Foreign Military Sales: Review Process for Controlled Missile Technology
Needs Improvement (Letter Report, 09/29/1999, GAO/NSIAD-99-231).

Pursuant to a congressional request, GAO reviewed how the Foreign
Military Sales program safeguards technology and arms transfers,
focusing on the: (1) process for deciding what technology may be
transferred as part of a sale through the program; (2) controls for
ensuring that technology transfer considerations have been weighed when
reviewing requests and agreements; and (3) Department of Defense's (DOD)
proposals to improve technology transfer procedures.

GAO noted that: (1) the U.S. government relies on a complex process with
many participants to determine what technology may be transferred as
part of a sale through the Foreign Military Sales program; (2)
technology transfer decisions begin with an interagency National
Disclosure Policy Committee process; (3) when making overall policy
decisions, the committee provides authority for the government to
transmit classified information associated with military items but does
not approve the actual transfer of those items; (4) it does not
typically address whether systems must be sold through the Foreign
Military Sales program or a direct commercial sale; (5) the committee
has a process for reviewing exceptions to the National Disclosure
Policy; (6) within the National Disclosure Policy framework, separate
organizations within the military departments recommend whether the
requested items under their jurisdiction may be sold and manage the
sales; (7) the U.S. government has not established a process for
ensuring that certain controlled items are fully and systematically
identified when reviewing requests or approving agreements under the
Foreign Military Sales program; (8) as a result of weaknesses in the
review process, items controlled by an international missile
nonproliferation agreement have been transferred under the program
without proper review and approval; (9) as structured, DOD's proposals
to reform the Foreign Military Sales program are primarily focused on
reducing time for making technology transfer decisions; (10) in
considering DOD's efforts to shorten the processing time, officials
acknowledge the need to properly assess the national security risks and
benefits of proposed transfers; (11) a DOD and industry working group
proposes more rigorously implementing requirements to make technology
transfer assessments early in the planning of a weapon program; and (12)
such assessments are a means of expediting technology transfer decisions
when responding to foreign customers' requests.

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

 REPORTNUM:  NSIAD-99-231
     TITLE:  Foreign Military Sales: Review Process for Controlled
	     Missile Technology Needs Improvement
      DATE:  09/29/1999
   SUBJECT:  Foreign military sales policies
	     Foreign military sales agreements
	     Internal controls
	     Technology transfer
	     International trade restriction
IDENTIFIER:  Foreign Military Sales Program
	     U.S. Munitions List
	     Dept. of Commerce Control List

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ns99231 A Report to the Chairman, Committee on International
Relations, House of Representatives

September 1999 FOREIGN MILITARY SALES

Review Process for Controlled Missile Technology Needs Improvement

GAO/NSIAD-99-231

  GAO/NSIAD-99-231

Letter 3 Appendixes Appendix I Military Departments' Disclosure
and Foreign Military Sales Agreement Process 24

Appendix II Comments From the Department of Defense 26 Appendix
III Comments From the Department of State 29

Figure Figure 1: National Disclosure Policy Exception Process 8

Abbreviations

DOD Department of Defense FMS Foreign Military Sales MTCR Missile
Technology Control Regime

National Security and International Affairs Division

Let ter

B-281640 September 29, 1999 The Honorable Benjamin A. Gilman
Chairman, Committee on International Relations House of
Representatives

Dear Mr. Chairman: The U. S. government and the defense industry
face growing challenges as they attempt to maximize the benefits
of international weapon sales while operating within the statutory
requirements that control defense exports to protect national
security and advance foreign policy. Over the years, the U. S.
government has sold certain sensitive military items through the

Foreign Military Sales program partly because the items are
presumed by some to be better controlled by the program than
through direct commercial sales. 1 However, the process for making
decisions about what technology may be transferred under the
program is not readily understood. As part of a broad request to
review the Foreign Military Sales program, you asked us to look at
how the program safeguards technology and arms transfers.
Specifically, we (1) identified the process for deciding what
technology may be transferred as part of a sale through the
program, (2) assessed the controls for ensuring that technology
transfer

considerations have been weighed when reviewing requests and
agreements, and (3) examined the Department of Defense's proposals
to improve technology transfer procedures. Results in Brief The U.
S. government relies on a complex process with many participants
to determine what technology may be transferred as part of a sale
through the Foreign Military Sales program. Technology transfer
decisions begin with an interagency National Disclosure Policy
Committee process. When making overall policy decisions, the
committee provides authority for the government to transmit
classified information associated with military items but does not
approve the actual transfer of those items. It does not typically
address whether systems must be sold through the Foreign 1 Other
potential advantages of the Foreign Military Sales program include
promoting interoperability with allies and encouraging military to
military contacts.

Military Sales program or a direct commercial sale. The committee
has a process for reviewing exceptions to the National Disclosure
Policy. Within the National Disclosure Policy framework, separate
organizations within the military departments recommend whether
the requested items under their jurisdiction may be sold and
manage the sales. The U. S. government has not established a
process for ensuring that certain controlled items are fully and
systematically identified when reviewing requests or approving
agreements under the Foreign Military Sales program. As a result
of weaknesses in the review process, items controlled by an
international missile nonproliferation agreement have been
transferred under the program without proper review and approval.
As currently structured, the Department of Defense's proposals to
reform the Foreign Military Sales program are primarily focused on
reducing time for making technology transfer decisions. In
considering the Department's efforts to shorten the processing
time, officials acknowledge the need to properly assess the
national security risks and benefits of proposed

transfers. A Department of Defense and industry working group
proposes more rigorously implementing current requirements to make
technology transfer assessments early in the planning of a weapon
program. Such assessments are a means of expediting technology
transfer decisions when responding to foreign customers' requests.
We have included recommendations in this report aimed at providing

proper review and approval of transfers of controlled technologies
through the Foreign Military Sales program. Background The United
States generally exports military items and services either

through (1) U. S. government sales under the Foreign Military
Sales (FMS) program or (2) direct commercial arms sales by
individuals and business entities. The Arms Export Control Act
authorizes the President to control

the export of all defense articles and services and to designate
items that are to be controlled under the U. S. Munitions List. 2
The President delegated 2 Section 38 (a) of the Arms Export
Control Act (22 U. S. C. 2778 (a)).

the control of exports of Munitions List items to the Secretary of
State 3 and the implementation of the FMS program to the Secretary
of Defense. As part of its responsibilities, the State Department
regulates direct commercial arms sales through export licenses and
reviews and approves arms sales under the FMS program. 4 Within
the Department of Defense (DOD), the Defense Security Cooperation
Agency is responsible for overall administration of the FMS
program, while the military departments implement individual sales
under the program. The Arms Export Control Act generally excludes
sales under the FMS program from the requirement for munitions
export licenses. 5

Specific policies and controls have been established for the
transfer of classified military intelligence and critical military
technology and defense articles. A presidential executive order
prescribed a uniform system for classifying, safeguarding, and
declassifying national security information. The National
Disclosure Policy was established to provide a framework for the
approval or denial of the transfer of classified military
information to foreign governments and international
organizations. 6 A decision to disclose or transmit information
must satisfy several criteria. These include that the transmission
of information be consistent with U. S. foreign policy and U. S.
military and security objectives and result in benefits to the
United States. In addition, the foreign recipient must afford the
information substantially the same degree of protection as the
United States provides it, and the information must be limited to
what is necessary to fulfill the prescribed purpose. Although the
policy prohibits the transmission of certain classified
information, technology, and defense articles to foreign
countries, it provides a process by which exceptions may be
granted. Procedures established under the National Disclosure
Policy are also used

to consider the release of unclassified military information to
foreign entities. 3 The Secretary of State must have concurrence
of the Secretary of Defense for items or categories of items that
shall be considered as defense articles or services subject to
export control. 4 The Department of Commerce, through the Commerce
Control List, regulates and reviews export licenses for dual- use
items, which have both military and civilian applications. 5 22 U.
S. C. 2778( b)( 2). 6 Classified military information includes
military materiel, arms, and munitions, as well as military
research and development information, military production
information, and military operations planning and readiness
information.

The United States and other nations have agreed to limit the
spread of certain types of arms and technologies by establishing
various international agreements, or regimes. For example, in 1987
the United States and several major trading partners created the
Missile Technology Control Regime (MTCR) to control the
proliferation of missiles and related technology. This regime,
implemented through national legislation in each of the member

countries, consists of common export policy guidelines that
include a list of controlled items. There are two categories of
controlled items. Category I items are rarely approved for export.
They include complete missile systems and subsystems such as
rocket engines and guidance sets. Category II items comprise a
wide range of commodities, including test

equipment and propellants. These items are evaluated on a case-
by- case basis and typically denied for sale if destined for use
in weapons of mass destruction. The U. S. government controls the
two categories of items through the U. S. Munitions List or
through the Commerce Control List. The Missile Technology Export
Control committee is a U. S. interagency working group that
reviews proposed U. S. exports of missile technology and evaluates
them in terms of MTCR and U. S. nonproliferation policy.

FMS Program Relies on The U. S. government has a complex process
with many participants to the Disclosure Process determine what
technology may be transferred as part of a proposed sale. An
interagency committee oversees the National Disclosure Policy and
to Determine What considers exceptions to the policy when
classified military information is Technology May Be

involved in the proposed transfer. The committee does not approve
actual Transferred foreign military sales but provides authority
to transmit the classified information associated with sales. In
addition, military departments with responsibility over certain
weapon systems and technologies have

administrative processes to make disclosure decisions within their
jurisdictions. Each military department has its own process for
making disclosure decisions within its authority and for preparing
proposed FMS agreements. National Disclosure Process

The National Disclosure Policy Committee is responsible for
formulating, Involves Multiple Agencies issuing, administering,
and monitoring the implementation of the National Disclosure
Policy, as well as considering exceptions to the policy. Although
the committee is responsible for determining what classified
military

information may be transmitted to a foreign government, it does
not approve the actual sale that transfers the information. The
committee may discuss actual sales in the context of considering
exceptions to the policy.

The committee consists of general members and special members who
represent heads of various federal agencies, DOD components, and
each military department. General members vote on all issues and
include the Secretaries of State, Defense, Army, Navy, and Air
Force and the Chairman of the Joint Chiefs of Staff. Special
members usually vote only on those issues in which they have a
direct interest. 7 The committee is co- chaired by the State
Department and DOD.

The committee has a process for reviewing exceptions to the
National Disclosure Policy. As illustrated in figure 1, the
committee's executive secretary distributes any request for an
exception to policy to all relevant members. The committee's
procedures allow a 30- day time frame for reaching final
decisions. The members present a position within 10 working days.
If there is not unanimous agreement on the proposed exception, the
committee members work on achieving consensus. If they are unable
to do so, the committee chairman formulates a position and informs
the members within 10 working days. The chairman's decision
becomes final unless appealed to the Secretary or the Deputy
Secretary of Defense by the cognizant department or agency within
10 working days. 7 Special members include the Secretary of
Energy; the Directors of the Central Intelligence Agency and the
Defense Intelligence Agency; the Under Secretaries of Defense for
Policy, for Acquisition and Technology, and for Command, Control,
Communications, and Intelligence; the Assistant to the Secretary
of Defense (Atomic Energy); and the Director of the Ballistic
Missile Defense Organization.

Figure 1: National Disclosure Policy Exception Process

Committee member Executive Executive Secretariat Secretariat
Committee members work

Committee sponsors member an

refers refers the the exception exception

Each Each committee committee

on Committee resolving members differences. work If exception
sponsors to the

an to to general general and and special

special member member prepares

prepares no on resolution, resolving the differences. chairman

If National exception Disclosure to the

Policy committee committee members members as

as a a position

position no makes resolution, final decision

the chairman National Disclosure Policy

appropriate appropriate

makes final decision

No

Unanimous Unanimous agreement agreement No

Appeal the

Yes

decision Appeal the decision Decision Decision on on the the
exception

exception to to the the National National Disclosure

Disclosure

Yes

Policy Policy is is accepted accepted and and recorded

recorded Secretary Secretary or or Deputy Deputy Secretary

Secretary of of Defense Defense decides

decides appeal

appeal

Unlike in earlier times, when the FMS program was often favored
over commercial sales as the method of transfer for some sensitive
weapon systems, some committee representatives told us that today
they typically do not recommend that systems be sold through the
FMS program and often do not address the method of sale. According
to several officials, both methods of sale are equally secure in
protecting technology. For example, in early 1999 the committee
agreed to change a long- standing policy that required an advanced
missile system to be sold through the FMS program. The revised
policy allows the system to be sold either through the FMS

program or directly by the contractor with State Department
approval. Irrespective of the method of sale, the purchasing
country must agree to security requirements, such as inventory of
the equipment, and U. S. government verification that the
requirements have been met. DOD's policy is to remain generally
neutral regarding the method of sale. However, the policy allows
for exceptions to permit FMS- only

recommendations based on criteria such as presidential directives,
legislation, and national or military department policies. While
military departments have recommended that certain weapon systems
be sold only through the FMS program, military officials we met
with had widely varying opinions about whether the FMS program
affords greater control than direct commercial sales. Some
officials prefer selling sensitive items through the FMS program
because DOD officials are involved in

implementing every aspect of the sale under that program. Other
officials stated that defense contractors have strong incentives
to adhere to export control laws and will ensure that sensitive
items are properly controlled when sold directly by the
contractor.

Military Departments Have Each military department has its own
process for implementing the

Separate Disclosure and National Disclosure Policy and for
preparing FMS agreements. The

FMS Agreement Processes Secretary of Defense has delegated
authority to implement the National

Disclosure Policy to military departments and other defense
agencies for information originated by or under the control of
their organizations, provided such information is in compliance
with disclosure policy. The military departments, in turn, have
delegated some disclosure authority to the heads of commands,
agencies, and major staff elements within their organizations.
Major military commands we visited have delegated certain
authority to disclosure officers who work with weapon program
offices on international sales. Appendix I provides additional
information on the differences between military departments'
disclosure and FMS agreement preparation processes. For example,
the Army generally handles FMS agreement preparations at the
command level with higher level approval, while the Air Force
prepares FMS agreements at the Secretary level with

input from other headquarters and program offices. The Army
maintains disclosure as a security policy function held by the
Deputy Chief of Staff for Intelligence, while the Air Force and
the Navy consider disclosure an international function located
with the Deputy Under Secretary of the Air Force for International
Affairs and the Navy International Programs Office, respectively.
DOD organizations prepare Delegation of Disclosure Authority
Letters or component regulations to provide authority to
disclosure officers to transmit classified military information to
foreign nationals as part of

weapon sales or other military activities. 8 The disclosure letter
explains classification levels, categories, scope, and limitations
on information, including unclassified technical data, that may be
disclosed to a foreign recipient. Some FMS program officials, in
consultation with disclosure officers, refer to the disclosure
letter as guidance when preparing FMS agreements. Each military
department has a mechanism for verifying that the agreements do
not exceed disclosure authority before referring them to the
Defense Security Cooperation Agency and State Department for final
approval. Disclosure letters can be subject to interpretation. In
matters that require interpretation, disclosure officers contact
program managers or engineers for technical assistance. At
military commands we visited, the disclosure

officers were in separate organizations from the FMS program
management offices. For weapon systems programs that had large
international sales, the disclosure officers were co- located in
the program offices to facilitate decisions. Some disclosure
officers told us that they want to retain a separate chain of
command from the program offices so they will remain independent
from those who manage the sales.

Certain Controlled The U. S. government has not established a
process for ensuring that certain Technology Is Not controlled
items are fully and systematically identified when reviewing
country requests for information or approving agreements to
purchase Properly Identified and items through the FMS program.
While the State Department and many Reviewed Under the DOD
components review proposed FMS agreements, no one organization FMS
Program is responsible for ensuring that all controlled items have
been identified and reviewed. As a result, controlled missile-
related technology has been transferred under the FMS program
without proper review and approval.

DOD Focal Point for FMS While the Defense Security Cooperation
Agency is the principal

Not Responsible for Making organization through which DOD carries
out its security assistance Technology Transfer responsibilities,
including administering the FMS program, it does not have
Decisions

the mission or expertise to identify controlled technology and
make technology transfer decisions for DOD. The Defense Security
Cooperation 8 DOD directives require DOD components to prepare
Delegation of Disclosure Authority Letters and other documents
such as the Program Protection Plan and Technology Assessment/
Control Plan to ensure that release of technology is considered
early on for weapon systems.

Agency is responsible for raising issues, through appropriate
channels, when higher decision- making authority is required. It
relies on the military departments, as well as other DOD
organizations, to identify technology transfer concerns. A DOD
directive requires certain DOD components to conduct policy
reviews, technical evaluations, operational and military impact
assessments, and intelligence assessments of all proposed

technology transfer cases. However, Defense Security Cooperation
Agency officials said they do not assess whether the military
departments have complied with this directive for controlled
technology.

As required by policy, the Defense Security Cooperation Agency
refers FMS requests and agreements for major defense equipment to
the Director, Office of the Joint Chiefs of Staff, and the Office
of the Under Secretary of Defense for Acquisition and Technology.
9 Joint Staff, in coordination with the unified commands and the
military departments, provides operational and military mission
impact assessments on technology transfers. DOD's Acquisition and
Technology office is responsible for ensuring that the

proposed technology to be transferred does not threaten U. S.
weapon superiority. Security assistance policy requires
coordination with these organizations for all new security
assistance requests and FMS agreements for major defense
equipment, including requests and agreements that are

expected to result in a notification to Congress or determined to
be of a sensitive nature. Defense Security Cooperation Agency
country managers determine whether or not to refer FMS requests
and agreements that meet major defense equipment criteria to the
Joint Staff and the Acquisition and Technology office. Items that
do not meet the criteria are only occasionally referred to these
organizations.

The Defense Security Cooperation Agency is also responsible for
notifying the State Department of all requests for purchases
through the FMS program and for obtaining the Department's
approval for FMS agreements. The State Department must provide its
approval before any arms can be transferred, including arms sold
under the FMS program, but it relies on DOD to provide information
describing the proposed sale and the

sensitivity of the technology. 9 Major defense equipment is
defined as sensitive defense articles and services identified on
the U. S. Munitions List where the U. S. government has incurred
either a nonrecurring research and development cost for the item
of more than $50 million or the item has a total production cost
of $200 million.

The Defense Security Cooperation Agency refers FMS requests and
agreements to the Defense Threat Reduction Agency on an ad hoc
basis. The Director of the Defense Threat Reduction Agency stated
that the Agency does not generally review FMS requests or
agreements. However, Defense Threat Reduction Agency officials
told us they should be given the opportunity to respond officially
on all FMS major defense equipment or sensitive items. Currently,
the Defense Security Cooperation Agency does not formally refer
FMS requests or agreements to the Defense Threat Reduction Agency
and furnishes information copies on a limited number of cases. 10
Because one of the Defense Threat Reduction Agency's principal

functions is to provide DOD's recommendations on license
applications, it utilizes technical experts and intelligence
sources to determine the advisability of exporting a particular
controlled item. The Defense Threat Reduction Agency, in reviewing
licenses, will examine the legitimacy of foreign companies
involved in the sale by using intelligence sources as well as the
State Department's Watch List of export violators. Defense
Security

Cooperation Agency officials stated that they informally discuss
intelligence assessments about FMS cases with Defense Threat
Reduction Agency officials. Defense Security Cooperation Agency
officials told us that they have an opportunity to review the
Defense Threat Reduction

Agency's intelligence assessments because most FMS cases have
associated commercial sales components that require an export
license. 11 The export license review process identifies foreign
companies that may be involved in the sale. The Defense Security
Cooperation Agency also does not routinely refer FMS requests or
agreements to intelligence organizations such as the Defense
Intelligence Agency for review. According to DOD directives, the
Defense Intelligence Agency upon request provides intelligence
reviews on technology, goods, services, and munitions transfer
cases to the Defense 10 According to DOD policy, each time the
Defense Security Cooperation Agency coordinates FMS requests and
agreements with the Joint Chief of Staff and the Office of the
Under Secretary, Acquisition and Technology, it also provides
information copies to various

DOD components, including the Defense Threat Reduction Agency. 11
According to Defense Security Cooperation Agency officials, direct
commercial sales are often associated with FMS agreements because
of foreign buyer offset requirements and customer preference.
Offsets are the entire range of industrial and commercial
compensation practices provided to foreign governments and firms
as inducements or conditions for the purchase of military goods
and services. Offsets can include

coproduction, technology transfer, training, investment, marketing
assistance, and commodity trading.

Threat Reduction Agency for munitions licenses and to the National
Disclosure Policy Committee for exceptions. Gaps in the FMS Review
The lack of clearly established responsibilities for FMS
technology transfer Process Led to Exports of review has led to
certain controlled items being transferred without proper Missile
Technology Without

review and approval. For example, MTCR- controlled equipment has
been Approval transferred under the FMS program without proper
review and approval for MTCR concerns. The State Department and
DOD have no assurance that MTCR- controlled items are routinely
being reviewed for nonproliferation concerns. As a result, both
departments have begun discussions to improve the review of MTCR
items. The State Department and DOD have organizations with
expertise in reviewing MTCR- controlled technology for export
licenses but are not fully using them to review proposed FMS
agreements.

The State Department must provide its approval before any arms,
including those sold under FMS agreements, can be transferred. The
Defense Security Cooperation Agency submits proposed FMS
agreements or summaries to the State Department's Bureau of
Political- Military Affairs, Office of Regional Security and Arms
Transfer Policy (Regional Security Office), for approval. When an
FMS agreement involves missiles or components that may fall under
the MTCR, the Regional Security Office

refers the agreement to the State Department's Office of Chemical,
Biological, and Missile Nonproliferation for review. However,
because the Regional Security Office does not have technical
experts and may not know which items are MTCR- controlled,
officials told us that they rely on DOD to identify whether or not
MTCR- controlled items are included in an agreement. State
Department Regional Security Office officials identified a
deficiency in the FMS review process for MTCR- controlled items in
May 1999, when reviewing a follow- on FMS agreement to a co-
production agreement to

produce the M1A1 tank with a foreign government. The U. S.
government sold equipment under a series of FMS agreements
beginning in 1989, including a filament winding machine controlled
by the MTCR, to this foreign government to build a tank factory.
12 Regional Security Office officials reviewed this follow- on
agreement and forwarded it to the MTCR 12 A filament winding
machine is used to produce lightweight, high- strength structures
for a variety of weapon systems parts and commercial products such
as liquid natural gas tanks.

experts within the State Department for review. The MTCR experts
initially denied approval of the FMS agreement because they
thought it was for the sale of the filament winding machine.
Because this machine is controlled under category II of the MTCR,
they were concerned that this export could

contribute to the foreign government's missile production
capabilities. However, when State Department officials learned
that the agreement was for the sale of spares for a filament
winding machine that had already been exported, they approved the
sale of the spares. State Department officials told us that the
original FMS agreements were not referred to the missile experts
for review because the filament winding machine was not
specifically listed in the information provided by the Defense
Security Cooperation Agency and was identified as test and support
equipment. Information was not provided that would have allowed a
missile technology expert to know that the agreement involved
MTCR- controlled technology.

State Department officials told us that several years ago there
was another incident involving a sale to the same country under
the same series of FMS agreements. The U. S. government sold an
MTCR- controlled item, an accelerator, without proper review by
MTCR experts. 13 According to State

Department officials, a subsequent export license application to
sell an accelerator to the same country was denied by the State
Department because the item was MTCR- controlled. The contractor
questioned the denial because the U. S. government had already
sold an accelerator to the same country. The State Department
advised DOD officials about the problem but does not know what
corrective measures DOD took at that time to ensure that MTCR-
controlled items under FMS agreements were

being properly reviewed. DOD officials responsible for the M1A1
tank FMS agreements said they were not contacted or made aware of
the problem. Sufficient information about weapon system components
and equipment in FMS agreements is necessary to identify MTCR-
controlled items. Many MTCR- controlled items may not be obvious-
even to a technical expert- unless the items in an agreement are
reviewed against the list of MTCRcontrolled equipment. Some MTCR-
controlled items are dual- use and controlled by the Commerce
Control List, resulting in confusion over who 13 An accelerator,
controlled by category II of the MTCR, is an X- ray machine that
can be used to inspect missiles and other weapon system components
for cracks and voids or welded assemblies used in automotive,
shipbuilding, aerospace, and power production

component manufacturing.

is responsible for identifying and controlling these items. 14
Regional Security Office officials assumed that DOD had identified
all of the technology issues in FMS agreements-including whether
or not the agreements covered MTCR- controlled technology.
Although State Department officials have discovered two such
cases, they do not know how many MTCR- controlled items may have
been transferred under the

FMS program without proper review because there are no procedures
in place to identify such items. In addition to missile- related
technology proliferation concerns, State Department officials are
concerned about the transfer of sensitive technologies, such as
medical testing equipment that can be used to develop biological
weapons, that are controlled by other nonproliferation regimes. 15

Technical experts in the military departments, however, told us
that they do not review FMS agreements specifically for compliance
with the MTCR. Officials at various military departments,
commands, and program offices told us that they do not compare
items to be transferred under FMS agreements against the list of
MTCR- controlled items. They stated that MTCR compliance is the
responsibility of either the State Department or the Defense
Security Cooperation Agency. According to State Department and
Defense Security Cooperation Agency officials, the military
departments also have technical experts who know what a particular
item's capabilities are and exactly what equipment is being
transferred under an FMS agreement. Defense Security Cooperation
Agency officials said their agency does not have the technical
experts to identify sensitive technologies such as those
controlled by the MTCR. Since the Defense Security Cooperation
Agency learned of this coordination deficiency for missile-
related technology, it has taken steps to have military
departments identify missile- related items in proposed FMS
agreements. The Defense Security Cooperation Agency sent draft
guidance to the military departments, in August 1999, advising
them

of their responsibility to identify missile- related technology
that is included in proposed agreements and to certify that MTCR
concerns have been 14 The Arms Export Control Act does not
specifically address the export of dual- use items under the FMS
program. 15 Other nonproliferation control regimes include the
Australia Group to discourage the spread of chemical and
biological weapons and the Nuclear Suppliers Group to control
enrichment materials and reprocessing plant assistance to
countries of nuclear proliferation concern.

resolved. The Defense Security Cooperation Agency also plans to
amend an internal coordination document to ensure that agreements
have been properly reviewed for MTCR issues. The State Department
routinely reviews proposed FMS agreements that meet the dollar
threshold for congressional notification. 16 However, State
Department officials said that many MTCR- controlled items are
valued below this dollar threshold. The State Department uses a
list of FMS agreements that the Defense Security Cooperation
Agency provides and that gives a general description of the item
being sold as the basis for approving the low dollar value
agreements. The current process for approving low dollar value
agreements does not identify MTCR- controlled

items unless the State Department requests additional information
to identify such items. The State Department and DOD currently do
not fully utilize their organizations that have expertise in
reviewing MTCR- controlled items. For example, the State
Department established the Missile Technology Export Control
committee, an interagency working group, to review export license
applications involving MTCR- controlled items. However, while the
State Department committee representative reviews FMS agreements
referred by the Regional Security Office, the full committee does
not review FMS agreements for nonproliferation concerns. Defense
Threat Reduction Agency reviewers have technical expertise in
weapon systems, as well as knowledge of the types of items
controlled by the MTCR, but they generally

do not identify MTCR- controlled items in agreements because the
Defense Security Cooperation Agency does not formally refer FMS
agreements to the Defense Threat Reduction Agency. 16 Section 36(
b) of the Arms Export Control Act (22 U. S. C. 2776( b)) requires
the President to notify Congress of FMS agreements to sell any
defense articles or services for $50 million or

more, any design and construction services for $200 million or
more, or any major defense equipment for $14 million or more
before such agreements are issued.

DOD's Reinvention DOD has several ongoing reinvention initiatives
that attempt to address Initiatives Focus on foreign customer and
industry complaints about the FMS program, including the
perception that the technology transfer review process takes
Shortening Technology too long. These initiatives contain
proposals focused on shortening the Transfer Approval technology
transfer review time, for example, by more rigorously Time

implementing DOD requirements for program documentation that
assesses what technology may be transferred. The Defense Security
Cooperation Agency organized a working group comprised of DOD and
industry officials to address complaints about the technology
transfer process. One of the group's proposals is to encourage

National Disclosure Policy Committee members to make decisions in
a timely manner when acting on exception cases. Although aware of
DOD's initiatives to make disclosure decisions more quickly, some
committee representatives said they need to research a case and
assess the merits of a proposed transfer from a national security
perspective. Some officials responsible for disclosure and
releasability decisions also told us they have

been asked to make decisions more quickly. Some of the initiatives
address the need to improve information to support technology
transfer decisions. For example, the DOD and industry working
group is proposing more rigorous implementation of current
requirements to prepare weapon systems program documents that
include technology transfer assessments. This proposal is aimed at
addressing technology transfer considerations early in the
development of the weapon system to facilitate decision- making
when export requests are received. In addition, the Navy
recommended pursuing an electronic policy distribution and

coordination system to facilitate the work of its internal
technology transfer review board and speed disclosure processing.
17 The Army is also sponsoring an initiative to develop an
integrated classified database of relevant records and documents
such as the National Disclosure Policy and weapon- specific
program protection plans to support technology transfer

decisions. Air Force headquarters officials told us the Air Force
recently reviewed its approximately 800 Delegation of Disclosure
Authority Letters to ensure disclosure guidance for all Air Force
programs was current. They said one benefit of the review was to
reduce the need to consult

17 The Navy Reinvention Laboratory issued reports in October 1998
and June 1999 documenting its first two phases of reform work and
recommendations for improvement.

headquarters staff when making disclosure decisions related to Air
Force programs, since officials in the field have current
guidance.

The DOD and industry working group proposes that DOD conduct a
technical review of the U. S. Munitions List to identify items and
technologies that should be decontrolled because they are low-
risk or already widely available. However, the State Department
has authority over

the U. S. Munitions List and, with DOD concurrence, is responsible
for determining what items are to be controlled. Beside the FMS
reinvention initiatives, DOD has chartered three high- level
advisory groups to study international industrial base issues in
the context of U. S. national security. These studies are ongoing,
but the findings are likely to have an impact on technology
transfer policy and procedures.

To date, none of DOD's initiatives specifically addresses the gaps
in the FMS technology transfer review process. For example, the
DOD/ industry working group's proposals address the need to
establish disclosure and technology transfer guidelines for
controlled unclassified information. The group emphasizes removing
unnecessary restrictions. However, the proposals do not address
the need to establish clear responsibilities for ensuring that
certain controlled items, like those we found, are fully and
systematically identified and reviewed. Conclusions The Foreign
Military Sales program does not have a systematic process to
identify and review certain controlled technologies. As a result,
items controlled by an international missile nonproliferation
agreement were sold through the Foreign Military Sales program
without proper review and approval. Recommendations To provide for
proper review and approval of proposed exports of controlled
technologies through the Foreign Military Sales program, we
recommend that the Secretaries of State and Defense establish a
process to

 identify all items on a proposed Foreign Military Sales agreement
that are controlled under the Missile Technology Control Regime or
other nonproliferation agreements by taking full advantage of the
expertise that resides in the Defense Threat Reduction Agency, the
military services, or elsewhere;

 refer the information to the State Department;  direct the
Missile Technology Export Control group or other nonproliferation
groups to review missile technology- related items or other
controlled items to ensure compliance with the nonproliferation
agreements; and  reflect this process in ongoing reinvention
efforts. Agency Comments In commenting on a draft of this report,
DOD generally concurred that it must develop and implement the
processes necessary to strengthen technology transfer controls
over MTCR- controlled items proposed for

export under the FMS program. However, DOD did not agree with the
title of our draft report or our conclusion that responsibilities
are unclear under the FMS program. DOD pointed out that the
material weaknesses we identified occurred only in technology
transfer cases involving MTCRcontrolled

items. We agree and modified the title and text to be more
precise. However, as we note in the report, the DOD and industry
reinvention working group recognized that confusion exists about
the rules governing the use and transfer of controlled
unclassified information under the FMS program. Such confusion
goes beyond the transfer of MTCRcontrolled items.

DOD concurred with the intent of our recommendation but solicited
relief from what it characterized as the daunting task of listing
MTCR- controlled items on all FMS documents, which it believes
would impede the flow of goods to foreign customers. Our
recommendation does not limit DOD's flexibility in how it
identifies MTCR- controlled items, as we recognize that there may
be different means of doing so. However, identifying controlled
items is the first step to ensuring that such items are reviewed
for nonproliferation concerns in compliance with U. S. export
control laws. Therefore, we have not modified our recommendation.
The comments from DOD are reprinted in appendix II. DOD also
provided some technical suggestions, which we have incorporated in
the text where appropriate. In commenting on a draft of this
report, the State Department agreed with our conclusions and
stated that it is working with the Defense Security

Cooperation Agency to establish better procedures. The comments
from the State Department are reprinted in appendix III. The State
Department also provided technical suggestions, which we have
incorporated in the text where appropriate.

Scope and To identify the process for making technology transfer
decisions under the

Methodology FMS program, we determined which organizations were
involved in the

FMS disclosure and approval processes and interviewed officials
from these organizations about their roles and responsibilities
and the criteria and guidance they used in performing their
duties. Specifically, we spoke with officials from the State
Department's Political Military Bureau and

multiple DOD offices, including the Office of the Under Secretary
of Defense for Acquisition and Technology, the Office of the Under
Secretary of Defense for Policy, the Defense Security Cooperation
Agency, the Defense Threat Reduction Agency, and the Defense
Intelligence Agency. We also spoke with officials from the Joint
Chiefs of Staff, the U. S. Central Command, the Central
Intelligence Agency, and each of the military departments as
follows:

 Department of the Army  Deputy Under Secretary of the Army
(International Affairs)  U. S. Army Security Assistance Command
Tank- automotive and Armaments Command  Aviation and Missile
Command  Apache Program Office  Program Executive Office, Tactical
Missiles  Short Range Air Defense Office  Department of the Air
Force

 Deputy Under Secretary of the Air Force (International Affairs)
Air Force Materiel Command  Air Force Security Assistance Center
F- 16 and F- 15 System Program Offices  Advanced Medium Range Air-
to- Air Missile Joint System Program

Office  Department of the Navy

 Naval International Programs Office  Naval Air Systems Command
E2C Program Office  F- 18 Program Office

At the military departments, we examined export weapons policy
papers, Delegation of Disclosure Authority Letters, Technology
Assessment/ Control Plans, Program Protection Plans, FMS
agreements, and/ or export licenses for selected weapons programs.
In addition, we reviewed the laws, regulations, DOD directives,
and policies that govern technology transfer and disclosure of
information.

To assess controls for reviewing technology transfer
considerations, we examined coordination documentation from
various DOD offices, Joint Staff, and military departments. We
reviewed the Defense Security Cooperation Agency's coordination
requests to the Joint Chiefs and the Office of the Under Secretary
of Defense for Acquisition and Technology and their responses from
1994 to 1998. The Defense Security Cooperation Agency did not have
these requests centrally maintained, so we relied on the records
of the recipient offices. In addition, we discussed with DOD

and State Department officials how they identified controlled
technology and reviewed it in accordance with relevant DOD
policies and procedures, governing laws and regulations, and MTCR
guidelines. We compared the

coordination practices for FMS items with those for export
licenses to identify any similarities or differences among the
reviewing organizations and their level of expertise in making
decisions. By comparing practices with export control laws and
policies, we identified areas of weaknesses

and discussed these with DOD and State Department officials. To
examine DOD's proposals to improve technology transfer practices,
we obtained documents from the Defense Security Cooperation Agency
and the military departments regarding their FMS reinvention
initiatives. We spoke with government officials involved in these
initiatives about their

proposed plans, the status of implementation of recommendations,
and/ or the extent of coordination with other reinvention
projects. We performed our review between January and August 1999
in accordance with generally accepted government auditing
standards. We are sending copies of this report to Representative
Sam Gejdenson, Ranking Minority Member, House International
Relations Committee, and Senator Jesse Helms and Senator Joseph
Biden in their capacities as Chairman and Ranking Minority Member
of the Senate Foreign Relations Committee. We are also sending
copies to the Honorable Madeleine K. Albright, Secretary of State;
the Honorable William S. Cohen, Secretary of Defense; and the
Honorable Jacob J. Lew, Director, Office of Management

and Budget. We will make copies available to others on request.
Please contact me at (202) 512- 4841 if you have any questions
concerning this report. Key contributors to this assignment were
Anne- Marie Lasowski, Anne Howe, and John Neumann.

Sincerely yours, Katherine V. Schinasi Associate Director Defense
Acquisitions Issues

Appendi xes Military Departments' Disclosure and Foreign

Appendi I x Military Sales Agreement Process Air Force Disclosure
Process:

The Air Force's central focal point for making disclosure
decisions is the Deputy Under Secretary of the Air Force for
International Affairs. The level of coordination depends on the
complexity of the case. For major weapon sales, the International
Affairs Disclosure Division coordinates a position through an
internal process known as Topline coordination. If the Air Force
does not have disclosure authority, it requests an exception from
the National Disclosure Policy Committee. The division is
responsible for notifying staff of disclosure decisions and
issuing disclosure guidance.

Air Force Delegation of Disclosure Authority:

The International Affairs Disclosure Division delegates certain
disclosure authority for major weapon sales to major commands.
Commanders of major commands, field operating agencies, and direct
reporting units are responsible for designating disclosure
officers and ensuring that the command disclosure program is
effective.

Air Force Foreign Military Sales Agreement Preparation:

The International Affairs Policy Division generally prepares
Foreign Military Sales agreements for major weapon systems with
input from the program offices.

Army Disclosure Process:

The Office of the Deputy Chief of Staff for Intelligence has
exclusive authority for making disclosure decisions for classified
military information under the Army's jurisdiction. The Office
prepares proposed exceptions to the National Disclosure Policy in
consultation with the sponsoring Army agency and the Deputy Under
Secretary of the Army, International Affairs. In addition,
International Affairs prepares export policies as needed.

Army Delegation of Disclosure Authority:

The Deputy Chief of Staff for Intelligence has delegated portions
of its disclosure authority to selected Army components. The
commander of the U.S. Army Security Assistance Command, under the
Army Materiel Command, has the authority to make disclosure
determinations for security assistance programs. Major system
commands have an information security directorate that is
responsible for providing a disclosure assessment for information
under their jurisdiction.

Army Foreign Military Sales Agreement Preparation:

Each command's security assistance management directorate, in
consultation with program offices, prepares Foreign Military Sales
agreements that are reviewed by the U.S. Army Security Assistance
Command.

Navy Disclosure Process:

The Navy International Programs Office, which reports to the
Assistant Secretary of the Navy (Research, Development, and
Acquisition), is the central focal point for making disclosure
decisions. The Office heads an internal working group, the
Technology Transfer and Security Assistance Review Board, which
makes technology transfer decisions. The Office drafts a policy
memorandum and coordinates it with various Navy components,
including systems commands. Once a consolidated position is
obtained, the Office transfers the policy to the Vice Chief of
Naval Operations and the Assistant Secretary of the Navy
(Research, Development, and Acquisition) to make a final decision
on the disclosure policy. If the Navy does not have disclosure
authority, the Office requests an exception from the National
Disclosure Policy Committee.

Navy Delegation of Disclosure Authority:

The International Programs Office has delegated limited disclosure
authority to the systems commands. The commands have a security
branch responsible for disclosure decisions under their
jurisdiction.

Navy Foreign Military Sales Agreement Preparation:

The International Programs Office, in conjunction with the
commands and program offices, generally prepares Foreign Military
Sales agreements. The Office also validates the agreements before
they are signed.

Appendi I I x Comments From the Department of Defense

Appendi x I I I Comments From the Department of State

GAO United States General Accounting Office

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Appendix I

Appendix I Military Departments' Disclosure and Foreign Military
Sales Agreement Process

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Appendix II

Appendix II Comments From the Department of Defense

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Appendix II Comments From the Department of Defense

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Appendix III

(707399) Let t er

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