Arms Control: Experience of U.S. Industry With Chemical Weapons
Convention Inspections (Testimony, 09/13/2000, GAO/T-NSIAD-00-249).

Pursuant to a congressional request, GAO discussed companies in the
chemical, agricultural, and brewing industries inspected under the
Convention on the Prohibition of the Development, Production,
Stockpiling and Use of Chemical Weapons and on Their Destruction
(Chemical Weapons Convention), focusing on: (1) how companies protect
proprietary information during inspections; (2) any adverse publicity
for companies as a result of being inspected; and (3) the costs to
companies of being inspected.

GAO noted that: (1) the experience of the first seven U.S. companies
that have been inspected under the Chemical Weapons Convention showed
that companies were generally able to protect proprietary information,
in part because of certain provisions in the Convention and U.S. law;
(2) GAO did not identify any instances in which a company was affected
by adverse publicity resulting from inspections, even though companies
varied in how much information was provided to the public concerning
inspections; (3) these companies reported inspection-related costs to
GAO ranging from $6,000 to $107,000; and (4) the large variation is
partly attributable to inconsistencies in components of costs included
in the total cost as well as differences in the facilities being
inspected.

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

 REPORTNUM:  T-NSIAD-00-249
     TITLE:  Arms Control: Experience of U.S. Industry With Chemical
	     Weapons Convention Inspections
      DATE:  09/13/2000
   SUBJECT:  Arms control agreements
	     Biological warfare
	     Chemical warfare
	     Proprietary data
	     Inspection
	     Cost analysis
IDENTIFIER:  Chemical Weapons Convention
	     Bacteriological (Biological) and Toxin Weapons Convention

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GAO/T-NSIAD-00-249

   * For Release on Delivery
     Expected at 10:00 a.m.
   * Wednesday,
   * September 13, 2000

GAO/T-NSIAD-00-249

ARMS CONTROL

Experience of U.S. Industry With Chemical Weapons Convention Inspections

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Statement of Jack L. Brock, Jr.

Managing Director, Acquisition and Sourcing Management

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Testimony

Before the Subcommittee on National Security, Veterans Affairs, and
International Relations, Committee on Government Reform, House of
Representatives

United States General Accounting Office

GAO

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Mr. Chairman and Members of the Subcommittee:

I am pleased to participate in your hearing on the impact of proposed
compliance regimes for the Convention on the Prohibition of the Development,
Production and Stockpiling of Bacteriological (Biological) and Toxin Weapons
and on Their Destruction (Biological Weapons Convention). These compliance
regimes would affect a number of U.S. companiesmostly in the pharmaceutical
industry but also may affect companies in the chemical, agricultural, and
brewing industries. The pharmaceutical industry has expressed concern over
the risk of compromising trade secrets, the potential cost of facility
inspections, and the risk to corporate reputations should the public become
aware that specific facilities are undergoing inspections related to
biological weapons.

These concerns are similar to those expressed by companies affected by the
Convention on the Prohibition of the Development, Production, Stockpiling
and Use of Chemical Weapons and on Their Destruction (Chemical Weapons
Convention) prior to its ratification. Accordingly, you asked us to assess
the experience to date of these companies inspected under the Convention.
Specifically, you asked us to (1) determine how companies protect
proprietary information during inspections, (2) identify any adverse
publicity for companies as a result of being inspected, and
(3) identify the costs to companies of being inspected.

In brief, the experience of the first seven U.S. companies that have been
inspected under the Chemical Weapons Convention showed that companies were
generally able to protect proprietary information, in part because of
certain provisions in the Convention and U.S. law. We also did not identify
any instances in which a company was affected by adverse publicity resulting
from inspections, even though companies varied in how much information was
provided to the public concerning inspections. Lastly, these companies
reported inspection-related costs to GAO ranging from $6,000 to $107,000.
The large variation is partly attributable to inconsistencies in components
of costs included in the total cost as well as differences in the facilities
being inspected.

Nevertheless, I would like to caution that our ability to draw conclusions
based on company experiences under the Chemical Weapons Convention is
somewhat limited. While the Biological Weapons Convention protocols
currently under negotiation bear some similarity to the Chemical Weapons
Convention in terms of requiring companies to submit information and provide
access to facilities, the level of detail for reporting and intrusiveness of
inspections has yet to be finalized for the Biological Weapons Convention
protocols.

Background

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The United States ratified the Chemical Weapons Convention in 1997. The
Convention (1) prohibits the development, production, stockpiling, or use of
chemical weapons, (2) requires the destruction of existing chemical weapons
production facilities, as well as stockpiles of weapons, and (3) establishes
an inspection regime to monitor the production, use, and transfer of
chemicals that could be associated with chemical weapons.

The Chemical Weapons Convention established the Organization for the
Prohibition of Chemical Weapons. As part of its charter, the Organization is
responsible for the inspection of government and industrial facilities to
ensure compliance with the Convention. The Organization's operations are
funded by contributions from countries that have ratified the Convention.
For 2001, the United States will provide the Organization with 25 percent of
its funds, or approximately $5.6 million. The Organization employs over 200
inspectors from about 60 countries. Under the Convention, countries may
reject specific individuals from conducting inspections on their
territories. Exercising this right, the United States has blocked Cuban and
Iranian nationals from participating in inspections of U.S. facilities.

The Chemical Weapons Convention, as implemented, requires companies to
provide information and access to facilities based on the type and quantity
of chemical a facility manufactures, uses, exports, or imports. Table 1
lists the categories of chemicals subject to the Convention.

Table 1: Types of Chemicals Subject to the Chemical Weapons Convention
 Type of
 chemical    Description                      Example
             Toxic chemicals that have little
                                              The nerve agent Sarin, which
 Schedule 1  or no commercial use and were    was used in the 1995 Tokyo
             developed or used primarily for
             military purposes.               subway attack.
                                              The chemical thiodiglycol is
             Chemicals that can be used to    used to manufacture
                                              ball-point pen ink and is
 Schedule 2  produce chemical weapons, but    also a precursor for mustard
             have commercial uses and are not
             produced in large quantities.    gas, which Iraq used against
                                              Iran in the Iran-Iraq War
                                              during the 1980s.
             Chemicals that can be used to
                                              Phosphorus trichloride, which
 Schedule 3  make chemical weapons,           is used to make Sarin and
             but also have significant
             commercial uses.                 insecticides.

 Unscheduled Certain chemicals subject to the Propylene glycol, which is
 discrete    Convention that are              used to make antifreeze, and
 organic     not listed in a schedule and are acetone, which is used in
 chemicals   used in a broad range            nail polish remover.
             of commercial products.

Source: GAO summary of Commerce Department and other documents.

Under the Chemical Weapons Convention, companies must provide information
annually on the quantity and location of specific types of chemicals to the
Organization for the Prohibition of Chemical Weapons and must, when
selected, submit to facility and record inspections by a team of
international inspectors. The information and inspection requirements vary
according to the risk of diversion of the chemical or facility to producing
chemical weapons. For example, facilities that use, produce, or store
Schedule 1 chemicals above a certain threshold can expect to be inspected at
least annually and are subject to the most stringent reporting requirements.
Other facilities may be inspected less frequently, based on the risk of
diversion.

There are three types of inspections: initial, routine, and challenge.
Initial and routine inspections verify the information provided to the
international body as well as the absence of Schedule 1 chemicals at certain
facilities. In the event that a signatory to the Chemical Weapons Convention
is suspected of violating the Convention, a challenge inspection may take
place. A challenge inspection may occur with very little notice and is not
limited to those facilities that have submitted information to the
Organization for the Prohibition of Chemical Weapons. To date, no challenge
inspections have occurred.

Similarities and Differences Are Likely to Exist Between the Chemical and
Biological Weapons Conventions

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There are likely to be broad similarities between the Chemical Weapons
Convention and the Biological Weapons Convention protocols. Such
similarities may include requiring companies to (1) submit information about
facility operations to an international governing body, (2) provide
international teams access to facilities, and (3) permit challenge
inspections of facilities suspected of noncompliance. However, many of the
details of the Biological Weapons Convention protocols have yet to be agreed
upon and could result in significant differences between the two
Conventions. For example, it is still unknown whether companies will be
required to submit confidential business information to a governing body or
what degree of access companies will be required to provide international
teams under the Biological Weapons Convention protocols. The Chemical
Weapons Convention requires companies to submit confidential business
information to the Organization for the Prohibition of Chemical Weapons and
requires companies to provide a level of access necessary to verify
information provided to the Organization, including the review of production
records and taking of samples for chemical analysis.

Confidential Business Information Has Been Protected

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Protecting confidential business informationthat is, trade secrets or
privileged commercial or financial informationhas been an ongoing concern of
U.S. companies in complying with the Chemical Weapons Convention. Similarly,
protecting such information is a major concern for the pharmaceutical
industry. For example, in the pharmaceutical industry, a sample of the
product may be sufficient to reveal enough confidential business information
for a competitor to gain an advantage. Nevertheless, we found that chemical
companies believe that they have been able to protect their proprietary
information, in part because of provisions within the Convention and U.S.
law and through extra measures taken by companies before and during
inspections.

The Chemical Weapons Convention prohibits inspectors from disclosing
confidential information they obtain during the course of their duties to
unauthorized individuals. Furthermore, inspectors, like all employees of the
Organization for the Prohibition of Chemical Weapons, are required to sign
secrecy agreements that cover the period of their employment plus
5 years. If an allegation is made that an inspector or other Organization
employee has violated the obligation to protect confidential information,
the Organization must investigate. If the allegation is substantiated, the
Organization can impose punitive and disciplinary measures. For serious
breaches of confidentiality, the inspector's or other employee's immunity
may be waived by the Organization, which could result in that individual
being subject to criminal or civil penalties in the affected country.

The U.S. company officials that we spoke with believe that they have been
able to adequately protect confidential business information while
satisfying the inspectors that they are in compliance with the Convention.
In fact, the Convention itself affords companies some flexibility in taking
measures to protect confidential business information, provided they can
still demonstrate compliance. In particular, companies have taken specific
steps to identify what constituted confidential business information prior
to inspection and have removed or covered specific articles to prevent
revealing such information. For example:

   * In one case, a company removed barrels of chemicals that were not
     related to the inspection from the production area to a storage room
     that the inspectors would not have access to. In the view of company
     officials, identification of the chemicals in the barrels could have
     revealed confidential business information to the inspectors.
   * A company covered sections of pipes in the production room that
     identified what chemicals were being used during the production process
     but were not related to the inspection.
   * Another company covered up procedures manuals that contained sensitive
     information about production processes.
   * Generally, companies maintained supervision of the inspectors by
     ensuring that they were continuously escorted while in the facility.

In other cases, companies have had to take extra measures to protect
information while satisfying the needs of the inspectors and meeting the
provisions of the Convention. For example, to protect production processes,
one company ensured that all computer screens in the control room of the
facility showed non-sensitive information before allowing inspectors into
the room. Some companies have had to create summary sheets of production
information for the inspectors because the raw data would reveal
confidential business information.

In addition, U.S. implementing legislation provides for the protection of
confidential business information and severe penalties for violations on the
part of any current or former U.S. government employee. Section 404 of the
Chemical Weapons Convention Implementation Act of 1998 exempts confidential
business information from public release under the Freedom of Information
Act, but permits disclosure to the Organization for the Prohibition of
Chemical Weapons, congressional committees or subcommittees of jurisdiction,
and law enforcement agencies under special circumstances. The law also
provides for fines and imprisonment in the event of willful disclosure of
confidential business information.

Federal agencies also provide assistance to help companies that are
inspected protect confidential business information. The Commerce Department
has sponsored seminars to explain the requirements of U.S. regulations
implementing the Chemical Weapons Convention and to suggest how to protect
confidential business information. Commerce and other agencies also provide
site assistance visits to help companies prepare for inspections. Moreover,
during inspections, Commerce and Defense Department staff escort the
inspectors at all times to prevent unauthorized access to facilities and
information and a Federal Bureau of Investigation official is on site for
counterintelligence purposes.

No Adverse Publicity From Inspections Reported

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Many companies have been concerned about negative public reaction to
knowledge that a company has been inspected under the Chemical Weapons
Convention. For example, neighboring communities might be alarmed that a
chemical produced nearby could be used to create a weapon. As one industry
official said, the worst case scenario would be a minor technical error
resulting in a headline stating that the company failed a chemical weapons
inspection. To date, however, U.S. companies we spoke with have indicated
that there has been no adverse publicity related to the inspections under
the Chemical Weapons Convention.

To prevent adverse public reaction, chemical companies have chosen to either
(1) not publicize the fact that their facility is subject to inspection or
(2) initiate a dialogue with surrounding communities about inspections. In
choosing the first approach, one company stated that the local community in
the past has objected to the presence of the facility near houses, and that
it did not want any more negative publicity. In opting to inform the public
about impending inspections, one company said that hiding the information
would be more damaging than addressing the concerns of the community.
Federal agencies have accommodated company decisions in both approaches.

Cost of Inspections Vary

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We obtained cost data from the first seven companies to be inspected and
found that they identified inspection costs ranging from $6,000 to $107,000.
We were not able to audit these costs. However, we found that factors
affecting this variation include the types of costs companies are reporting,
how they calculate those costs, and differences in the facilities inspected.

The Chemical Weapons Convention Implementation Act of 1998 requires the
President to submit an annual report to the Congress on inspections made
under the Convention. The report must include such information as the number
of inspections conducted in the United States during the preceding year, the
cost to the United States for each inspection, and the total cost borne by
U.S. industry in the course of the inspections. In implementing this Act,
Commerce regulations require facilities that have undergone an inspection to
report total cost related to the inspection to the Bureau of Export
Administration within 90 days of the inspection. Although the regulation
states that the reports should identify categories of costs if possible,
Commerce has reiterated that the only mandatory reporting is for total cost.
Four companies told us that they have submitted inspection-related cost data
to the Commerce Department.

One reason for variances and inconsistencies in costs being reported is that
Commerce did not provide detailed guidance to companies concerning what
types of costs should be included or how to calculate inspection-related
costs, which may limit the usefulness of the cost data. As a result,
companies are including different types of costs as they prepare cost data
to submit to Commerce. For example, one company included all costs related
to compliance with Commerce's regulations on the Chemical Weapons
Convention, including the costs of preparing the initial report to the
Organization for the Prohibition of Chemical Weapons. The company also
included the cost of briefing headquarters executives on the results of the
inspection. Another company included costs related to an internal practice
inspection prior to receiving notification of the actual inspection. Other
companies limited their reported costs to those related to the inspection
from the time that Commerce notified the facility of the impending
inspection until the inspectors departed. In addition, companies varied in
the other costs identified. For example, two companies identified only labor
and travel costs, whereas other companies included the use of conference
rooms, faxes, photocopiers, and delivery services.

The regulation also did not explain how companies should calculate costs.
For example, all companies included labor costs, but calculated them
differently. Some companies applied the number of hours employees spent on
inspection-related tasks to actual wages, while others used an average or
standard hourly rate. Further, in calculating labor rates, most companies
included the cost of employee benefits in addition to salaries while one did
not. Some companies tried to directly track costs, while others estimated
costs for reporting purposes. Two companies established a cost code for the
inspection in order to capture costs. Another company said that creating a
separate cost code for inspection-related activities would have been an
unnecessary cost because of the infrequent nature of the inspections.

To some degree, the variances in the costs that facilities incur as a result
of these inspections may be attributable to differences among the facilities
themselves and how the facilities prepared for inspections. For example, a
company that is involved in the production and consumption of multiple
chemicals subject to inspection may require more time and effort to prepare
for the inspection than a company that only uses one chemical subject to
inspection. For safety reasons, one company decided to suspend its
operations during the inspection, which resulted in lost business that was
estimated and included as a cost. Other companies did not suspend
operations. Two companies hired outside legal counsel to assist in the
preparation and conduct of the inspection, while other companies relied on
in-house legal services. Also, one company provided training to facility
personnel who could come in contact with inspectors to prepare them for the
inspection, which was included as a cost incurred by that company.

In addition, the costs reported by the companies may not be representative
for the entire industry. As of September 1, 2000, only nine U.S. industry
facilities had been inspected under the Chemical Weapons Convention. The
first inspection occurred in May 2000. The facilities that have been
inspected to date use or produce Schedule 1 or Schedule 2 chemicals. As
these chemicals have the highest risk and the most stringent inspections,
the experience of these facilities may not be applicable to facilities with
Schedule 3 and unscheduled discrete organic chemicals. For example, the
Chemical Weapons Convention permits inspections related to Schedule 2
chemicals to last as long as 96 hours (4 days), but limits the inspections
related to Schedule 3 chemicals to 24 hours. As a result, the cost of
hosting a Schedule 3 or unscheduled discrete organic chemical inspection
will likely be less. The frequency of inspections may also have an impact on
future costs. For example, all Schedule 1 facilities are subject to frequent
inspections and therefore may experience cost decreases as they become more
familiar with preparing and hosting inspections. However, other facilities
will be inspected less frequently and therefore may not experience such cost
decreases.

It should be noted that in addition to the costs borne by the companies, the
U.S. government and the Convention's governing body also incur costs. For
example, for the seven inspections we reviewed, the U.S. government paid the
salaries and travel costs for federal agency personnel who went to
facilities to help companies prepare for inspections and to escort the
inspectors. The cost of inspectors' salaries, transportation to the United
States, and accommodations during the inspection are paid by the
Convention's governing body, which is supported by member states.

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In conclusion, though there are parallels between the two conventions, the
relevance of our findings will largely depend on the specifics that are
agreed upon under the Biological Weapons Convention protocols. This is
particularly so with regard to the risk to confidential business information
since issues such as the level of detail of reporting and the level of
intrusiveness of proposed inspections have yet to be resolved. The risk to
corporate reputations from adverse publicity, on the other hand, is likely
to be similar to that experienced by chemical companies under the Chemical
Weapons Convention. Lastly, while the types of inspection costs will most
likely be similar to those incurred by the chemical industry under the
Chemical Weapons Convention, the costs may well be different because of
differences between the companies. Further, the usefulness of reporting
costs will depend on the consistency and completeness of the data reported.

Mr. Chairman, this concludes my statement. I would be happy to answer any
questions you or the other Subcommittee Members may have. Major contributors
to this testimony include Katherine V. Schinasi, Thomas J. Denomme, Johana
R. Ayers, Cristina Chaplain, Delores Cohen, Dianne D. Guensberg, Paula J.
Haurilesko, Stephanie J. May, David Merrill, and William T. Woods.

(707543)

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The Chemical Weapons Convention is the first arms control treaty to directly
affect a substantial portion of U.S. industryspecifically, over 300
companies.

Chemical Weapons Convention Implementation Act of 1998 (22 USC 6701 et
seq.).

Of the seven companies we spoke with, the three who have yet to report costs
to Commerce are still within the 90-day period.
*** End of document. ***