Export Controls: 1998 Legislative Mandate for High Performance Computers
(Letter Report, 09/24/1999, GAO/NSIAD-99-208).

Pursuant to a congressional request, GAO examined: (1) whether exporter
notification to the Department of Commerce of proposed sales of high
performance computers (HPC) to countries of concern has resulted in
license applications and what final action was taken on these licenses;
and (2) how Commerce is conducting post-shipment verifications of the
use of high performance computers after their export to these countries.

GAO noted that: (1) under the review process required by the National
Defense Authorization Act (NDAA), most of the 938 proposed exports of
HPCs to what were believed to be civilian end-users in countries of
concern have generally been allowed to continue without export licenses;
(2) from February 3, 1998, when procedures implementing the new NDAA
became effective, to March 19, 1999, reviewing agencies allowed 828
proposed HPC exports to continue without a license, but they required
license applications for 101 exports because of military, proliferation,
or foreign policy reasons such as human rights violations; (3) the
majority of the objections made by reviewing agencies to the 101
proposed exports were based on concerns that the proposed end-users of
the HPC might have been involved in military or proliferation-related
activity; (4) licenses that were approved had additional conditions
placed on the reexport or end-use of HPCs; (5) the majority of these
applications involved China, India, and Israel; (6) after the NDAA
procedures were implemented, licenses were required for nine exports of
HPCs to end-users of concern who had previously received HPC exports
without a license; (7) while the NDAA contains no time limit for
completing post-shipment verifications, Commerce has completed
verifications on 104 HPC exports, or about 27 percent of those
verifications required on the 390 HPCs exported during fiscal year 1998;
(8) in a report to Congress, Commerce stated that all 104 post-shipment
verifications were favorable, meaning that the computer had been seen
during an on-site visit and that nothing was inconsistent with the
license or the license exception; (9) verification conducted by Commerce
but not yet completed detected the possible diversion of two computers
to a military end-user, in apparent violation of U.S. export control
regulations; (10) according to Commerce, the main reasons why these
post-shipment verifications were not conducted were that: (a) Chinese
policy prior to June 1998 did not permit post-shipment verifications to
be made; or (b) the exports did not meet the requirements agreed upon in
a June 1998 memorandum of understanding between the Department of
Commerce and China's Ministry of Foreign Trade and Economic Cooperation;
and (11) although the NDAA requires post-shipment verifications on all
HPCs exported since November 18, 1997, whether licensed or not, Commerce
believes that it is futile to seek to visit HPCs exported to China
before the end-use visit arrangement or without end-user certificates.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-99-208
     TITLE:  Export Controls: 1998 Legislative Mandate for High
	     Performance Computers
      DATE:  09/24/1999
   SUBJECT:  Export regulation
	     International cooperation
	     Foreign sales
	     International trade restriction
	     Licenses
	     Supercomputers
	     Foreign military sales policies
	     Dual-use technologies
	     Foreign governments
IDENTIFIER:  China
	     India
	     Israel

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NS99208 A Report to the Chairman and Ranking Minority Member,
Committee on Armed Services, House of Representatives

September 1999 EXPORT CONTROLS 1998 Legislative Mandate for High
Performance Computers

GAO/NSIAD-99-208

  GAO/NSIAD-99-208

National Security and International Affairs Division

Lett er

B-283584 September 24, 1999 The Honorable Floyd D. Spence Chairman
The Honorable Ike Skelton Ranking Minority Member Committee on
Armed Services House of Representatives

In 1996, the executive branch streamlined its export controls for
high performance computers by removing licensing requirements for
most exports to civilian end- users while focusing control on
military and

proliferation- related end- users. This streamlined process made
exporters responsible for determining if they needed to apply for
an export license because they were selling a computer to a
military or proliferation- related end- user. In 1997, however,
several high performance computers were exported to Russian
nuclear weapons laboratories and to a military end- user in China
without a license. Concerned that exporters may not be aware of
the activities of the end- users they sell to, Congress included a
provision in the fiscal year 1998 National Defense Authorization
Act

(P. L. 105- 85) to require exporters to notify the Commerce
Department of any proposed high performance exports to countries
that pose a concern for military or proliferation reasons 1 to
determine if these exports need a license. The act also requires
Commerce to verify that high performance computers exported to
countries of concern are being used by the appropriate end- user
for the intended purpose. In response to your request, we
determined (1) whether exporter notification to Commerce of
proposed sales of high performance computers to countries of
concern has resulted in license applications and

what final action was taken on these licenses and (2) how Commerce
is conducting post- shipment verifications of the use of high
performance computers after their export to these countries.

1 Countries that pose such a concern include China, Russia, India,
Pakistan, Israel, and Egypt.

Results in Brief Under the review process required by the National
Defense Authorization Act, most of the 938 proposed exports of
high performance computers to

what were believed to be civilian end- users in countries of
concern have generally been allowed to continue without export
licenses. Specifically, from February 3, 1998, when procedures
implementing the new National Defense Authorization Act became
effective, to March 19, 1999, reviewing agencies 2 allowed 828
proposed high performance computer exports to continue without a
license, but they required license applications for 101 proposed
exports because of military, proliferation, or foreign policy

reasons such as human rights violations. 3 The majority of the
objections made by reviewing agencies to the 101 proposed exports
were based on concerns that the proposed end- users of the high
performance computers might have been involved in military or
proliferation- related activity. Subsequently, of the 101 license
applications required by the National Defense Authorization Act
review, 16 were approved and 6 were denied.

The remaining 79 were returned to the exporter without action. 4
Licenses that were approved had additional conditions placed on
the reexport or end- use of the high performance computers. The
majority of these

applications involved China, India, and Israel. After the National
Defense Authorization Act procedures were implemented, licenses
were required for nine exports of high performance computers to
end- users of concern who had previously received high performance
computer exports without a license.

Post- shipment verifications confirm the physical location of the
high performance computers and, to the extent practical, verify if
they are being used as intended. However, there are limitations to
determining end- use.

While the National Defense Authorization Act contains no time
limit for completing post- shipment verifications, Commerce has
completed verifications on 104 high performance computer exports,
or about

2 The reviewing agencies include the Departments of Commerce,
Defense, Energy, and State. The Arms Control and Disarmament
Agency also reviewed cases until March 31, 1999, when the Agency
was merged with the State Department. 3 Nine additional proposed
exports were classified as incomplete and returned to the exporter
without action. 4 Commerce will return license applications
without action to exporters at their request or because the
required documentation has not been submitted to proceed with the
application. Because reviewing agencies have determined that a
license is needed to export, returning license applications
without action in effect blocks the export.

27 percent of those verifications required on the 390 high
performance computers exported during fiscal year 1998. In a
report to Congress, Commerce stated that all 104 post- shipment
verifications were favorable, meaning that the computer had been
seen during an on- site visit and that nothing was inconsistent
with the license or the license exception.

However, verification conducted by Commerce but not yet completed
detected the possible diversion of two computers to a military
end- user, in apparent violation of U. S. export control
regulations. The Commerce

Department has opened an investigation of these diversions. Of the
286 high performance computer exports that have not yet been
verified, almost two- thirds (187) involve exports to China.
According to Commerce, the main reasons why these post- shipment
verifications were not conducted were that (1) Chinese policy
prior to June 1998 did not permit post- shipment verifications to
be made or (2) the exports did not meet the

requirements agreed upon in a June 1998 memorandum of
understanding between the Department of Commerce and China's
Ministry of Foreign Trade and Economic Cooperation. Although the
National Defense Authorization Act requires post- shipment
verifications on all high performance computers exported since
November 18, 1997, whether licensed or not, Commerce believes that
it is futile to seek to visit high

performance computers exported to China before the end- use visit
arrangement or without end- user certificates. In addition, they
believe it would not be the most effective use of Commerce's
limited resources.

Background In 1996, the executive branch revised export controls
and licensing conditions for high performance computers (HPC)
based on the risks

specific countries and end- users posed to U. S. national
security. The executive branch organized countries into four
tiers, with each tier after tier 1 representing a successively
higher level of concern to U. S. security interests. Tier 3
contains 50 countries of concern for military or

proliferation reasons. The executive branch also established
separate control levels for different types of end- users in tier
3. For end- users of military or proliferation concern, the
controls require a license to export HPCs performing over 2,000
millions of theoretical operations per second (MTOPS). For
civilian end- users in tier 3, the controls require a license to
export HPCs that perform over 7,000 MTOPS. For exports of HPCs
performing between 2,000 and 7, 000 MTOPS, an exporter could ship
the

computers without a license, 5 provided the exporter determined
that the end- user was involved only in civilian activities. 6 The
revision did not affect export licensing requirements to the seven
countries in tier 4 countries, for which the United States has a
virtual embargo on all computer exports. 7 The fiscal year 1998
National Defense Authorization Act requires an

exporter to notify Commerce in advance that it proposes to export
or reexport HPCs that perform between 2,000 and 7,000 MTOPS to
civilian users in tier 3 countries. During a 10- day period,
Commerce circulates the notifications to the Departments of
Defense, State and Energy, and the Arms Control and Disarmament
Agency (ACDA) 8 for review. The NDAA

requires a license to export if any of these agencies raises a
written objection to the export without a license. According to
National Security Council guidance, agency objections shall state
whether the proposed 5 Under 15 C. F. R. Part 740 of the Export
Administration regulations.

6 On July 1, 1999, the executive branch further revised licensing
levels for tier 3 countries. The levels for civilian end- users
were raised from 7,000 MTOPS to 12, 300 MTOPS effective
immediately, and for military end- users from 2,000 MTOPS to 6,500
MTOPS effective in 6 months. The executive branch also raised the
National Defense Authorization Act (NDAA) notification levels from
2, 000 MTOPS to 6,500 MTOPS. By law, this change will take effect
6 months after the executive branch reports the changes to
Congress. The revision does not affect the NDAA requirement to
conduct post- shipment verifications on all exported computers
over 2,000 MTOPS to tier 3 countries. 7 The seven countries are
Iraq, Iran, Libya, North Korea, Cuba, Syria, and Sudan. 8 On March
31, 1999, ACDA was terminated as an independent entity, and its
arms control and nonproliferation functions were merged with those
of the State Department. ACDA therefore did not have a role in the
NDAA process as a reviewing agency after March 31, 1999.

export represents a risk of diversion to a military or
proliferation end- use or end- user of concern. If no objection is
raised during the 10- day period, the exporter may ship the HPCs
without a license. Exporters that want to ship HPCs to known
military end- users or end- users of proliferation concern must
directly apply to Commerce for a license; they do not go through
the notification process. In addition, the NDAA requires Commerce
to conduct post- shipment verifications on all licensed and

unlicensed HPCs above 2,000 MTOPS exported to tier 3 countries.
This requirement applies to all HPCs exported from the United
States on or after November 18, 1997, the date of enactment of the
NDAA. NDAA's Effect on HPC Of 938 HPC export notifications to tier
3 countries that were reviewed by Exports

Commerce between February 3, 1998, and March 19, 1999, the
executive branch agencies objected to 101 notifications and, as a
result, these notifications were converted to license
applications. (App. I contains a detailed breakdown of NDAA
notifications, licenses, and license actions.) During this same
time period, HPC manufacturers submitted 146 license applications
directly to the Department of Commerce. (App. II contains a

country breakout of license applications submitted directly to
Commerce.) The Arms Control and Disarmament Agency and the
Department of Defense raised most of the NDAA objections. Most of
the license applications for which objections were raised were
returned to the exporter without action, either at the exporter's
request or because Commerce had not received additional
documentation to act on the application. Executive Branch
Agencies' Of the 101 objections raised regarding the proposed HPC
exports, ACDA Objections to Exports

and the Department of Defense submitted 59 and 55, respectively;
the State Department submitted 14; and Commerce submitted 3. The
Department of Energy raised no objections. According to Commerce,
an agency will often

not object if an objection has already been raised by another
agency. The majority of the objections were based on concerns that
the proposed end- users of the HPCs might have been involved in
some military or proliferation- related activity. This was
particularly evident in ACDA's objections to telecommunications
end- users in China. Of ACDA's 59

objections, 39 were for exports to China and 29 of those involved
telecommunications end- users, which, according to ACDA officials,
have close ties with China's military. The HPCs could therefore
contribute to the military's command and control capability. The
Defense Department had

similar concerns with several other civil entities in China about
the risk of diversion of HPCs to military end- users/ uses.

State, ACDA, and Defense also raised objections based on
proliferation concerns: they raised 21 objections over HPC exports
to India, primarily because of sanctions imposed on India and
Pakistan for the nuclear testing both countries had conducted in
May 1998. 9 Before the sanctions took

place, objections had been made on proposed HPC exports to
research institutes and government entities in India because of
the risk of diversion to proliferation end- users/ uses, such as
missiles or nuclear weapons. State objected to two HPC exports to
Chinese public security entities and one HPC export involving an
intermediate consignee in Serbia based on foreign policy and human
rights concerns. According to State Department

officials, although National Security Council guidance requires
that objections state whether proposed HPC exports represent a
risk of diversion to military or proliferation end- users or end-
uses, it does not rule out the use of foreign policy reasons other
than proliferation as grounds for objections. However, Commerce
disagrees with State on this matter. We found that from the NDAA
review process, objections were made to nine proposed HPC exports
to end- users that had previously received HPCs without a license.
10 Of the nine proposed exports, four were for end- users in
China, four were for India, and one was for Israel. The agencies
raised objections on the four proposed HPC exports to China based
on their potential diversion from telecommunication and university
end- users to

military and proliferation- related activities. Objections to the
four proposed HPC exports to India were based on the sanctions
imposed due to proliferation concerns. One objection to a proposed
HPC export to Israel involved an Israeli university that might
have had connections to

proliferation- related activities. Commerce approved a license for
one export and returned the remaining eight applications to the
exporters without action.

9 The President imposed sanctions on June 18, 1998, under the
authority of the Arms Export Control Act (22 U. S. C. section
2799aa- 1). 10 These HPC exports, completed prior to NDAA review
procedures, did not require a license under the regulations at
that time, if the HPC was between 2, 000 and 7,000 MTOPS and if
the exporter believed the HPC was going to a civilian end- user.

Outcome of NDAA Of the 101 license applications required by the
NDAA review, 16 were Notifications Converted to

approved and 6 were denied. The remaining 79 were returned to the
License Applications for exporter without action. The 16
applications for licenses that were Tier 3 Countries

approved included additional licensing conditions. The conditions,
which were the same for all 16 licenses, were that (1) no reexport
or retransfer of the HPCs could be made without prior Commerce
Department approval, (2) the end- user must comply with Security
Safeguard Plans, 11 and (3) the exporter must verify delivery and
installation of the HPCs.

Six licenses were denied for foreign policy, military, and
proliferation reasons. For example, license denials of HPC exports
destined for China involved research institutes that were
reportedly engaged in military or proliferation activities, and
license denials of HPC exports to India

involved end- users that were engaged in missile proliferation
activities. As previously mentioned, the majority of license
applications required due to NDAA objections (79 of the 101) were
returned without action. One reason that applications were
returned without action was that the time period for exporters to
submit additional information to process the applications (30
days) had expired. Typically, additional information is needed on
end- users, remote access end- users, or the entity that will
install and/ or service the HPCs. The exporter must resubmit a
regular export license application if it obtains the required
information after the first

application has been returned. Applications were also returned at
the exporters' requests for various other reasons: the end- user
sometimes canceled the order, changed the HPC's MTOPS level to a
higher or lower capability, or changed the proposed end- use. For
example, in some cases, the exporter canceled the license
application and substituted exports of HPCs that performed below
2,000 MTOPS and therefore did not require a license.

Commerce has no system for tracking resubmissions of license
applications that were returned without action. The Department
instead depends on the memory of its licensing officers or on
exporters to inform the Department that they are resubmitting an
application. According to a Commerce licensing officer, the
Department received very few

11 Commerce may require that the exporter submit a Security
Safeguard Plan signed by the end- user and, sometimes, also
certified by the export control authorities of the importing
country. The plan identifies a range of safeguards required by
Commerce, which the end- user agrees to implement as a condition
for receiving a license.

resubmissions of applications returned without action that were
originally converted to a license application. Implementation of

Section 1213 of the NDAA requires the Secretary of Commerce to
conduct Post- Shipment post- shipment verifications (PSV) on each
HPC exported over 2,000 MTOPS from the United States to a tier 3
country, whether licensed or Verifications Is

unlicensed, on or after the date of the statute's enactment, which
was Incomplete and Has

November 18, 1997. 12 Commerce uses either export enforcement
officers Several Limitations sent from the United States or
Foreign Commercial Service officers from U. S. embassies or
consulates to perform the PSVs. The PSVs confirm the physical
location of the HPC and, to the extent practical, verify if it is
being used as intended. However, there are limitations to
determining end- use. While the NDAA contains no time limit for
completing PSVs, Commerce has completed PSVs on 104 HPC exports,
or about 27 percent of those verifications required for the HPCs
exported during fiscal year 1998.

Commerce reported that all 104 PSVs were favorable. However, a PSV
conducted by Commerce that has yet to be completed detected the
possible diversion of two computers to a military end- user, in
apparent violation of U. S. export control regulations. The
Commerce Department

has opened an investigation. How Commerce Conducts The Commerce
Department uses U. S. personnel from its Bureau of Export NDAA-
Mandated PostShipment Administration or its U. S. and Foreign
Commercial Service officers located

Verifications at U. S. embassies and consulates to conduct NDAA-
mandated

post- shipment verifications on the use of HPCs. Export
Administration teams, which typically comprise two agents, go to a
country or a group of countries for a 2- to 3- week period to
conduct PSVs and pre- license checks and to meet with businesses
to educate them on U. S. export control regulations. During fiscal
year 1998, Export Administration teams took two trips to Russia,
one trip each to Israel and Egypt, and one trip to India to
conduct PSVs. No trips were made to China. Commerce's guidelines
instruct the PSV officials to determine

 what the serial number of the HPC is and, if possible, whether
the machine has been upgraded;

12 The July 1, 1999, revision of licensing levels does not affect
the NDAA requirement to conduct post- shipment verifications on
all exported computers over 2,000 MTOPS to tier 3 countries.

 what the location of the HPC is, including a complete address,
telephone number, fax number, and the name of a contact person, if
the HPC has been resold or retransferred;  whether the HPC is
being used in a manner consistent with the stated purpose;

 whether anyone has remote access to the computer and, if so, who
does and for what purpose;  whether the HPC is located in a secure
area and whether the level of security seems consistent with the
function performed or seems overly

strict for a commercial facility; and  whether any activities seem
inconsistent with the stated end- use,

including indications of ownership or operations by a military
organization or involvement of an organization in the design,
manufacture, storage, use, or testing of nuclear, chemical, or
biological weapons.

When conducting a PSV, officials confirm that the computer has
arrived at the intended location and either qualifies for a
license exception (if it has been exported without a license) or
is being used under the terms of the license. According to an
Export Administration official, a favorable PSV means that an HPC
has been seen during an on- site visit and that nothing was
inconsistent with the license or the license exception. An
unfavorable PSV means that an inconsistency was found between the
actual end- use

and the end- use intended for the export. The Export
Administration's Office of Export Enforcement may investigate the
inconsistency, depending on its seriousness. In its report to
Congress, Commerce said that

two HPCs sent to a distributor had been sold to a military end-
user in apparent violation of U. S. export control regulations and
the matter is under investigation.

A Significant Number of During the first year after enactment of
the NDAA (Nov. 18, 1997, to

Post- Shipment Verifications Nov. 17, 1998), 390 HPC exports were
reported to Congress. PSVs had been

Have Not Been Completed completed on 104 (27 percent) of the
total, and 286 (73 percent) had not been completed (see table 1).
Also, appendix III has a country- by- country breakdown of the
reasons why PSVs were not conducted.

Table 1: NDAA Post- Shipment Verifications on High Performance
Computer Exports to Tier 3 Countries, November 18, 1997 - November
17, 1998 Number of

Number of PSVs Number of PSVs

Percent not Country HPCs exported completed not completed
completed

China 191 1 190 99. 5 Israel 82 42 40 48. 8 Russia 33 21 12 36. 4
India 29 20 9 31. 0 UAE 20 11 9 45 Egypt 11 2 9 81. 8 Saudi 8 2 6
75 Arabia Croatia 3 2 1 33. 3

Kuwait 2 0 2 100 Ukraine 2 0 2 100 Algeria 1 0 1 100 Angola 1 0 1
100 Bahrain 1 0 1 100 Lebanon 1 0 1 100 Oman 1 0 1 100 Pakistan 1
0 1 100 Azerbaijan 1 1 0 0 Kazakstan 1 1 0 0 Serbia 1 1 0 0

Total 390 104 286 73

Source: Fiscal year 1998 National Defense Authorization Act
section 1213 annual report.

Two- thirds of the HPCs that have not yet been verified involved
exports to China. According to the Commerce Department, the main
reasons why these PSVs were not conducted were that (1) Chinese
policy prior to June 1998 did not permit PSVs or (2) the exports
did not conform to the June 1998 memorandum of understanding
between Commerce and China's Ministry of Foreign Trade and
Economic Cooperation (MOFTEC), which is not legally binding. As
shown in appendix III, 105 HPCs were exported to China after
enactment of the NDAA in November 1997, but before June 1998, when
the Commerce-MOFTEC arrangement went into effect.

Chinese authorities would not allow PSVs to be conducted on HPCs
shipped before June 1998 because of sovereignty concerns. Under
the June

1998 arrangement, the Chinese government now allows the United
States to conduct PSVs on HPC exports under certain conditions.
However, PSVs could not be conducted on 82 HPCs shipped after the
June 1998

arrangement because the exports did not conform to the
arrangement. According to the Commerce Department, the 82 HPCs
were shipped without a license and the exporters were not required
to obtain a Chinese end- user certificate. An end- user
certificate, issued by China, facilitates Commerce's ability to
conduct PSVs in China. It was not until January 14, 1999, that
Commerce's Bureau of Export Administration published regulations
requiring exporters to obtain a Chinese end- user certificate for
any computer over 2, 000 MTOPS to China, whether under license or
a

license exception, and report the information to the Bureau. This
requirement, however, became effective only for HPCs shipped after
February 11, 1999. Although the National Defense Authorization Act
requires post- shipment verifications on all high performance
computers

exported since November 18, 1997, whether licensed or not,
Commerce believes that it is futile to seek to visit high
performance computers exported to China prior to the end- use
arrangement or without end- user

certificates and also that it would not be the most effective use
of Commerce's limited resources. According to Commerce, 89 PSVs
are planned for fiscal year 1999, or requests for these visits are
pending at embassies or consulates. Many Export Administration
trips are scheduled for Saudi Arabia, the United Arab Emirates,
India, Israel, Jordan, Egypt, Russia, Pakistan, and China. Seven
other PSVs were not done because in two cases the HPC exports were
canceled, and in five cases the HPCs were exported to countries
for

which the NDAA does not require a PSV. Scope and To determine
whether exporter notification to Commerce of proposed Methodology

exports of HPCs to countries of concern have resulted in
applications for licenses and what final action was taken on these
licenses, we obtained data on NDAA notifications made by U. S.
computer exporters from the Commerce Department's export control
database for January 1, 1998, to

March 19, 1999. From this data, we quantified the number of (1)
NDAA notifications made since procedures implementing the fiscal
year 1998 NDAA became effective on February 3, 1998, to March 19,
1999; (2) objections executive branch agencies raised on these
notifications during this period; and (3) license applications
required from these objections and whether these licenses were
approved, denied, or returned to the exporter without action. We
also obtained the basis of agency

objections to NDAA notifications by interviewing agency officials,
reviewing their files on the objections, and reviewing the types
of end- users and end- uses. Further, using data from the Commerce
Department export control database, we determined the reasons why
licenses were returned without action and denied. In addition, we
determined whether the executive branch is requiring licenses on
end- users that previously received HPC exports without a license.
We compared data on unlicensed exports to tier 3 countries from
January 1, 1996, to September 30, 1997, with NDAA notifications
that required a license from February 3, 1998, to March 19, 1999.

To assess how the Commerce Department is carrying out the
requirement to conduct post- shipment verifications on all HPC
exports to tier 3 countries, we interviewed Commerce officials to
discuss the various methods they use to conduct PSVs and how they
assess their results. We also reviewed Commerce guidelines for
conducting PSVs on HPCs and reviewed trip reports submitted by
Export Enforcement Special Agents conducting PSVs under the
Commerce's safeguards program during 1998. To determine to what
extent Commerce had complied with the NDAA requirement that all
HPC exports be verified, we (1) reviewed the legal requirements
for the PSVs in section 1213 of the fiscal year 1998 National

Defense Authorization Act and (2) analyzed data presented in the
report mandated by section 1213 of the NDAA, to determine to what
extent HPC exports had been verified and the reasons why PSVs had
not been performed. In addition, we reviewed the June 1998
memorandum of understanding between Commerce and China's MOFTEC
concerning PSVs conducted in China and discussed its provisions
with officials from the General Counsel's Office of Commerce's
Bureau of Export Administration.

We conducted our review between November 1998 and July 1999 in
accordance with generally accepted government auditing standards.
Agency Comments and

We provided copies of this report to the Departments of Commerce,
Our Evaluation

Energy, Defense, and State. Energy did not comment on the report.
The State Department provided oral technical comments, which we
incorporated accordingly. The Defense Department reviewed the
report and had no comments. Commerce said that the report did not
acknowledge

that it had to divert enforcement resources from investigations
and other preventive enforcement activities to conduct NDAA-
mandated post- shipment verifications and that it will soon be
impossible to perform such verifications mandated by the NDAA.
Commerce believes it will

become impossible to perform PSVs in the future because computer
power is increasing and prices are declining. Commerce, however,
could not identify any cases in which PSVs could not be done on
non- NDAA cases because available resources were used on NDAA
cases. In addition, Commerce officials provided no supporting
analysis showing at what point it would be impossible to conduct
all mandated verifications. Commerce also had some technical
changes that we incorporated into the report as appropriate.

Commerce also commented that the licenses required from the NDAA
notification process for HPC exports to nine end- users of
concern, who previously received HPC exports without a license,
represented only 2.61 percent of those exports previously made
without a license before the NDAA. We agree that these nine cases
represent a small proportion of

those HPCs exported without a license before the NDAA, but they
illustrate that the NDAA notification process is working and has
been successful in identifying suspect end- users. Commerce stated
that most uncompleted PSVs were in China and that 103 of 200
outside of China were completed. Table 1 and supporting narrative
shows that most uncompleted PSVs were in China. Commerce said that
it is futile to seek to visit HPCs exported to China prior to the
end- use visit arrangement or without end- user certificates,
particularly in view of the proposed changes to control levels for
exports to tier 3 military end- users. We agree with Commerce that
the proposed changes to the control levels would remove all future
licensing requirements for many HPCs that have already been
exported to China. Nevertheless, the NDAA currently requires
Commerce to conduct PSVs on

all licensed and unlicensed HPCs above 2000 MTOPS exported to tier
3 countries, including China, notwithstanding the control levels
established by the executive branch.

Commerce and Defense Department written comments are reprinted in
appendixes IV and V.

We are sending copies of this report to the Honorable William M.
Daley, Secretary of Commerce; the Honorable Bill Richardson,
Secretary of Energy; the Honorable William S. Cohen, Secretary of
Defense; and the Honorable Madeleine K. Albright, the Secretary of
State. We will also make copies available to other interested
parties on request.

Please contact me or F. James Shafer on (202) 512- 4128 if you or
your staff have any questions concerning this report. Key
contributors to this assignment were Charles T. Bolton and Jason
Fong.

Harold J. Johnson, Associate Director International Relations and
Trade Issues

Appendi xes NDAA Notifications and License Actions,

Appendi x I

February 3, 1998 - March 19, 1999 NDAA notifications NDAA licenses
License Country a Approved required Incomplete b Total Approved
Denied RWA Total

China 442 59 2 503 9 3 47 59

Russia 91 3 0 94 0 1 2 3

Israel 82 10 3 95 0 0 10 10

UAE 29 0 0 29 0 0 0 0

India 18 21 0 39 6 2 13 21

Egypt 17 1 1 19 0 0 1 1

Saudi Arabia 17 4 1 22 1 0 3 4

Kuwait 16 1 0 17 0 0 1 1

Romania 13 0 0 13 0 0 0 0

Norway 11 0 0 11 0 0 0 0

Qatar 10 0 0 10 0 0 0 0

Ukraine 7 0 0 7 0 0 0 0

Kazakhstan 7 0 0 7 0 0 0 0

Croatia 7 0 0 7 0 0 0 0

Lebanon 6 0 0 6 0 0 0 0

Bahrain 5 0 0 5 0 0 0 0

Lithuania 5 0 0 5 0 0 0 0

Estonia 5 0 0 5 0 0 0 0

Jordan 5 0 0 5 0 0 0 0

Serbia 4 0 0 4 0 0 0 0

Latvia 4 0 0 4 0 0 0 0

Oman 4 0 0 4 0 0 0 0

Australia 3 0 0 3 0 0 0 0

Bulgaria 3 0 0 3 0 0 0 0

Hong Kong 3 1 0 4 0 0 1 1

Belgium 2 0 0 2 0 0 0 0

Cyprus 2 0 0 2 0 0 0 0

Singapore 0 0 2 2 0 0 0 0

Morocco 2 0 0 2 0 0 0 0

Azerbaijan 2 0 0 2 0 0 0 0

Angola 2 0 0 2 0 0 0 0

Belarus 2 0 0 2 0 0 0 0

Algeria 1 0 0 1 0 0 0 0

NDAA notifications NDAA licenses License Country a Approved
required Incomplete b Total Approved Denied RWA Total

Yemen 1 0 0 1 0 0 0 0

Germany 0 1 0 1 0 0 1 1 Total 828 101 9 938 16 6 79 101

Legend NDAA= National Defense Authorization Act RWA= Returned
Without Action

UAE= United Arab Emirates a Several NDAA notifications involved
tier 1 and 2 countries because the intermediate consignee for the

export was located in a tier 3 country or the HPC was to be used
on a ship going into the territorial waters of a tier 3 country. b
Returned without action to the exporter because incomplete
information was submitted or the export required a license.

Source: Commerce's Bureau of Export Administration Export Control
Database.

Decisions for HPC License Applications Submitted Directly to the
Commerce

Appendi x II

Department, January 1, 1998 - March 19, 1999 Country Approved
Denied RWA Total

China 12 0 25 37

Russia 12 2 17 31

India 11 5 8 24

Saudi Arabia 7 0 8 15

Oman 2 0 2 4

Romania 0 0 1 1

Switzerland 0 0 1 1

Poland 0 0 1 1

UAE 2 0 11 13

Belarus 0 1 2 3

Syria 2 0 7 9

Bahrain 0 0 1 1

Kazakhstan 2 0 0 2

Australia 2 0 0 2

Bulgaria 1 o 0 1

Pakistan 0 1 0 1 Total 53 9 84 146

Legend RWA= Returned Without Action UAE= United Arab Emirates
Source: Commerce's Bureau of Export Administration Export Control
Database

Reasons Why NDAA Post- Shipment

Appendi x I II

Verifications Were Not Completed Transaction does not Chinese
policy prior to

conform to U. S. the end- use

arrangement with Request is

Check is Number of PSVs

arrangement did not China for end- use

pending at planned for Country not completed

permit such checks a checks b

post coming year Other c

China 190 105 82 3 0 0 Israel 40 0 0 16 20 4 Russia 12 0 0 11 0 1
India 9 0 0 0 9 0 UAE 9 0 0 0 7 2 Egypt 9 0 0 0 7 2 Saudi Arabia 6
0 0 0 6 0 Croatia 1 0 0 1 0 0 Kuwait 2 0 0 0 2 0 Ukraine 2 0 0 2 0
0 Algeria 1 0 0 0 1 0 Angola 1 0 0 0 1 0 Azerbaijan 0 0 0 0 0 0
Bahrain 1 0 0 0 1 0 Kazakstan 0 0 0 0 0 0 Lebanon 1 0 0 1 0 0 Oman
1 0 0 0 1 0 Pakistan 1 0 0 1 0 0 Serbia 0 0 0 0 0 0

Total 286 105 82 35 55 7

Legend PSV= Post- shipment Verification HPC= High performance
computer a Exports occurred prior to June 1998 arrangement between
the United States and China for

post- shipment checks. b Exports shipped without a Chinese end-
users certificate, which is required for post- shipment
verifications.

c Includes two HPCs located on ships controlled by companies in
countries that do not require a PSV under the NDAA, three HPCs
reexported to countries not requiring a PSV under the NDAA, two
HPC exports canceled, and a PSV for two HPC exports that has not
been completed but is under investigation.

Source: Fiscal year 1998 NDAA section 1213 annual report.

Comments From the Department of

Appendi x V I Commerce

Now on p. 3. Now on p. 3. Now on p. 4.

Now on p. 8.

Appendi x V

Comments From the Department of Defense (711399) Lett er

GAO United States General Accounting Office

Page 1 GAO/NSIAD-99-208 Export Controls

Contents Letter 2 Appendixes Appendix I NDAA Notifications and
License Actions,

February 3, 1998 - March 19, 1999 16 Appendix II Decisions for HPC
License Applications Submitted

Directly to the Commerce Department, January 1, 1998 - March 19,
1999 18 Appendix III Reasons Why NDAA Post- Shipment Verifications
Were Not Completed 19 Appendix IV Comments From the Department of
Commerce 20 Appendix V Comments From the Department of Defense 23

Tables Table 1: NDAA Post- Shipment Verifications on High
Performance Computer Exports to Tier 3 Countries, November 18,
1997 - November 17, 1998 11

Abbreviations

ACDA Arms Control and Disarmament Agency HPC high performance
computer MOFTEC Ministry of Foreign Trade and Economic Cooperation
MTOPS millions of theoretical operations per second NDAA National
Defense Authorization Act PSV post- shipment verification

Page 2 GAO/NSIAD-99-208 Export Controls United States General
Accounting Office

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Appendix I

Appendix I NDAA Notifications and License Actions, February 3,
1998 - March 19, 1999

Page 17 GAO/NSIAD-99-208 Export Controls

Page 18 GAO/NSIAD-99-208 Export Controls

Appendix II

Page 19 GAO/NSIAD-99-208 Export Controls

Appendix III

Page 20 GAO/NSIAD-99-208 Export Controls

Appendix IV

Appendix IV Comments From the Department of Commerce

Page 21 GAO/NSIAD-99-208 Export Controls

Appendix IV Comments From the Department of Commerce

Page 22 GAO/NSIAD-99-208 Export Controls

Page 23 GAO/NSIAD-99-208 Export Controls

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