreed
    whether an item is           procedures for referring         with our
    Commerce or                  requests that are returned to    recommendations,
    State-controlled or when     companies because the items are  while the
    requesting a change in       controlled by State or because   Departments of
    jurisdiction, an             they require a commodity         Commerce and
    exporter may request a       jurisdiction review.             Defense agreed to
    commodity jurisdiction                                        implement our
    determination from        Commerce, Defense and State         recommendations.
    State. State, which       Departments
    consults with Commerce                                           o  Commerce and
    and Defense, is the only     o  revise interagency guidance      Defense have
    department authorized to     to incorporate any changes to       added staff to
    change export control        the referral process and time       assist with
    jurisdiction. If an          frames for making decisions.        their
    exporter knows an item       o  assess the resources needed      respective
    is Commerce-controlled       to make jurisdiction                processes.
    but is uncertain of the      recommendations and
    export requirements, the     determinations within
    exporter can request a       established time frames and
    commodity classification     reallocate them as appropriate.
    from Commerce. Commerce
    may refer classification
    requests to State and
    Defense to confirm that
    an item is
    Commerce-controlled.

    Main issues: The
    Commerce Department has
    improperly classified
    some State-controlled
    items as
    Commerce-controlled
    because it rarely
    obtains input from
    Defense and State before
    making commodity
    classification
    determinations. As a
    result, the U.S.
    government faces an
    increased risk that
    defense items will be
    exported without the
    proper level of
    government review and
    control to protect
    national interests.
    Also, Commerce has not
    adhered to regulatory
    time frames for
    processing
    classification requests.

    In its implementation of
    the commodity
    jurisdiction process,
    the State Department has
    not adhered to
    established time frames,
    which may discourage
    companies from
    requesting jurisdiction
    determinations. State
    has also been unable to
    issue determinations for
    some items because of
    interagency disputes
    occurring outside the
    process.
    Nonproliferation: Strategy Needed to Strengthen Multilateral Export Control
    Regimes (Oct. 25, 2002, GAO-03-43 )
    Background: Multilateral  GAO recommendations                 Action taken
    export control regimes
    are a key policy          State Department                    The State
    instrument in the                                             Department has not
    overall U.S. strategy to     o  as the U.S. government's      implemented our
    combat the proliferation     representative to the            recommendations.
    of weapons of mass           multilateral regimes, establish
    destruction. They are        a strategy to strengthen these
    consensus-based,             regimes. This strategy should
    voluntary arrangements       include ways for regime members
    of supplier countries        to
    that produce
    technologies useful in               o  improve
    developing weapons of                information-sharing,
    mass destruction or                  o  implement regime
    conventional weapons.                changes to their export
    The regimes aim to                   controls more
    restrict trade in these              consistently, and
    technologies to prevent              o  identify
    proliferation. The four              organizational changes
    principal regimes are                that could help reform
    the Australia Group,                 regime activities.
    which controls chemical
    and biological weapons       o  ensure that the United States
    proliferation; the MTCR;     reports all license application
    the Nuclear Suppliers        denials to regimes.
    Group; and the Wassenaar     o  establish criteria to assess
    Arrangement, which           the effectiveness of the
    controls conventional        regimes.
    weapons and dual-use
    items and technologies.
    All four regimes expect
    members to report
    denials of export
    licenses for controlled
    dual-use items, which
    provides members with
    more complete
    information for
    reviewing questionable
    export license
    applications. The United
    States is a member of
    all four regimes.

    Main issues: Weaknesses
    impede the ability of
    the multilateral export
    control regimes to
    achieve their
    nonproliferation goals.
    Regimes often lack even
    basic information that
    would allow them to
    assess whether their
    actions are having their
    intended results. The
    regimes cannot
    effectively limit or
    monitor efforts by
    countries of concern to
    acquire sensitive
    technology without more
    complete and timely
    reporting of licensing
    information and without
    information on when and
    how members adopt and
    implement agreed-upon
    export controls. For
    example, GAO confirmed
    that the U.S. government
    had not reported its
    denial of 27 export
    licenses between 1996
    and 2002 for items
    controlled by the
    Australia Group. Several
    obstacles limit the
    options available to the
    U.S. government in
    strengthening the
    effectiveness of
    multilateral export
    control regimes. The
    requirement to achieve
    consensus in each regime
    allows even one member
    to block action in
    adopting needed reforms.
    Because the regimes are
    voluntary in nature,
    they cannot enforce
    members' compliance with
    regime commitments. For
    example, Russia exported
    nuclear fuel to India in
    a clear violation of its
    commitments under the
    Nuclear Suppliers Group,
    threatening the
    viability of this
    regime. The regimes have
    adapted to changing
    threats in the past.
    Their continued ability
    to do so will determine
    whether they remain
    viable in curbing
    proliferation in the
    future.
    Nonproliferation: Improvements Needed to Better Control Technology Exports for
    Cruise Missiles and Unmanned Aerial Vehicles (Jan. 23, 2004, GAO-04-175 )
    Background: Cruise        GAO recommendations                 Action taken
    missiles and unmanned
    aerial vehicles (UAV)     Commerce Department                 The Commerce
    pose a growing threat to                                      Department has
    U.S. national security       o  assess and report to the      addressed our
    interests as accurate,       Committee on Government Reform   recommendation by
    inexpensive delivery         on the adequacy of the Export    revising its
    systems for                  Administration Regulations'      licensing
    conventional, chemical,      catch-all provision to address   requirement for
    and biological weapons.      missile proliferation by         missile technology
    Exports of cruise            nonstate actors. This assessment exports.
    missiles and military        should indicate ways the
    UAVs by U.S. companies       provision should be modified.    While the Commerce
    are licensed by the                                           Department has
    State Department while    Commerce, Defense and State         taken some actions
    government-to-government  Departments                         to address our
    sales are administered                                        recommendations,
    by the Defense               o  as a first step, each         the others
    Department. Exports of       department complete a            departments have
    dual-use technologies        comprehensive assessment of      not done so.
    related to cruise            cruise missile, UAV, and related
    missiles and UAVs are        dual-use technology transfers to
    licensed by the Commerce     determine whether U.S. exporters
    Department.                  and foreign end users are
                                 complying with the conditions on
    Main issues: U.S. export     the transfers.
    control officials find       o  as part of the assessment,
    it increasingly              each department conduct
    difficult to limit or        additional postshipment
    track dual-use items         verification visits on a sample
    with cruise missile or       of cruise missile and UAV
    UAV-related capabilities     licenses.
    that can be exported
    without a license. A gap
    in dual-use export
    control authority
    enables U.S. companies
    to export certain
    dual-use items to
    recipients that are not
    associated with missile
    projects or countries
    listed in the
    regulations, even if the
    exporter knows the items
    might be used to develop
    cruise missiles or UAVs.
    The gap results from
    current "catch-all"
    regulations that
    restrict the sale of
    unlisted dual-use items
    to certain national
    missile proliferation
    projects or countries of
    concern, but not to
    nonstate actors such as
    certain terrorist
    organizations or
    individuals. Catch-all
    controls authorize the
    government to require an
    export license for items
    that are not on control
    lists but are known or
    suspected of being
    intended for use in a
    missile or weapons of
    mass destruction
    program.

    The Departments of
    Commerce, Defense, and
    State have seldom used
    their end use monitoring
    programs to verify
    compliance with
    conditions placed on the
    use of cruise missile,
    UAV, or related
    technology exports. For
    example, Commerce
    conducted visits to
    assess the end use of
    items for about 1
    percent of the 2,490
    missile-related licenses
    issued between fiscal
    years 1998 and 2002.
    Thus, the U.S.
    government cannot be
    confident that
    recipients are
    effectively safeguarding
    equipment in ways that
    protect U.S. national
    security and
    nonproliferation
    interests.
    Export Controls: Post-Shipment Verification Provides Limited Assurance that
    Dual-Use Items Are Being Properly Used (Jan. 12, 2004, GAO-04-357 )
    Background: The U.S.      GAO recommendations                   Action taken
    government's policy
    regarding exports of      No recommendations.                   Not applicable.
    sensitive dual-use
    technologies seeks to
    balance economic,
    national security,
    and foreign policy
    interests. The Export
    Administration Act
    (EAA) of 1979, as
    amended, has been
    extended through
    executive orders and
    law. Under the act,
    the President has the
    authority to control
    and require licenses
    for the export of
    dual-use items, such
    as nuclear, chemical,
    biological, missile,
    or other technologies
    that may pose a
    national security or
    foreign policy
    concern. In 2002,
    there were two
    different bills
    before the 107th
    Congress-H.R. 2581
    and S. 149-that would
    enact a new EAA.b

    Main issues: A new
    EAA should take into
    consideration the
    increased
    globalization of
    markets and an
    increasing number of
    foreign competitors,
    rapid advances in
    technologies and
    products, a growing
    dependence by the
    U.S. military on
    commercially
    available dual-use
    items, and heightened
    threats from
    terrorism and the
    proliferation of
    weapons of mass
    destruction.
    Export Controls: Rapid Advances in China's Semiconductor Industry Underscore
    Need for Fundamental U.S. Policy Review (April 19, 2002, GAO-02-620 )
    Background:                             GAO recommendations     Action taken
    Semiconductor
    equipment and                           Commerce Department     After initially
    materials are                                                   disagreeing with
    critical components                        o  in consultation   our
    in everything from                         with the Defense and recommendations,
    automobiles to                             State Departments,   the Commerce
    weapons systems. The                       reassess and         Department has
    U.S. government                            document U.S. export cited our
    controls the export                        policy on            recommendations
    of these dual-use                          semiconductor        as the basis for
    items to sensitive                         manufacturing        increased
    destinations, such as                      equipment and        resources so it
    China. Exports of                          materials to China:  can conduct the
    semiconductor                                                   recommended
    equipment and                                      o  complete  analyses.
    materials require a                                the analyses
    license from Commerce                              needed to
    Department. Other                                  serve as a
    departments, such as                               sound basis
    Defense and State,                                 for an
    assist Commerce in                                 updated
    reviewing license                                  policy;
    applications. The                                  o  develop
    United States is a                                 new export
    member of the                                      controls, if
    multilateral                                       appropriate,
    Wassenaar Arrangement                              or
    on Export Controls                                 alternative
    for Conventional Arms                              means for
    and Dual-Use Goods                                 protecting
    and Technologies.                                  U.S.
                                                       security
    Main issues: Since                                 interests;
    1986, China has                                    and
    narrowed the gap                                   o
    between the U.S. and                               communicate
    Chinese semiconductor                              the results
    manufacturing                                      of these
    technology from                                    efforts to
    approximately 7 years                              Congress and
    to 2 years or less.                                U.S.
    China's success in                                 industry.
    acquiring
    manufacturing
    technology from
    abroad has improved
    its semiconductor
    manufacturing
    facilities for more
    capable weapons
    systems and advanced
    consumer electronics.
    The multilateral
    Wassenaar Arrangement
    has not affected
    China's ability to
    obtain semiconductor
    manufacturing
    equipment because the
    United States is the
    only member of this
    voluntary arrangement
    that considers
    China's acquisition
    of semiconductor
    manufacturing
    equipment a cause for
    concern.
    Additionally, U.S.
    government policies
    and practices to
    control the export of
    semiconductor
    technology to China
    are unclear and
    inconsistent, leading
    to uncertainty among
    U.S. industry
    officials about the
    rationale for some
    licensing decisions.
    Furthermore, U.S.
    agencies have not
    done the analyses,
    such as assessing
    foreign availability
    of this technology or
    the cumulative
    effects of such
    exports on U.S.
    national security
    interests, necessary
    to justify U.S.
    policies and
    practices.
    Export Controls: More Thorough Analysis Needed to Justify Changes in High
    Performance Computer Controls (Aug. 2, 2002, GAO-02-892 )
    Background: High                        GAO recommendations     Action taken
    performance computers
    that operate at or                      No recommendations.     Not applicable.
    above a defined
    performance
    threshold, measured
    in millions of
    theoretical
    operations per
    second, require a
    Commerce license for
    export to particular
    destinations. The
    President has
    periodically changed,
    on the basis of
    technological
    advances, the
    threshold above which
    licenses are
    required. The
    National Defense
    Authorization Act of
    1998 requires that
    the President report
    to Congress the
    justification for
    changing the control
    threshold. The report
    must, at a minimum,
    (1) address the
    extent to which high
    performance computers
    with capabilities
    between the
    established level and
    the newly proposed
    level of performance
    are available from
    foreign countries,
    (2) address all
    potential uses of
    military significance
    to which high
    performance computers
    between the
    established level and
    the newly proposed
    level could be
    applied, and (3)
    assess the impact of
    such uses on U.S.
    national security
    interests.

    Main issues: In
    January 2002, the
    President announced
    that the control
    threshold-above which
    computers exported to
    such countries as
    China, India, and
    Russia-would increase
    from 85,000 to
    190,000 millions of
    theoretical
    operations per
    second. The report to
    Congress justifying
    the changes in
    control thresholds
    for high performance
    computers was issued
    in December 2001 and
    focused on the
    availability of such
    computers. However,
    the justification did
    not fully address the
    requirements of the
    National Defense
    Authorization Act of
    1998. The December
    2001 report did not
    address several key
    issues related to the
    decision to raise the
    threshold: (1) the
    unrestricted export
    of computers with
    performance
    capabilities between
    the old and new
    thresholds will allow
    countries of concern
    to obtain computers
    they have had
    difficulty
    constructing on their
    own, (2) the U.S.
    government is unable
    to monitor the end
    uses of many of the
    computers it exports,
    and (3) the
    multilateral process
    used to make earlier
    changes in high
    performance computer
    thresholds.
    Background: The Commerce  GAO recommendations                 Action taken
    Department conducts
    post-shipment             Commerce Department                 Our
    verification (PSV)                                            recommendations
    checks to ensure that        o  improve technical training    have been
    dual-use items arrive at     for personnel conducting PSV     implemented.
    their intended               checks to ensure they are able
    destination and are used     to verify compliance with
    for the purposes stated      license conditions.
    in the export license.       o  ensure that personnel
    To conduct PSV checks,       conducting PSV checks assess
    Commerce personnel visit     compliance with license
    foreign companies to         conditions.
    verify the use and           o  require that the exporter
    location of exported         inform the end user in writing
    items. PSVs serve as one     of the license conditions.
    of the primary means of
    checking whether end
    users are complying with
    conditions imposed by
    the license. Commerce
    placed conditions on
    nearly all approved
    licenses for exports to
    countries of concern for
    fiscal years 2000 to
    2002.

    Main issues: In fiscal
    years 2000 to 2002, the
    Commerce Department
    approved 7,680 licenses
    for dual-use exports to
    countries of concern,
    such as China, India,
    and Russia. However, we
    found that during this
    time Commerce completed
    PSV checks on only 428
    of the dual-use licenses
    it approved for
    countries of concern.

    We identified three key
    weaknesses in the PSV
    process that reduce its
    effectiveness. First,
    PSVs do not confirm
    compliance with license
    conditions because U.S.
    officials often lack the
    technical training
    needed to assess
    compliance and end users
    may not be aware of the
    license conditions by
    which they are to abide.
    Second, some countries
    of concern, most notably
    China, limit the U.S.
    government's access to
    facilities where
    dual-use items are
    shipped, making it
    difficult to conduct a
    PSV. Third, PSV results
    have only a limited
    impact on future
    licensing decisions.
    Companies receiving an
    unfavorable PSV may
    receive greater scrutiny
    in future license
    applications, but
    licenses for dual-use
    exports to these
    companies can still be
    approved. In addition,
    according to Commerce
    officials, past PSV
    results play only a
    minor role in future
    enforcement actions.

    Source: GAO analysis of prior work.

    aPub. L. No. 105-85, S:1211, 111 Stat. 1932-34 (1997).

    b Neither H.R. 2581 nor S. 149 was enacted.

    cFunctions performed by the Immigration and Naturalization Service are now
    divided between U.S. Citizenship and Immigration Services and U.S.
    Immigration and Customs Enforcement, both of which are within the
    Department of Homeland Security.

    Appendix III:
    Comments from the Department of Commerce

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

    See comment 2.

    See comment 1.

    See comment 4.

    See comment 3.

    See comment 6.

    See comment 5.

    See comment 8.

    See comment 7.

    See comment 11.

    See comment 10.

    See comment 9.

    See comment 13.

    See comment 12.

    See comment 15.

    See comment 14.

    See comment 18.

    See comment 17.

    See comment 16.

    See comment 22.

    See comment 21.

    See comment 20.

    See comment 19.

    See comment 28.

    See comment 27.

    See comment 26.

    See comment 25.

    See comment 24.

    See comment 23.

    See comment 29.

    See comment 31.

    See comment 30.

    See comment 32.

    See comment 34.

    See comment 33.

                                      GAO Comments

               1. The scope of our review has remained unchanged. We examined
               BIS's dual-use export control system and whether changes were made
               to the system by focusing on three specific issues related to how
               well the system is operating in the post-September 2001
               environment.

                            2. Our report is not premised on a need for BIS to
                            develop a national security strategy, which is
                            outside of BIS's mission. BIS's stated goal is the
                            protection of national security and economic
                            interests. In its comments, BIS appears to define
                            "national security interests" in terms of the
                            administration's National Security Strategy, but BIS
                            has not developed performance measures to evaluate or
                            determine whether the dual-use export control system
                            is supporting and furthering that strategy.
                            Commerce's comments also do not address what effects
                            the dual-use export control system has had on U.S.
                            economic interests.

                            3. The eight specific measures cited in our report
                            are not "samples" of steps taken by BIS. Rather, they
                            represent all of the changes identified by BIS
                            officials as a result of their ad hoc review to
                            determine what changes, if any, should be made to the
                            system after the September 2001 terror attacks.
                            4. Our report accurately depicts what BIS officials
                            told us regarding the ad hoc review they conducted in
                            the aftermath of the 2001 terror attacks. Given that
                            BIS officials did not document their review, we can
                            neither confirm what the review consisted of nor
                            determine the sufficiency of this review and the
                            resulting changes.
                            5. Our report acknowledges that BIS made adjustments
                            to its enforcement efforts in response to the
                            changing security environment. Also, GAO is currently
                            conducting a separate review of export control
                            enforcement efforts.
                            6. Our report identifies  the specific changes BIS
                            officials stated were the result of their
                            post-September 2001 ad hoc review and acknowledges
                            that BIS has reprioritized its enforcement efforts
                            and taken other actions as a result of various
                            geopolitical changes. However, without performance
                            measures and systematic evaluations, BIS is not in a
                            position to readily identify weaknesses in the
                            dual-use export control system, implement corrective
                            measures, and determine whether those measures are
                            having the intended effects of protecting U.S.
                            national security and economic interests.
                            7. Commerce's characterization of BIS's annual
                            foreign policy report is misleading. BIS's annual
                            report summarizes export control changes and
                            describes what those changes were intended to
                            achieve. BIS's report does not contain an assessment
                            of the actual impact foreign policy-based controls
                            have had on U.S. interests.
                            8. Our report acknowledges that there have been over
                            100 amendments to the EAR since September 2001.
                            However, based on our review of those amendments, the
                            specific basis for many of these revisions is not
                            clear and given BIS's lack of evaluations, the impact
                            of these revisions is unknown. Also, it should be
                            noted that many of the regulatory amendments made
                            since September 2001 consisted of administrative
                            changes and technical corrections as opposed to
                            revisions of export requirements for dual-use items.
                            9. The quotes from senior BIS officials' speeches do
                            not address whether the dual-use export control
                            system is protecting U.S. interests nor do they
                            provide other evidence that BIS has developed
                            performance measures or conducted systematic
                            evaluations. While these speeches outline BIS's
                            mission and the role of export controls, the lack of
                            performance measures and systematic evaluations
                            precludes a determination as to whether that mission
                            and role are being successfully fulfilled. It is also
                            unclear how changing the bureau's name is an example
                            of a successful adaptation to the current
                            environment. Further, the increased scrutiny of
                            license applications was not the result of BIS's
                            actions as one of the quotes implies. As discussed in
                            our report, increases in the referral of license
                            applications resulted from decisions by other
                            agencies involved in the application review process.
                            10. Absent any documentation to the contrary,
                            particularly when BIS officials repeatedly
                            acknowledged that BIS had not undertaken systematic
                            evaluations, we stand by our finding that BIS has not
                            systematically evaluated the overall effectiveness
                            and efficiency of the dual-use export control system.
                            Regarding BIS's ad hoc post-September 2001 review, we
                            could not assess the validity and sufficiency of the
                            review and resulting changes due to the lack of
                            documentation.
                            11. Commerce's description of BIS's Game Plan is
                            misleading and inaccurate. First, BIS's mission and
                            priorities as summarized in the Game Plan are not
                            consistent with the mission and goals stated in
                            Commerce's official performance management documents,
                            such as the annual performance plan. The Game Plan
                            may represent BIS's thoughts for how to align
                            activities and priorities in the future, but it does
                            not depict what has been in place since the September
                            2001 terror attacks. Second, the Game Plan does not
                            contain measures of effectiveness. When we discussed
                            the Game Plan with BIS officials, they acknowledged
                            that they had not developed measures for evaluating
                            how well the dual-use export control system is
                            protecting national security and economic interests.
                            12. We agree that the development of measures for
                            determining the effectiveness of the dual-use export
                            system would be difficult. However, BIS's existing
                            performance measures, which focus on processing
                            times, fall far short of government management
                            standards since they do not provide a basis for
                            determining whether the system is protecting U.S.
                            interests.
                            13. Our report presents BIS's position that it was
                            unable to obtain assistance from other agencies to
                            develop performance measures for assessing the
                            dual-use export control system's effects on national
                            security and economic interests. The two examples of
                            performance measures provided in Commerce's comments
                            do not relate to BIS's administration of the export
                            controls system, which was the focus of our review,
                            but rather to BIS's export enforcement efforts and
                            assistance to other countries. Also, it is not clear
                            how these two measures would provide BIS with a basis
                            for determining the security and economic impact of
                            its controls on dual-use exports. Additionally,
                            Commerce's statement that BIS is assigning staff to
                            develop a methodology for evaluating the system's
                            effectiveness indicates that BIS does not yet have a
                            systematic evaluation process in place.
                            14. Our report discusses that, in the absence of
                            systematic evaluations, BIS officials obtain
                            information from industry to gauge how the dual-use
                            export control system is operating. However, the
                            collection of data from industry does not constitute
                            a measure or evaluation of how the dual-use export
                            control system is affecting U.S. economic interests.
                            Also, BIS officials repeatedly informed us that they
                            do not have measures for determining the impact of
                            dual-use export controls on economic interests.
                            15. The Office of Management and Budget determined in
                            its 2005 review that BIS lacked measures related to
                            the fundamental purpose of the dual-use export
                            controls system. Given this and our evaluation as
                            well as BIS's limited measures of efficiency and lack
                            of comprehensive analyses as to which items under its
                            control have actually been exported, BIS is not
                            meeting government performance management standards
                            and, therefore, does not represent the gold standard.
                            16. We examined the completeness of the watchlist and
                            the thoroughness of BIS's watchlist screening process
                            and found omissions in the list and weaknesses in the
                            process. Our intent was not to determine whether
                            licenses were approved for parties not on the
                            watchlist. As our report explains, a match between an
                            application and the watchlist does not necessarily
                            mean that the application will be denied but that the
                            application will be more closely scrutinized during
                            the license application review process.
                            17. Our report places BIS's watchlist in the context
                            of the larger license application review process. A
                            process built on multiple layers and multiple
                            agencies is only as strong as its weakest link. Other
                            agencies that participate in the license application
                            review process expect BIS to thoroughly screen all
                            parties on all applications against the watchlist
                            before referring applications to them. Given the
                            omissions we identified in the watchlist and the
                            weakness in the screening process, BIS's watchlist is
                            not serving its intended purpose of helping identify
                            those license applications that warrant additional
                            scrutiny. We identified many of the 147 parties not
                            on the watchlist by using the lists cited in
                            Commerce's comments. While BIS expects exporters to
                            check these publicly available lists, we found that
                            BIS failed to include all of the publicly-listed
                            parties on its watchlist. It is reasonable that BIS
                            would focus its licensing and enforcement efforts on
                            the "truly bad actors." However, given that the
                            watchlist is supposed to help BIS identify parties of
                            export control concern, BIS's ability to focus on
                            "bad actors" is undermined by the omissions we
                            identified in the watchlist.
                            18. The 147 parties we identified should not be
                            regarded as an exhaustive list of every party of
                            export control concern that should be on BIS's
                            watchlist. Our intent was not to identify all parties
                            but rather to evaluate the process that BIS uses to
                            determine which parties should be on the list.
                            Therefore, the 147 parties represent examples that
                            illustrate weaknesses in BIS's management of the
                            watchlist. However, to provide additional context, we
                            revised the text to include the number of names on
                            the BIS watchlist.
                            19. The measures listed in Commerce's comments do not
                            address the underlying weaknesses we identified or
                            our corrective recommendations.
                            20. Our report accurately reflects that several, but
                            not all, of GAO's prior recommendations regarding the
                            dual-use export control system have been implemented.
                            BIS's disagreement with the conclusions of GAO's
                            report on China's semiconductor industry does not
                            change the fact that BIS continues to cite that
                            report and its recommendations as justification for
                            requested increases in resources. However, BIS has
                            not implemented the report's recommendations. The
                            continued failure to address GAO's recommendations
                            regarding the commodity classification process and
                            export control jurisdiction places BIS's mission of
                            protecting national security and economic interests
                            at risk. Improper decisions regarding jurisdiction
                            and the lack of clear jurisdiction create the risk
                            that defense-related items will be exported without
                            the proper level of government review and control to
                            protect national interests. These weaknesses can also
                            result in companies seeking to export similar items
                            under the different controls of the Departments of
                            State and Commerce, which places some companies at a
                            competitive disadvantage.
                            21. As discussed in our report's scope and
                            methodology, we reviewed BIS's documents, such as its
                            performance plans, that contain BIS's official
                            performance measures. None of these documents
                            contains performance measures related to the
                            processing of commodity classifications. During
                            meetings with BIS officials, they did not identify
                            additional measures for evaluating the system's
                            effectiveness. Also, Commerce's comment is
                            misleading, as our report does not cite BIS
                            statistics on commodity classifications. Our report
                            contains GAO's analyses of BIS's data on commodity
                            classification processing times and shows that BIS
                            has exceeded regulatory processing time frames.
                            22. We are not revising the graphic because it
                            depicts what can occur in the license application
                            review process under different circumstances.
                            23. Text revised to further clarify the CIA's role in
                            the license application review process.
                            24. The examples provided by Commerce are limited to
                            BIS's analyses of licensing data. However, BIS has
                            not comprehensively analyzed data on actual exports,
                            particularly on unlicensed exports that represent the
                            majority of exports subject to BIS's control.
                            25. Our report states that Executive Order 12981
                            provides time frames for the entire license
                            application review process. However, none of BIS's
                            performance measures addresses the timeliness of the
                            entire process. Also, BIS has not reported overall
                            timeframes consistently in its annual reports.
                            26. Our draft report cited changes in BIS's licensing
                            policy for dual-use exports to Iraq as an
                            illustrative example; however, we have revised our
                            report to include the other countries listed in
                            Commerce's comments.
                            27. Despite Commerce's comment regarding its sources,
                            some of the 147 parties we identified as not being on
                            the watchlist appear on publicly available documents
                            from the State Department's Directorate of Defense
                            Trade Controls and the Homeland Security Department's
                            Immigration and Customs Enforcement.
                            28. We are not revising the text based on Commerce's
                            comment because our report accurately reflects how
                            the Treasury Department characterizes the list it
                            maintains on individuals and companies.
                            29. Despite Commerce's comment that it adds
                            individuals to its watchlist, we identified many
                            individuals who were not on the list but should have
                            been.
                            30. Our report explains that BIS has a regulatory
                            change pending that once implemented will address
                            this recommendation from 2001.
                            31. Commerce's actions regarding production equipment
                            for missile technology items do not resolve the lack
                            of clear jurisdiction between State and Commerce as
                            to which department controls the export of almost 25
                            percent of the missile technology items the U.S.
                            government agreed to control as part of its
                            commitments to the Missile Technology Control Regime.
                            As a result, GAO's recommendations regarding this
                            matter remain unimplemented.
                            32. See comment 20.
                            33. The memorandum contained in Commerce's comments
                            does not address GAO's recommendations that BIS
                            develop criteria, with the concurrence of the State
                            and Defense Departments, for the referral of
                            commodity classification requests and develop
                            procedures for referring other commodity
                            classification requests to the State Department. As a
                            result, GAO's recommendations regarding this matter
                            remain unimplemented.
                            34. We revised the report text to more clearly
                            reflect BIS's actions.

    Appendix IV: GAO Contact and Staff Acknowledgments

    GAO Contacts

    Ann Calvaresi-Barr (202) 512-4841 or calvaresibarra@gao.gov

    Staff Acknowledgments

    In addition to the contact named above, Anne-Marie Lasowski, Assistant
    Director; Johana R. Ayers; Lily Chin; Arthur James, Jr.; Megan Masengale;
    Margaret B. McDavid; Bradley Terry; Karen Thornton; and Joseph Zamoyta
    made key contributions to this report.

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    . Washington, D.C.: November 13, 1996.

    (120475)

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    Highlights of GAO-06-638 , a report to the Chairman, Committee on
    International Relations, House of Representatives

    June 2006

    EXPORT CONTROLS

    Improvements to Commerce's Dual-Use System Needed to Ensure Protection of
    U.S. Interests in the Post-9/11 Environment

    In regulating exports of dual-use items, which have both commercial and
    military applications, the Department of Commerce's Bureau of Industry and
    Security (BIS) seeks to allow U.S. companies to compete globally while
    minimizing the risk of items falling into the wrong hands. In so doing,
    BIS faces the challenge of weighing U.S. national security and economic
    interests, which at times can be divergent or even competing.

    In light of the September 2001 terror attacks, GAO was asked to examine
    BIS's dual-use export control system. In response, GAO is reporting on
    BIS's (1) evaluations of and changes to the system, (2) screening of
    export license applications against its watchlist, and (3) actions to
    correct weaknesses previously identified by GAO.

    What GAO Recommends

    GAO recommends that the Secretary of Commerce systematically evaluate the
    dual-use export control system; correct omissions in BIS's watchlist and
    weaknesses in the screening process; and take action to address GAO's
    prior unimplemented recommendations. Commerce disagreed with the report's
    findings and characterizations of its system but did not address GAO's
    recommendations. GAO maintains that the report fairly represents BIS's
    actions and the need for an overall evaluation framework.

    Lack of systematic evaluations. Although BIS made some regulatory and
    operational changes to the dual-use export control system, it has not
    systematically evaluated the system to determine whether it is meeting its
    stated goal of protecting U.S. national security and economic interests.
    Specifically, BIS has not comprehensively analyzed available data to
    determine what dual-use items have actually been exported. Further,
    contrary to government management standards, BIS has not established
    performance measures that would provide an objective basis for assessing
    how well the system is protecting U.S. interests. Instead, BIS relies on
    limited measures of efficiency that focus only on narrow aspects of the
    license application review process to assess the system's performance. BIS
    officials use intelligence reports and meetings with industry to gauge how
    the system is operating. Absent systematic evaluations, BIS conducted an
    ad hoc review of the system to determine if changes were needed after the
    events of September 2001. BIS officials determined that no fundamental
    changes were needed but opted to make some adjustments primarily related
    to controls on chemical and biological agents. GAO was unable to assess
    the sufficiency of the review and resulting changes because BIS officials
    did not document their review.

    Omissions in BIS's watchlist. GAO found omissions in the watchlist BIS
    uses to screen export license applications. This screening, which is part
    of the license application review process, is intended to identify
    ineligible parties or parties warranting more scrutiny. The omissions
    undermine the list's utility, which increases the risk of dual-use exports
    falling into the wrong hands. GAO identified 147 parties that had violated
    U.S. export control requirements, had been determined by BIS to be
    suspicious end users, or had been reported by the State Department as
    committing acts of terror, but these parties were not on the watchlist of
    approximately 50,000 names. Reasons for the omissions include a lack of
    specific criteria as to who should be on the watchlist and BIS's failure
    to regularly review the list. In addition, a technical limitation in BIS's
    computerized screening system results in some parties on license
    applications not being automatically screened against the watchlist.

    Some prior GAO recommendations left unaddressed. BIS has implemented
    several but not all of GAO's recommendations for ensuring that export
    controls on sensitive items protect U.S. interests. Among weaknesses
    identified in prior GAO reports is the lack of clarity on whether certain
    items are under BIS's control, which increases the risk of defense-related
    items being improperly exported. BIS has yet to take corrective action on
    this matter.
    *** End of document. ***