Export Controls: Implementation of the 1998 Legislative Mandate for High
Performance Computers (Testimony, 10/28/1999, GAO/T-NSIAD-00-53).

Pursuant to a congressional request, GAO discussed the export of high
performance computers to countries of concern that might use the
computers for military or nuclear proliferation purposes, focusing on
whether: (1) exporters' notifications to the Department of Commerce of
proposed sales of high performance computers to countries of concern
have resulted in any license applications and what action was taken on
these licenses; and (2) Commerce is verifying the use of high
performance computers after their export to these countries.

GAO noted that: (1) most of the 938 proposed exports of high performance
computers to civilian end users in countries of concern from February 3,
1998, when procedures implementing the 1998 authorization act became
effective, to March 19, 1999, did not require a license; (2) the
agencies that reviewed the exporters' proposals--the Departments of
Commerce, Energy, Defense, and State and, until March 1999, the Arms
Control and Disarmament Agency--allowed 828 proposed high performance
computer exports to continue without a license, but they required
license applications for 101 proposed exports; (3) nine export proposals
were classified "incomplete" and returned to the exporter; (4) the
majority of the agencies' objections to the 101 proposed exports were
based on concerns that the proposed end users of the computers might
have been involved in military or proliferation-related activities; (5)
of the 101 license applications required, 16 were approved and 6 were
denied; (6) the remaining 79 were returned to the exporters without
action, which essentially blocks the proposed export; (7) licenses that
were approved had additional conditions placed on the reexport or end
use of the computers; (8) the majority of these applications involved
China, India, and Israel; (9) licenses were required in nine cases where
the end user had previously received computers without a license before
the 1998 National Defense Authorization Act was implemented; (10) the
Act contains no time limit for the completion of post-shipment
verifications; (11) Commerce stated that all 104 post-shipment
verifications were favorable, that is, the computer had been seen during
an on-site visit and nothing was inconsistent with the license or
license exceptions; (12) however, a 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; (13) Commerce is investigating these diversions; (14) of
the 286 high performance computer exports where post-shipment
verifications had not been completed, almost two-thirds involve exports
to China; and (15) according to Commerce, the verifications have not
been done because China's policy prior to June 1998 did not permit
post-shipment verifications, or the exports did not meet requirements
agreed upon in a June 1998 memorandum of understanding between Commerce
and China's Ministry of Foreign Trade and Economic Cooperation.

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

 REPORTNUM:  T-NSIAD-00-53
     TITLE:  Export Controls: Implementation of the 1998 Legislative
	     Mandate for High Performance Computers
      DATE:  10/28/1999
   SUBJECT:  Supercomputers
	     Export regulation
	     Foreign sales
	     Licenses
	     Foreign governments
	     International trade restriction
	     Foreign military sales policies
	     International relations
	     Dual-use technologies
	     Nuclear proliferation
IDENTIFIER:  China
	     Russia
	     India
	     Pakistan
	     Israel
	     Egypt

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Before the Committee on Armed Services, House of Representatives

For Release on Delivery
Expected at
10:00 a.m., EDT
Thursday,
October 28, 1999

EXPORT CONTROLS

Implementation of the 1998 Legislative Mandate for High Performance
Computers

Statement of Harold J. Johnson, Associate Director, International
Relations and Trade Issues, National Security and International Affairs
Division
*****************

*****************

GAO/T-NSIAD-00-53

Export Controls: 1998 Legislative Mandate for High Performance Computers 
Mr. Chairman and Members of the Committee:

We are pleased to be here to discuss our recent report on the export of
high performance computers to countries of concern that might use the
computers for military or nuclear proliferation purposes./Footnote1/ In
1996, the executive branch removed licensing requirements for most exports
of high performance computers to civilian end-users but retained a
licensing requirement for countries of concern. This change made exporters
responsible for determining whether they needed to apply for an export
license based on their knowledge of the end-user's activities. In 1997,
several U.S. exporters shipped high performance computers to Russian
nuclear weapons laboratories and to a military end-user in China without
licenses. Because the Congress believed that U.S. exporters may be unaware
of end-users' activities, it included a provision in the fiscal year 1998
National Defense Authorization Act (P.L. 105-85) requiring exporters to
notify the Commerce Department of any proposed export of a high
performance computer to countries of concern so that a determination could
be made whether the export needed a license. Countries that pose such a
concern include China, Russia, India, Pakistan, Israel, and Egypt. The act
also requires Commerce to verify that high performance computers exported
to countries of concern, regardless of whether a license was required, are
being used by the appropriate end-user.

You asked us to determine whether (1) exporters' notifications to Commerce
of proposed sales of high performance computers to countries of concern
have resulted in any license applications and what action was taken on
these licenses and (2) Commerce is verifying the use of high performance
computers after their export to these countries. I will briefly summarize
our principal findings.

Summary

We found that most of the 938 proposed exports of high performance
computers to civilian end-users in countries of concern from February 3,
1998, when procedures implementing the 1998 authorization act became
effective, to March 19, 1999, did not require a license. The agencies that
reviewed the exporters' proposals--the Departments of Commerce, Energy,
Defense, and State and, until March 1999, the Arms Control and Disarmament
Agency--allowed 828 proposed high performance computer exports to continue
without a license, but they required license applications for 101 proposed
exports. Nine export proposals were classified as "incomplete" and
returned to the exporter. The majority of the agencies' objections to the
101 proposed exports were based on concerns that the proposed end-users of
the computers might have been involved in military or proliferation-
related activities. Of the 101 license applications required, 16 were
approved and 6 were denied. The remaining 79 were returned to the
exporters without action, which essentially blocks the proposed export.
Licenses that were approved had additional conditions placed on the
reexport or end-use of the computers. The majority of these applications
involved China, India, and Israel. Licenses were required in nine cases
where the end-user had previously received computers without a license
before the Authorization Act was implemented.

The act contains no time limit for the completion of post-shipment
verifications. As of November 17, 1998, Commerce had performed
post-shipment verifications of 104 exported high performance computers, or
27 percent of the 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;
that is, the computer had been seen during an on-site visit and nothing
was inconsistent with the license or license exceptions. However, a
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 is
investigating these diversions.

Of the 286 high performance computer exports where post-shipment
verifications had not been completed, almost two-thirds (187) involve
exports to China. According to Commerce, the verifications have not been
done because China's policy prior to June 1998 did not permit 
post-shipment verifications, or the exports did not meet 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.

The Departments of Commerce, Energy, Defense, and State were provided an
opportunity to comment on our report. Energy did not comment and State
provided oral technical comments, which we incorporated in our report. 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 the legislatively mandated post-shipment verifications and that
it would soon be impossible to perform the verifications mandated by law.
Commerce also stated that most uncompleted verifications were in China and
that 103 of 200 outside of China were completed. Although the 1998 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 verify the use of high performance computers exported to
China before the end-use visit arrangement or without end-use
certificates. This is particularly true in view of the proposed changes to
control levels for exports military end-users in countries of concern.

The July 1999 announcement to change export control levels removed future
licensing requirements for many high performance computers that have
already been exported to China. Notwithstanding the new control levels
established by the executive branch, the act requires Commerce to conduct
post-shipment verifications on all licensed and unlicensed high
performance computers at certain performance levels that are exported to
countries of concern, including China.

Background

The legislation authorizes a 10-day period following notification for
Commerce to circulate among the Departments of Defense, State, and
Energy/Footnote2/ the exporters' notifications of proposed exports of high
performance computers (HPC). The act 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 are to state whether the proposed export represents a risk of
diversion for a military or proliferation end-use or to an end-user of
concern. If no objection is raised during the 10-day period, the exporter
may ship the computers without a license. Exporters that plan to ship HPCs
to users that are already known to be of military or proliferation concern
must apply directly to Commerce for an export license; they do not need to
go through the notification process.

To indicate the level of concern the United States has with regard to the
export of HPCs, the executive branch has organized countries into four
tiers. Each tier after tier 1 represents a successively higher level of
concern to U.S. security interests. (App. I contains a list of countries
in the four tiers.) Tier 3 contains 50 countries that are 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 high performance computers that perform over 2,000
millions of theoretical operations per second (MTOPS). For civilian end-
users in 
tier 3 countries, a license was required to export computers 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, provided
the exporter determined that the recipient was a civilian 
end-user./Footnote3/

The act also requires Commerce to perform post-shipment verifications in
tier 3 countries on the use of all licensed and unlicensed computers that
perform more than 2,000 MTOPS. This requirement applies to all high
performance computers exported from the United States on or after November
18, 1997. Verifications confirm the physical location of the computers
and, to the extent practical, verify whether they are being used as
intended. The current legislative requirement to conduct verifications on
all computers performing over 2,000 MTOPS that were exported to countries
of concern is not affected by the July 1999 executive announcement to
raise export control levels.

The Legislation's Effect on HPC Exports

The responsible executive branch agencies objected to 101 of 938 the
notifications of proposed HPC export to tier 3 countries between 
February 3, 1998, and March 19, 1999.

Of the 101 objections raised regarding the proposed HPC exports, the Arms
Control and Disarmament Agency (ACDA) 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 and uses.

During the review process, objections were made to nine proposed HPC
exports to end-users that had previously received HPCs without a
license./Footnote4/ 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 for
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.

Implementation of Post-Shipment Verifications Is Incomplete and Has
Several Limitations

Section 1213 of the legislation requires the Secretary of Commerce to
conduct post-shipment verifications (PSV) on each HPC performing over
2,000 MTOPS exported from the United States to a tier 3 country, whether
licensed or unlicensed, on or after the date of the statute's enactment, 

which was November 18, 1997./Footnote5/ The PSVs confirm the physical
location of the HPC and, to the extent practical, verify whether it is
being used as intended. However, there are limitations to determining end-
use. While the legislation 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 is
investigating these possible diversions.

The Commerce Department uses U.S. personnel from its Bureau of Export
Administration or its U.S. and Foreign Commercial Service officers located
at U.S. embassies and consulates to conduct legislatively mandated 
post-shipment verifications of 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

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

o 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;

o whether the HPC is being used in a manner consistent with the stated
  purpose;

o whether anyone has remote access to the computer and, if so, who does
  and for what purpose;

o 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

o 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.

Mr. Chairman, this concludes my prepared testimony. I would be happy to
respond to any questions you or other members may have.

Contacts and Acknowledgments

For further information regarding this testimony, please contact Jim
Johnson at 512-3540. Individuals making key contributions to this
testimony were Jim Shafer, Charles Bolton, and Jason Fong.

--------------------------------------
/Footnote1/-^(GAO/NSIAD-99-208, Sept. 24, 1999).
/Footnote2/-^The Arms Control and Disarmament Agency also reviewed cases
  until March 31, 1999, when it was terminated as an independent entity
  and its arms control and nonproliferation functions were merged with the
  State Department.
/Footnote3/-^In July 1999, the executive branch further revised licensing
  levels for tier 3 countries and reported these changes to Congress. The
  level for civilian end-users was 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 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.
/Footnote4/-^These HPC exports, completed prior to the legislatively
  mandated review procedures, did not require a license under the
  regulations at that time if the HPC performed between 2,000 and 7,000
  MTOPS and if the exporter believed the HPC was going to a civilian end-
  user.
/Footnote5/-^The July 1, 1999, revision of licensing levels does not
  affect the act's requirement to conduct post-shipment verifications on
  all exported computers performing over 2,000 MTOPS exported to tier 3
  countries.

LICENSING REQUIREMENTS FOR HIGH PERFORMANCE COMPUTER EXPORTS, BY COUNTRY
GROUP
===========================================================================

Four country groups and licensing requirements have been established for
high performance computer exports, as follows:

o Tier 1 (32 countries: Western Europe, Eastern Europe, Japan , Canada,
  Mexico, Brazil, Australia, and New Zealand). No prior government review
  (license exception) for all computers, but companies must keep records
  on higher performance shipments that will be provided to the U.S.
  government, as directed.

o Tier 2 (102 countries: Latin American, South Korea, Association of
  Southeast Asian Nations, or ASEAN; Slovak Republic; Slovenia; and South
  Africa). No prior government review (license exception) for computers
  performing up to 20,000 MTOPS, with record-keeping and reporting as
  directed; individual license (requiring prior government review) for
  computers performing above 20,000 MTOPS.

o Tier 3 (50 countries: India, Pakistan, all Middle East/Maghreb, the
  former Soviet Union, China, Vietnam, and the rest of Eastern Europe).
  No prior government review (license exception) for computers performing
  up to 2,000 MTOPS. Individual license for military and proliferation-
  related end uses and users and license exception for civilian end users
  for computers performing between 2,000 MTOPS and 7,000 MTOPS, with
  exporter record-keeping and reporting as directed. Individual license
  for all end users for computers performing above 7,000 MTOPS. Above
  10,000 MTOPS, additional safeguards may be required at the end-user
  location.

o Tier 4 (7 countries: Iraq, Iran, Libya, North Korea, Cuba, Sudan, and
  Syria). Current policies continue to apply (i.e., virtual embargo on
  computer exports).

For all these groups, reexport and retransfer provisions continue to
apply. The government continues to implement the Enhanced Proliferation
Control Initiative, which authorizes the government to block exports of
computers of any level in cases involving exports for end uses or to end
users of proliferation concern or risks of diversion to proliferation
activities. Criminal as well as civil penalties apply to violators of the
initiative.

(711464)

*** End of document. ***